Israel: Re-Approval/Revision Of The Compensation Policy For Executive Officers And Directors In Israel

Last Updated: 15 June 2017
Article by Amir Shachar

In light of the experience our firm has accumulated on the issue of officers' compensation, we thought it fitting to present our comments and recommendations regarding the re-approval and revision of the compensation policy for executive officers and directors. Of course, this list is neither exhaustive nor binding, and there are definitely other relevant points as well as those that must be specifically tailored to your firm, but we hope that this memorandum will serve as a good starting point for the process.

1. Don't wait until the last minute

Companies which have not yet re-approved their compensation policy when the three-year period from the date of approval of the prior policy is soon to reach its end, should note that the process of renewing the policy is liable to take quite some time and to involve preliminary work, sometimes with the inclusion of various compensation consultants, meetings and approvals by the compensation committee and board of directors, approval by the general meeting of shareholders, and occasionally, negotiations with shareholders and institutional investment consultants. To these companies, we recommend that the process be initiated several months before the aforesaid three-year period is to reach its end.

2. Keep it simple

Complex formulas in variable compensation plans or policy, which include, among other things, a large number of targets, are difficult to understand, to quantify and to compare compensation versus performance. Moreover, they are likely to lead to the possibility of mistakes, and it is therefore recommended to create compensation formulas that are relatively simple.

3. Use plain language

The remuneration policy should be clear and methodical, without superfluous paragraphs or statements that are self-evident. The policy should not include statements that overly limit the board of directors when applying the policy in practice, or statements that are open to the interpretation of unnecessary legal questions in the future.

4. Key points that should be revisited

Many subjects are likely to be relevant to the discussion when renewing the executive compensation policy, and each company has its own specific circumstances. At the same time, we recommend that a discussion of the following issues be considered in all cases:

  • Caps in the policy and threshold conditions for the payment of bonuses;
  • Correlation between past performance and the bonus paid to senior officers;
  • The need to revise the policy on the basis of changes in legislation, the position of the Securities Authority (the "Authority") and the current positions of institutional investment consultants such as Entropy and ISS (insofar as relevant according to the shareholder composition in the company);
  • Use of relevant benchmarking following changes in the market;
  • Director compensation;
  • Express reference to the conditions of employment of officers (CEO or chairman) who are controlling shareholders.

5. Caps and threshold conditions

The Companies Law requires that various caps be defined in the compensation policy (including a cap on the retirement bonus, a cap on the amount of compensation paid in cash at the time of payment, and definition of a limit on equity compensation, which is not paid in cash at the time it is granted). More than a few companies have added other caps to their compensation policy, such as a limit with regard to base salary as well as various threshold conditions for the payment of bonuses. In this context, it is recommended that the following points be considered:

  • Have the caps in place in the policy overly limited the company?
  • Do the caps allow for reasonable managerial flexibility according to changing circumstances? For example, when there is a need to recruit officers abroad.
  • Looking back, timely suitability to the company and to certain officers in subsidiaries, according to structural changes and forward-looking plans.

6. Link between performance and compensation

One of the major goals of Amendment 20 to the Companies Law was to strengthen the connection between performance and compensation as part of an approach that views this compensation method as preferable in terms of the company's stakeholders and interested parties1 (however, see also the reference made in par. 7.4.A below with respect to a legislation amendment of February 2016 in regard to officers who are CEO subordinates). In this context, attention should be given to the following:

  • Whether the targets which were set for officers in the variable compensation plans were sufficiently – but not excessively – challenging.
  • The type and composition of the targets (financial and others) and their consistency with the company's plans and with the officers' ability to influence these targets.
  • Switching to performance-based equity compensation plans, or integrating performance-based equity compensation plans in the equity plans in place in the company.

7. Attitudes outside the organization

7.1 The Authority

The ISA staff has expressed its opinion on numerous occasions since the implementation of Amendment 20, and we recommend that tailoring the compensation policy accordingly be considered. Thus, for example:

  1. With regard to the award of a discretionary bonus to the CEO/director level: The ISA is of the view that a discretionary bonus is a backward-looking bonus or a bonus that is based on non-measurable goals. Accordingly, any bonus, whatever it is called, which constitutes a discretionary bonus, is subject to the limitation in Amendment 20 with regard to a bonus of this kind. The ISA's interpretation of the cap on this "insignificant part" is up to 25% of the actual variable compensation or fixed compensation. In the ISA's opinion, a measurable criterion is one which, when fulfilled, both parties know that it has been satisfied, and the test of this is objective.
  2. Claw back provision: The requirement to return compensation paid also applies to agreements that were in place prior to Amendment 20, and the ISA will not intervene if the repayment period is set at 3 or more years, nor with regard to the definition of minimal amounts that will not be required to be repaid.

    As far as dual-listed companies are concerned, in July 2015 the SEC published a proposal, which has not yet been finally approved, according to which public companies traded in the US (including foreign private issuers) are required to define a variable compensation claw-back policy with respect to such compensation paid to officers in the event of an accounting restatement applying to the preceding three years. Once the process for the approval of the above proposal has been completed, many dual-listed companies will be required to adapt the claw-back provision in their compensation policy to the SEC's guidelines on the subject.
  3. With regard to the need for approval by the general meeting of the targets set for the CEO or chairman of the board: In the ISA's opinion, to the extent that the objectives were defined in the first quarter, are measurable and are within the bounds of the policy, they do not require approval by the general meeting with respect to officers who are not controlling shareholders.
  4. With regard to various benefits awarded to officers in the form of the company's products/services and determining whether they are part of the conditions of office and employment: The ISA announced its position on the subject in a letter of August 27, 2014 to Israel Canada T.R. Ltd.2, according to which "Conditions of Office and Employment" will include all substantive benefits awarded to an officer due to his holding office as such, even if they are awarded by a privately held subsidiary and there is no explanation for their award other than the officer's employment by the public parent company.

7.2 Entropy

In April 2015 Entropy revised its voting policy, among other things, in terms of equity compensation for directors, the grant of exemption to officers, etc.

The possibility of adapting the company's compensation policy to Entropy's revised policy should be explored.

7.3 ISS (relevant mainly to dual-listed Israeli companies)

In January 2016 ISS revised its policy as adapted for Israel companies and it should be taken into account, including with respect to the cap on retirement bonuses and the rate of dilution in equity allocations to officers.

7.4 Amendments to legislation

Numerous regulatory mitigations were recently approved (or are in the process of being approved) by the Knesset, including relief with regard to senior executive compensation. It is worth considering whether to adopt these alleviations and include them in the company's compensation policy (to the extent relevant). Among others are mitigations applying to the following:

  1. Award of discretionary bonuses to officers who are CEO subordinates: The obligation determined in Amendment 20 that variable components be based on measurable criteria no longer applies to officers who are CEO subordinates, i.e. vice presidents, CLO, etc.
  2. A bonus of three monthly salaries per year payable to the CEO and above on the basis of non-measurable criteria: For the purpose of Item (1)(a) in the First Addendum "A" to the Companies Law, it has been determined that a bonus amounting to three monthly salaries may be awarded on the basis of non-measurable criteria considering the officer's contribution to the company.
  3. Reduction of board meeting fees paid to outside directors in small companies: As part of the relief awarded to SMEs (companies with shareholders' equity of up to NIS 275 million), a decision was made to permit a 50% reduction in the "minimum" and "fixed" board meeting fees prescribed in the Third Addendum to the Companies Regulations (Rules Regarding Compensation and Expense Reimbursement of External Directors), 2000. This reduction applies to directors whose candidacy is proposed at the general meeting that is convened after 30 days have elapsed from the publication of the regulations.
  4. Alleviations in compensation in connection with an IPO

    D.1. To facilitate the IPO process, it was decided that the compensation policy described in the prospectus or IPO documents of a company making an initial public offering will be determined after the IPO and will be deemed as valid as if it had been duly approved by the general meeting, including with respect to the manner of approval of individual agreements with officers after the IPO.

    D.2. It was further determined that the first compensation policy of such an issuing company (whether the policy was described in the prospectus or approved by the general meeting within nine months after the date of the IPO) will remain in force for an extended five-year period, and only at the end of said period will the regular provisions requiring re-approval of the policy once in three years apply

    D.3. A company issuing securities to the public for the first time, in which the incumbent CEO withdrew within five years from the IPO, will be able to appoint a new CEO who will receive a similar salary to his predecessor without the general meeting's approval of the salary being required. A company will be able to renew the CEO's conditions of office and employment without the need for approval by the general meeting, provided that the new conditions do not include an increase and are consistent with the compensation policy.
  5. Approval by the CEO of insignificant changes in the conditions of office of CEO subordinates: In their compensation policies companies shall be permitted to define a reasonable range for insignificant changes in the salaries of officers who are CEO subordinates. Where this is defined, the CEO will be permitted to approve such changes within the approved range, without further approval by the compensation committee or the board of directors being required.
  6. The audit committee also serves as the compensation committee: An audit committee that meets the stringent conditions with respect to the composition of the compensation committee may also serve as the company's compensation committee (and in this manner, avoid the artificial division between the meetings of these two committees).
  7. Relief granted to certain Israeli companies whose shares are traded abroad

    G.1 Alleviations have been approved for companies whose shares are traded on NYSE and NASDAQ, which have no controlling shareholder; the alleviations permit such companies to choose not to comply with a number of provisions in the Companies Law, including with respect to the composition of the compensation committee and the obligation to appoint outside directors, as well as the obligation that an outside director will serve on every committee of the board of directors. Such companies will be subject only to the arrangements in those stock exchanges (which, to date, had applied in addition to the provisions of Israeli law). Transitional rules have been defined for companies that adopt the relief with regard to outside directors whose term of office began before the alleviations were adopted. In the context of the compensation policy – in relevant companies where the remuneration policy contains reference to the composition of the compensation committee in accordance with the Israeli Companies Law, thought should be given to adapting the policy to accommodate the possibility that the composition of the committee will be consistent with the arrangements in place in the relevant foreign stock exchange. Furthermore, in those companies where there are no outside directors in office, the company will be not be subject to the regulations for compensation of external directors.

    G.2 Revision of the amounts of compensation payable to outside directors in a "foreign company"3 or a "dual-listed company"4, where the foreign law applying to them imposes additional obligations or requirements on an outside director besides the obligations and requirements set forth in Israeli law, arising from his position as an independent director.
  8. Alleviations relating to the date for convening a meeting to approve the CEO's conditions of office: A company many refrain from convening a special general meeting for the purpose of approving the conditions of office and employment of a director or CEO, and approval by the compensation committee and the board of directors will be sufficient at the time of the engagement, until the next general meeting that is convened. The relief will apply if the conditions of office and employment satisfy the following conditions: (a) they have been approved by the compensation committee and the board of directors in accordance with the provisions of the Companies Law; (b) they are consistent with the company's compensation policy; and (c) they do not exceed those received by the relevant officer's predecessor, or do not contain a significant change in relation to them.

7.5 Public, press

Thought should also be given to position statements or other comments received by the company in connection with the compensation policy in the past.

8. Benchmarking

Some compensation committees and boards retain the services of compensation consultants from time to time, among other reasons for the purpose of making comparisons to define various caps in the compensation policy as well as to determine the actual payments to officers. Those compensation committees that choose to also include benchmarking in the set of considerations applied when determining the officer's conditions of office are advised to make sure to use an accepted methodology in the benchmarking process, including a check of the relevance of the companies used in the comparison from time to time, among other reasons as a result of structural changes in the companies (M&A, change of business area, etc.) and relocation. Ideally, the benchmark should serve as an additional, non-decisive component in the body of considerations.

9. Director compensation

Given the importance of the composition of the board of directors and the competition over suitable candidates, it is advisable to devote time to the director compensation philosophy. In this context, the following points, among others, should be considered – whether the compensation paid meets the company's needs; whether equity compensation should be included in director compensation and a transition made to proportionate compensation according to the rules for compensation of external directors5.

10.The compensation policy should include express reference to officers who are controlling shareholders

Specific reference should also be made to the conditions of office of officers such as the CEO or chairperson who are controlling shareholders of the company, and whose employment conditions are approved as conflict of interest transactions in any event to allow for greater leniency in the approval procedure in certain cases when personnel changes are made.

Footnotes

[1] See also: http://www.isa.gov.il/Corporations/2901/Conferences/kenestagidim7/Documents/KENESTAGIDIM_6.pdf

[2] See http://maya.tase.co.il/bursa/report.asp?report_cd=917685

[3] Foreign company – a public company whose shares were offered to the public outside of Israel only, or are listed for trade on a stock exchange outside of Israel only.

[4] Dual-listed company – a public company whose shares are listed for trade on a stock exchange outside of Israel as well as on TASE.I In this context, see the reference to the presentation "Trends in Director Compensation" made by Adv. Lior Aviram at EY's Annual Directors Conference held in collaboration with our firm on April 11, 2016, at .http://www.shibolet.com/wp-content/uploads/2016/04/SHIBOLETDOCS-1490464-v1-%D7%9E%D7%92%D7%9E%D7%95%D7%AA_%D7%91%D7%AA%D7%92%D7%9E%D7%95%D7%9C_%D7%93%D7%99%D7%A8%D7%A7%D7%98%D7%95%D7%A8%D7%99%D7%9D-_10_4_16.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions