Influential CEO and Board Behavior in Reaction to a Regulatory Reform: A Quasi-Natural Experiment

We investigate the impact of a new regulation, Amendment 20, on executive compensation in Israel. The Amendment, effective as of 2013, is aimed at controlling rapidly increasing executive compensation, as well as the perceived disconnect between executive pay and firm’s financial performance. The concentrated ownership structure in Israel provides us with the opportunity to examine the value of control as manifested in the implementation of the Amendment. The analysis is conducted using hand-collected data on firms traded on Tel-Aviv Stock Exchange in a 2-year window around 2012, the year in which the Amendment was signed into law. We find evidence that chief executive officers (CEOs) classified as related parties in firm’s annual financial statements are able to impact the structure of their post-amendment compensation. Our evidence is consistent with CEOs who are related parties, compared to CEOs who are not related parties, influencing the design of their compensation so that its bonus component increases, leading to an increase in their total cash compensation. However, we are unable to find evidence that this increase stems from an increase in salary. In this way, companies with influential CEOs seem to shift the composition of pay from cash salaries to cash bonuses in response to the Amendment, visibly complying with the intent of the Amendment, however, leaving the CEO better off. We also find evidence for the ability of powerful chairmen to temper the bonus growth of non-influential CEOs. Last, we find no evidence that equity-based compensation increased, suggesting that the bonding of CEO pay to stock-market performance did not increase.