Dear Clients,

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 parties[1] (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:

A. 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.

B. 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.

C.  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.

D. 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:

A. 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.

B. 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.

C. 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.

D. 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.

E.  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.

 F. 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).

 G.  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.

H.  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 directors[5].

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.


This memorandum contains general information only and does not constitute legal advice or a substitute for such advice. This memorandum is provided as a service to our clients while emphasizing that in all specific cases a separate, pertinent discussion is required. We are happy to be at your disposal in the event of any questions or clarifications regarding the contents of this memorandum.


[1] See also:[2] See[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 .

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