At the end of last month, Bank Hapoalim quietly approved a new wage agreement for its chairman, Yair Seroussi.

By the bank's standards, it didn't break any records: Ten years ago, Hapoalim paid then-chairman Shlomo Nehama and CEO Zvi Ziv salaries of NIS 20 million each; Seroussi's remuneration will be far more modest. If everything goes well, and all the bonuses and stock allocations perform as expected, Seroussi's package is expected to be NIS 10 million per year, the same as that of CEO Zion Kenan.

Even institutional investors and their consultant on such matters, Entropy Risk Management Solutions, thought that salary was fair. The consensus was that it didn't deviate from industry norms and should be approved. Only one institution thought otherwise: It proposed that the basic contract be for five years, but with some of the benefits approved in two separate stages.

In comparison to previous peaks, Seroussi's salary is almost inoffensive. Eli Yones, a former Hapoalim CEO who is now CEO of Mizrahi Tefahot, has received more than NIS 25 million per year on average during his time at Mizrahi Tefahot - and he's the manager of a far smaller bank. So no one was bothered by Seroussi's salary.

But that doesn't mean the subject of bankers' salaries isn't worthy of serious discussion. Who decided that a bank chairman should be paid NIS 10 million a year? Could it be that to recruit good managers, Hapoalim really needs to pay what Yones is getting, which is to say, double or triple the current rate? Conversely, maybe a CEO and chairman could be found who are no less competent than Seroussi and Kenan, but would agree to work for a far more modest salary, say NIS 3 million per year?

Bankers' salaries have shot to the top of the socioeconomic agenda in Israel in recent years, and even more so in the United States. After the U.S. financial system collapsed, when banks continued to shower tens or even hundreds of millions of dollars on their executives, demands for action escalated. Commissions of inquiry and various studies found that the system of incentives the bank heads used encouraged them to take unnecessary risks, fabricate data and act in ways that were detrimental to their customers. Therefore, it was decided that executives of banks that received publicly-funded bailouts would have their pay capped.

Luckily, things were different in Israel. No Israeli banks collapsed during the crisis and none needed government assistance - so the state had no reason to cap salaries. But there was a public debate over bankers' pay.

The numbers are eye-popping for a country where the average salary is NIS 8,500 per month. Some politicians - including MKs Shelly Yacimovich and Robert Ilatov - submitted bills aimed at limiting executive pay in general, and bankers' pay in particular. The government objected, and none of the laws passed. Yet some bank heads sought to lower their profiles by lowering their salary packages, to about the NIS 10 million mark.

That, however, doesn't mean this level is appropriate.

What is a bank?

To determine a more accurate norm, we should start by considering what it means to be a bank in Israel in 2012. First, Israeli banks are an oligopoly: They operate in an environment characterized by low levels of competition in many of their fields of operation. This diagnosis was unequivocally handed down by David Zaken, the Bank of Israel's supervisor of banks, in a recent report.

Second, Israeli banks are partly-public bodies at the very least. Even if at some, the controlling interest is held by a few families from the business sector, the majority of shares are held by the public, and most of the banks' money comes from the public's deposits. Moreover, a bank that collapses will take down the whole economy with it. A bank - especially in Israel, where five banks control the entire market and two control about 60% of it - is a very public organization.

Third, no Israeli bank can fail, because the state would save it under any circumstances - with taxpayers' money. This government guarantee against bank failure is unofficial, but it is clear and absolute. After the collapse of Lehman Brothers nearly destroyed the global financial system, the Bank of Israel and the government decided they had no intention of ending up in a similar situation. Every large and medium-sized bank in Israel is "too big to fail."

Fourth, the banks' employees, especially the veteran ones, have tenure. The power of the banks' unions safeguards workers' jobs, and even if someone is fired, his compensation will be higher than in other industries.

Finally, Israeli banks are strictly supervised by the Bank of Israel, which scrutinizes every activity it can and steers many key managerial decisions. Examples abound: The central bank limits the banks' real estate investments; it instructs them to replace chairmen; it dictates who they can give mortgages to and under what conditions, how to set service charges and who is ineligible for additional lines of credit. It even determines who is eligible to buy a bank and how he must fund the acquisition.

Why do owners approve such wages?

To justify paying a business manager high sums, one thing is crucial: He must get better results than any other manager. But that is possible only in businesses that operate in a free, competitive market.

Impressively, Yones doubled Mizrahi Tefahot's volume of activity and improved its efficiency indicators. But that bank's strength lies mainly in the mortgage market - one of the few sectors where the banks really compete with each other. In return for his achievements, he was handsomely rewarded.

Other banks, however, had previously paid their executives high salaries that weren't linked to performance.

Because Israeli banks are not competitive in most fields, they are more like public services than private commercial enterprises. Consider their characteristics: oligopoly, public ownership, a government guarantee, employee tenure, strict supervision. These are the characteristics of public bodies like electric or water corporations, not those of a business entity that needs to fight for survival every day and take care not to stumble.

But if the banks resemble public services, there is no need to pay their managers NIS 1 million a month. No one thinks, for example, that Israel Electric Corporation executives - who earn NIS 70,000 per month - are downtrodden, yet they receive a tenth of what the bankers get.

So maybe the standard salary for the head of an Israeli bank should be NIS 100,000 a month? We could even generously assume that banking requires more expertise than managing an electricity or water company and double that figure, to NIS 200,000 per month - or two to three million shekels a year. That is still only a third of the remuneration Seroussi and Kenan receive.

Added to the other benefits a bank chairman and CEO get - including a luxurious car, a driver, endless first-class travel abroad and enormous respect - it doesn't seem that any bank would struggle to fill their seats even if it offered a more modest pay package. At least the banks could try. In the worst case, they could gradually increase wages until a suitable candidate was found.

All this still doesn't answer a different question: If the banks can employ a manager who is just as competent at a lower salary, why don't they? Why do controlling shareholders and boards agree to pay out higher salaries than they need to?

There is no definitive answer, but here are three hypotheses offered by experts.

1. The board of directors is happy to authorize high salaries for senior employees, because each board member thinks he might someday be in a similar position. Therefore, it is in their interest for high salaries to be the norm.

2. The money paid doesn't really belong to anyone, and banks are huge businesses, for whom NIS 20 million is pocket change. Such sums won't affect the bank's dividends, or its customer service.

3. Finally, the most troubling explanation: Very high salaries ensure the manager's loyalty to those who appointed him. A bank's controlling shareholders are forbidden to intervene in the organization's ongoing management. But when you pay your manager NIS 1 million a month, you know that on the day you need a favor from him - even if it is incompatible with both the public interest and that of the organization - he won't disappoint you.