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The relative calm in labor relations in the banking sector should fool no one. With inflation having eroded wages, almost all the banks are negotiating pay rises with labor representatives. The calm belies the fact that while banking sector employees have high expectations, the banks can no longer afford to grant the kind of generous wage increments they used to.

The appetite of the banking sector unions for a wage hike stems not only from a desire to compensate for inflationary erosion of wages, but also from force of habit. For years the banks dished out generous wage and benefit packages, making banking sector employees the second highest paid group of salaried employees behind only the utility monopolies of the Israel Electric Corporation and the water company Mekorot.

For years the banks financed wage hikes and benefits for their pampered employees through high interest margins and ever-more expensive and new commission charges and fees. This year the banks will try to compensate themselves for the heavy losses suffered to their credit portfolios from the deteriorating financial stability of many of their borrowers, but clearly there is a limit to their ability to raise the cost of banking services and pass the buck to their customers.

For 2002, the banks will post yields of only 4-5 percent, while some of the banks will even post losses. In such a scenario, one would expect the banks to try to reduce their expenditure, and thus it is not at all clear why some banks, including Israel Discount Bank and Bank Leuni, are already discussing wage rises under the guise of "differential increments" and the like.

According to the Central Bureau of Statistics the average wage of salaried employees fell 5.6 percent in 2002, while in the banking, insurance and financial sectors, wages fell by 6.9 percent. These figures present the banks with an exceptional opportunity to consolidate a real cut in wages. If businesses in the private sector are cutting back and even the public sector is talking about wage cuts, the banks can also consider the possibility.

The initial reaction of Riki Bachar and Louis Roth, the heads of the unions of Bank Discount and Bank Leumi respectively, may well be to call for industrial action, but this is the time for banking sector managers to show their ability to prove their worth. Of course, the managers would have to show a personal example and cut their own wages. In the meantime, at Bank Discount and Bank Leumi, only the chairmen of the board and the CEOs have agreed to take a wage cut, while at Bank Hapoalim all the members of the board and senior management have agreed to a seven percent wage cut.

In any event, the banks must base their wage policies on performance. A bank that posts losses can not afford to raise wages, even if the wages of its employees are linked to those of a more successful bank. If the employees want a "differential payment," their performance should also be calculated differentially.