Israeli Banks Begin Pondering Pay Caps

Just a week after the Knesset passed legislation placing a cap on pay in the financial services industry, Israel’s banks have begun campaigns to keep their top executives from fleeing.

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The board of Bank Leumi, Israel’s second-largest lender, met late on Tuesday to discuss ways of stemming what they fear could be an exodus of senior and mid-level executives, who face salary cuts or, in more cases, big reductions in their severance pay if they quit. Sources said no decisions were taken at the meeting.

The new law, which takes effect in six months, puts a ceiling on compensation for bankers and other financial service executives at 2.5 million shekels ($660,000), or 35 times the salary of the lowest paid person employed at the institution.

It isn’t yet clear whether the cap applies to severance pay, but if it does and causes an exodus of top bankers, the banks themselves will suddenly find themselves saddled with tens of millions of shekels in costs this year.

Just days after the law was approved, Zion Kenan, CEO of Bank Hapoalim, said he would step down in in six months. He didn’t cite the law for his decision, but his compensation last year was 7.9 million shekels and his severance package equal to as much as 17 million.

At Tuesday’s Leumi meeting, management noted that many contracts entitle managers to resign and continue getting their salaries for another six months, conditions that might spur a wave of resignations soon. However, CEO Rakefet Russak-Aminoach said executives requesting early retirement had to give three months’ notice of their plans, which she said should be enough time to identify replacements.

Citigroup issued a report on Wednesday that said the odds of a banker exodus are low, although it noted that the new law is unprecedented anywhere in the world for the severity of its terms. Although some countries cap bonuses, none cap base salaries.

“We believe there could be a risk of some more high-profile departures but we do not expect a major exodus from the sector. The local market is small and there are not too many well-paid vacancies elsewhere,” the report said.

However, Citi said Leumi was more vulnerable than Hapoalim because more Leumi executives’ compensation is in the form of pension benefits rather than bonuses. It said Israel Discount Bank is likely to be the least affected because only the chairman and CEO earned more than 2.5 million shekels in 2015.

Meanwhile, Hapolaim’s board moved forward with finding a successor for Kenan, naming a search committee headed by chairman Yair Seroussi. The five-member panel is to come back with a candidate by the end of May.

No names have been officially mentioned, but banking sources have said that Ari Pinto, now Hapoalim’s deputy CEO and chief operating office, is the leading candidate.