Many of Israel’s top bankers are in store for a massive pay cut after the Knesset approved a law Monday that will cap their salaries at 2.5 million shekels ($650,000) a year, or 35 times the lowest salary paid by the banking institution.
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The measure, which will also affect insurance and other financial-services companies, was passed by a vote of 56 to zero, with no abstentions – an indication of broad public displeasure with the banks and with widening income gaps across the economy.
“For the first time ever, Israel is saying ‘enough.’ There are people who are earning pay that is simply crazy. I can’t understand how these disparities can exist and we haven’t said anything,” said MK Moshe Gafni (United Torah Judaism), chairman of the Finance Committee and the person who steered the law through Knesset.
Israel’s huge income gaps, among the highest for countries belonging to the Organization for Economic Cooperation and Development, have become a political issue since the 2011 social-justice protests. Finance Minister Moshe Kahlon, who promoted the pay cap, rose to political prominence as a crusader for the poor and middle class.
“There is a moral significance beyond the economic significance of this law,” Kahlon said Tuesday. “It symbolizes narrowing pay gaps, solidarity and consideration for the weak.”
Although salaries for all top executives have grown sharply in recent years, financial-service firms have stood out for their excessive pay. According to the finance committee, one-quarter of the 40 public companies in the country with the highest pay levels belong to that sector.
The new law will mean a huge reduction in compensation for many bankers, when it goes into effect in six months. All told, about 50 financial-service executives will be affected by it.
At the top of the banker pay scale is Rakefet Russak-Aminoach, CEO of Bank Leumi, whose total compensation expenses last year came to 8.1 million shekels. Zion Kenan, CEO of Bank Hapoalim, was not far behind with 7.9 million. This compares with an average wage of 115,000 shekels.
The law doesn’t actually put a ceiling on salaries, but it bars banks and financial-service companies from deducting any compensation costs above the limit for tax purposes. The law includes a grandfather clause that means even executives who have been getting pay in excess of the ceiling are now subject to it.
The measure was first proposed in the last government by then-Finance Minister Yair Lapid and became even tougher as it continued to wend its way through the Knesset. Lapid’s proposal, which stalled after last year's elections were called, capped salaries at 3.5 million shekels. Kahlon dropped the ceiling to 2.5 million and lawmakers then added the ratio: first to 44 times the lowest salary and then reducing it to 35.
The latter figure could mean that the real ceiling for compensation will work out to an even lower 2.1 million shekels. That is because the ratio includes contract workers, like cleaning personnel, at least some of whom earn the minimum wage of 5,000 shekels a month, or 70,000 annually.
The ratio makes Israel an outlier in the developed world, where high executive salaries have also elicited strong criticism.
In Europe, there has been resistance to any mandatory top-pay-to-bottom-ranking-pay ratio, while in the United States, under the Dodd-Frank Wall Street Reform, financial firms have to disclose what the ratio is, but there is no binding one.
The European Union shareholder rights directive approved last year backed a shareholder vote every three years on pay policies at listed companies, but an attempt to insert a cap on pay was defeated.
The Israeli salary-cap move gained widespread support from both the coalition and opposition, but banks opposed to it. Some commentators called it a populist measure that might lead to higher costs for the public if banks were to pass on any higher taxes.
For its part, Israel’s Association of Banks said the law could disrupt labor relations in the banking sector, while a spokesman for the group said it would likely appeal to the High Court of Justice.
(With reporting by Reuters.)