A new initiative by Finance Minister Yair Lapid would cap the salaries of top executives at financial institutions that manage public money. Under the plan, salaries above 3.5 million shekels a year, including bonuses, would not be recognized for tax purposes − meaning these executives would pay much higher taxes. Salaries above 3.5 million shekels would also need to receive the vote of a majority of shareholders in a general assembly. Participants in the assembly would be required to discuss the implications for the company’s financial state.
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Finance Ministry sources explained Sunday that the initiative is motivated by the fact that these financial executives have a major impact on the country’s economy, including on household spending − in the form of bank and management fees − and also set standards for executive salaries in other fields.
This comes after several years of increasing executive salaries at these institutions.
“These institutions are expected to meet high standards of corporate governance, particularly when it comes to their pay policies, a Finance Mininstry source said. “The finance minister will submit a tax code amendment within the next few weeks in order to lay the foundation for proper standards in compensation policy.”
Lapid has asked senior ministry staff, including Director General Yael Andorn, to look into the issue of executive salaries in general.
The Bank of Israel was not involved in Lapid’s initiative. The central bank believes that the existing regulation is sufficient. A new regulation caps bonuses at one month’s salary, and the central bank says this move has cut compensation packages in the banking sector by 35%.
Not recognizing high salaries for tax purposes could be an effective way of bringing down salaries so long as shareholders agree to cut back executives’ salaries. To date, objections from minority shareholders to high salaries have not succeeded in bringing down these salaries, particularly because institutional investors tend to vote in favor of the generous compensation packages.
If shareholders do not vote to reduce salaries in keeping with the new plan, it may actually raise salary costs, as executives demand additional compensation due to the tax penalty.