Top Treasury Officials Warn of More Drastic Steps if Wage Cap Doesn’t Work

Lapid plan to bar tax recognition of excessive salaries wins praise from experts.

Olivier Fitoussi

If Finance Minister Yair Lapid’s plan to cap the salaries of senior executives at banks and financial institutions doesn’t succeed, the treasury will consider taking more drastic steps to bring them down, government officials said on Monday.

“We all understand that the situation cannot continue as it is,” said one official, who spoke on condition of anonymity. “Everyone has to understand that the public is watching.”

The warning came a day after the Finance Ministry proposed that total salary costs for top executives at financial institutions would no longer be a deductible cost for tax purposes if they exceed 3.5 million shekels ($1 million). The proposal had been under discussion among top Finance Ministry officials for about two months.

Officials said the cap was determined after examining practices overseas. They defended it as reasonable when compared with international standards and current compensation costs in the Israeli finance industry. Moreover, the ceiling applies only to companies managing the public’s money and those that would likely be bailed out at the taxpayers’ expense if they wound up in financial trouble.

The sources said the plan avoided direct government interference in the compensation decisions of privately held companies. But, they said, it should influence the shareholders of the companies to vote to rein in compensation costs, since the alternative is a higher tax liability for the company at the shareholders’ expense.

“If independent shareholders don’t use the authority they are being given to reduce salary costs, the Finance Ministry will need to examine what can be done to develop new tools,” said one source. “The high costs of top executives mustn’t come at the expense of shareholders or he taxpayers.” He said officials would give the new rules one year to monitor the impact.

A number of alterative ideas for capping salaries had been considered, among them an outright salary ceiling, but that was rejected in part due to concerns that it would create excessive government involvement. Officials also rejected a plan for a special, higher tax rate on excessive salaries because experience in other countries had shown it was difficult to enforce.

While treasury officials on Monday were optimistic the measure would win legislative approval, a source in the Knesset said lawmakers were likely to try to broaden the rule to include all publicly traded companies, not just financial institutions. Justice Minister Tzip Livni gave her backing to the plan Monday.

A similar proposal was debated in the previous Knesset, but never advanced to a final vote. Under the proposal, which was made by Shai Hermesh (Kadima), only salary costs of up to 3 million shekels would be recognized for tax purposes The proposal was brought to the Neeman committee, chaired by former Justice Minister Yaacov Neeman, which rejected it.

Yehuda Nasradishi, a former tax commissioner and member of the Neeman panel, told TheMarker that there were reasons to reject a tax-based salary ceiling, saying that many companies would choose to absorb the cost. He said he favored a higher tax rate on salaries in excess of 3.5 million shekels.

But Avi Ben-Bassat, a professor of economics at the Hebrew University of Jerusalem and a former director general of the treasury, was supportive.

“The direction is correct,” he said. “The problem of high executive salaries in Israel is a serious one. The recommendations of the Neeman committee didn’t prove to be effective and didn’t bring about any real restraint… so it requires more direct and more serious intervention.”

Momi Dahan, head of the Federmann School of Public Policy and Government at Hebrew University, also backed the Lapid plan. “In the end the public will benefit, because if salary costs don’t go down, then corporate tax payments will go up. That money can go to education, welfare, health as a result.”

Shmuel Slavin, another former director general of the treasury, suggested that the Lapid proposal was insufficient and that the 3.5 million shekel salary cap should be absolute, meaning that anyone whose wage costs exceed it would be subject to criminal penalties.

“People will take salaries to the upper limit and will put any costs over and above that on the shoulders of investors and others in the company,” he said. “Amendment 20 to the Companies Law, which widens supervision [over salaries], hasn’t done anything to control salaries in finance and banking.”