There we sat at a café, the candidate to be CEO of Israel’s second biggest bank and myself, five years ago. He explained at length why he was the right man for the job, elaborated on his plans for Bank Leumi and vast implications for the Israeli economy given the economic concentration in Israel.
I asked if he agreed that Israel’s banks are massively overstaffed, costing them an extra 8-10 billion shekels a year to finance something like 10,000 senior staff and managers who each earn between 50,000 to 100,000 shekels a month. He laughed, and said every manager in the banking system is familiar with the figures.
Bank Leumi’s former CEO, Galia Maor, had cost the bank a wage of 8 million shekels a year – wouldn’t that itself be an obstacle to her contending with the bank’s bloat? “Of course,” he said.
Say the government announces a law curbing the pay of bank CEOs to a quarter of Maor’s take: 2 million a year, I said – would he take the job? “Obviously,” he didn’t blink. “Who wouldn’t agree to be CEO of Bank Leumi for that money? I’d grab the opportunity with both hands.”
Five years later, the bank is managed by Rakefet Russak-Aminoach, who makes the same as her predecessor. The banks Hapoalim, Leumi and Discount continue to suffer mightily from manpower bloat costing them billions, which they roll over onto their customers, mainly the small fry.
Last week the Knesset passed a law to cap bankers’ pay. We can expect the bankers to fight it tooth and nail. Ahead of the fray, let’s look at the bankers’ arguments.
1. Capping bankers’ pay is socialism.
The bankers don’t want discussion of their pay, the banks’ inefficiency and inflated workforces, or the billions upon billions they wrote off from loans to tycoons in the last 10 years. They would rather talk about socialism, communism, capitalism and government intervention. But the claim that limiting CEO pay at companies and banks is tantamount to socialism bears examination.
Most people think banks are private businesses and don’t see why government and politicians should get involved, but banks in general and Israeli ones in particular are hardly private companies. They’re public, not because they’re traded on the stock exchange (which they are) but because big banks are public by definition. Their size and business model are set by regulators, as is the level of competition in the banking sector, how they measure risk and more. This isn’t unique to Israel.
Banks need to be supervised by central banks, if only because so many are too big to fail and their collapse could bring down the system, as happened on Wall Street in 2008. Most of the banks would have collapsed if the American taxpayer hadn’t been forced to rescue them.
To a large degree, Israel’s banking system is governmental: The vast concentration and the fact that all are too big to fail, limited competition and heavy regulation make them so. Curbing wages at the banks isn’t socialist in any way. The only place the government shouldn’t interfere at the banks is their management itself – to whom the banks extend credit. That would be intolerable interference and politicization that could warp credit allocation.
2. The board should set pay.
Makes sense, doesn’t it? That’s how companies work: Professional directors hire management and set their pay. But experience shows agency problems at most big public companies: The directors and managers at banks are agents of a large public of shareholders and depositors, but their personal interests are not those of these people.
Executive pay shot up mainly because directors were “captives” of management or because the directors didn’t have any interest in constraining it. The pool of executive talent isn’t large and incentives can lead to increases in pay irrespective of the good of the company, let alone of society.
The ouster of Danny Dankner as chairman of Bank Hapoalim six years ago revealed a chain of failures in the corporate governance of Israel’s biggest bank. Dankner received personal perks from interested parties and was convicted of crimes, right under the board’s nose. When Stanley Fischer, the Bank of Israel governor at the time, demanded Dankner be fired, the entire Hapoalim board stood by controlling shareholder Shari Arison, who protected Dankner mightily; it took years for her to admit her mistake.
3. High pay attracts the best people.
Yes, we need talent at the banks, but we also need talent at the Finance Ministry, National Insurance Institute and Health Ministry. If top-level pay at the banks and insurance companies is capped at 2-3 times that of a government director general, the banks could still attract terrific people.
4. No country has ever constrained bankers’ pay.
Indeed, in most countries, bankers earn pots of money, especially in recent years. Yet there has been mounting suspicion since the 2008 financial crisis that they aren’t worth their money in terms of the banks’ performance. Worse, economists studying the financial system suspect that its massive growth in recent years hasn’t improved the efficient allocation of resources. A growing part of the global financial system is devoted to activity that does no good to the economy. Executive pay at banks and giant companies hasn’t been constrained because democracies cringe before the bankers’ wealth and contacts.
5. The banks would have no reason to become more efficient.
One could argue that curbing bankers’ pay would create a public-sector culture in the banking system. Absent clear financial incentives, the banks would operate like government monopolies and not seek to maximize profits. Sounds logical, but there are two issues here: Although banker pay shot up in the last 20 years, Israel’s banks remain absolutely bloated with surplus manpower. And both Hapoalim and Leumi made unsecured loans to tycoons who then went broke.
How did that happen? Because there’s hardly any competition in Israeli banking.
The only reason for the banks to become more efficient is competition. When that arrives, managers who want to keep their jobs will have to increase efficiency (and won’t be able to justify lending billions to tycoons without collateral). Right now they can sit pretty without cutting flab and costs and without worrying overmuch about credit quality, thanks to their millions of captive customers and monopolistic status.
6. The politicians want to cut bank pay because of populism.
True. But that’s how democracy works. And the public’s “populist” demand that bankers make less is based on solid economic foundations. Most people believe in free economics and competition. Since the cost-of-living protests broke out in Israel in 2011, and the tycoons’ reign of terror collapsed, a new dynamic has arisen, which exposed the public to how the giant companies in Israel – including the banks – make their money.
People realized that the huge salaries at most of the big companies have nothing to do with capitalism or socialism, but to a structure that lets the big companies set the rules of the game in the markets, routing growing parts of the pie to a small group of people.
7. It won’t make a difference to the little man.
True, how much 30 or 40 bankers and insurers make is marginal compared with the balance sheets of these companies, the entire economy and the cost of living in Israel. But it has vast influence on norms.
The first thing cutting executive pay at the banks and insurance companies would do is strengthen the message that the smokescreens of left-right, peace and security can’t legitimize bloated, distorted economic structures any more. The public remains torn on security but is united against the tax militias that have conquered the decision-making process, that steal from the public’s pocket and threaten the public’s economic security and that of its parents and children.
Legislation would also dramatically reduce the gap between the pay earned by the regulators supervising the bankers and insurers, and the pay bankers and insurers get, which can be 10 to 30 times as much. The gaps create negative social influences.
Capping bankers’ and insurers’ pay won’t change the economy in a day, but it’s a necessarily step in changing norms and the loci of power.
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