The Bank of Israel issued a series of stern directives Tuesday that cap bonuses and stock options paid to banking executives and order the banks to cancel the pay packages they were planning to put into place for next year.
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“The compensation plans must be rebuilt from scratch,” Banks Supervisor David Zaken said during a telephone news conference shortly after issuing the directives. “Compensation policy must be simple and clear, so that shareholders can also understand what they are voting on.”
The move came in the wake of a media storm over multi-million-shekel pay packages that have been approved by the boards of Bank Hapoalim, Bank Leumi and other lenders in recent weeks. The packages include a base salary, bonuses and stock options that could add up to as much as NIS 11 million a year for each of the banks’ CEOs, chairmen and directors.
The Finance Ministry on Monday agreed to fight the Bank Leumi compensation plan by using its 6% shareholding in the bank to oppose it when it came up for a vote by shareholders. Finance Minister Yair Lapid, who approved the plan, even went to Facebook to express his apposition.
“At a time when most Israelis can’t pay their bills at the end of the month, senior banking executives (and not just those at Bank Leumi) cannot continue to act like the party continues,” he declared.
Under the Bank of Israel guidelines issued yesterday, the variable compensation component of the banks’ pay packages — those based on bonuses and stock option grants — can no longer exceed 100% of an executive’s base salary, except under exceptional circumstances detailed by Zaken when the rate can rise to 200%. Zaken said stock-based compensation would not be considered part of senior bank executives’ fixed salary.
Now that they violate the new directives, Zaken ordered the banks to cancel the annual general meetings of shareholders that had been scheduled over the next month to vote on the packages.
Nevertheless, Zaken did not place any limits on bank executives’ actual salaries. While that left open the possibility that the banks’ boards would seek to raise them in place of large bonuses and stock option grants, Zaken expressed the belief that the banks would not exploit this loophole.
“I think the [banking] system has matured, and I hope that the banks will act responsibly,” he said. “Public opinion and international regulations cannot be ignored.”
Zaken criticized some of the banks for setting unreasonably low performance targets for issuing stock options and said they would need to set new ones. He criticized the banks for presenting compensation plans that he called insufficiently transparent and unclear.
Despite a request made by Bank Leumi's management, the directive states that stock-based compensation can no longer be used as an incentive for retaining senior bank executives.
Zaken said his directives were in line with the main points of the European directive regarding compensation at banks, the final text of which was published in June as part of the implementation of Basel III recommendations in Europe.
"These changes are intended to tailor the method of compensation in the Israeli banking system to the most advanced international standards,” he said, saying they would allow executives to be compensated fairly while creating incentives for excellence and discouraging “excessive risk-taking that exceeds that bank's appetite for risk.”
The guidelines will soon be presented for discussion at a meeting of the Bank of Israel's advisory committee on banking issues.