Analysis

So, There Are Israeli CEOs Who Will Suffice With $1 Million Salaries

Israeli banks found three new quality CEOs in short order, even though the government has capped pay for financial-service executives

FILE PHOTO: A man enters the Tel Aviv Stock Exchange, in Tel Aviv, Israel January 29, 2017.
\ Baz Ratner/ REUTERS

The summer of 2019 shouldn’t have been an easy one for Israeli bank search committees. Demand for CEOs surged after three bosses (at Bank Hapoalim, Bank Leumi and Israel Discount Bank) announced in the spring they were stepping down. Leumi also needed to find a new chairman.

Against that, there were a lot of doubts about the supply of potential CEOs, or at least the supply of quality candidates. A 2016 law has capped annual compensation for bankers and other financial-service executives at between 2.5 million and 3.5 million shekels ($1 million), a fraction of the 8 million shekels that some had been earning before the legislation went into effect.

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Who would take a demanding job like CEO of a big bank for such peanuts?

As it turns out, the banks had no problem filling the top jobs. The last of the CEO posts was filled Tuesday when Leumi announced it had named Hanan Friedman to replace Rakefet Russak-Aminoach. The month before, Hapoalim appointed Dov Kolter to replace Arik Pinto, and Discount named Uri Levin to replace Lilach Asher-Topilsky. In June, Leumi named a new chairman, Samer Haj Yehia.

When the pay cap was approved by the Knesset three years ago, people in the banking sector were in an uproar, warning that the move would lead to a mass exodus of executive talent and make it difficult, if not impossible, to find the best people for the top jobs in the sector.

It’s probably true that the nearly simultaneous departure of the three bank CEOs was connected in one way or another with the ceiling, but their successors in each case are experienced and talented managers. The fact remains that despite all the challenges of leading a big Israeli bank – the regulatory pressures, the obstreperous labor unions, the media pressure – the job is still attractive. If the pay isn’t what it once was, the power remains.

There’s no reason to assume, even if they end up occupying the executive suite for less time than bank CEOs have in the past, that they shouldn’t want to prove themselves and lead their institutions to new heights.

The impact of the pay cap could be seen in the lower number of candidates for the job. The ability to recruit “star” CEOs has been diminished and is likely to continue to diminish. One way we saw this was Leumi’s attempt to lure a top Israeli expat to the CEO job. It failed, even though Leumi is by almost every measure the top-performing bank in Israel.

Some would say that it doesn’t really make much of a difference who’s running an Israeli bank because banks are quasi-public bodies, not real businesses. They’re highly regulated and the Bank of Israel is careful not to let them face too much competition. No CEO can expose his or her bank to excessive risks, so pay maxing out at 3.5 million shekels isn’t a deterrent to finding good people.

Unfortunately, that’s not entirely true. As the relative performance of Israel’s big banks over the last five years shows, leadership does make a difference. That doesn’t mean we should be going back to the days of 8-million-shekel salaries, but policy makers should thoroughly assess the number of departures of mid-level executives in the financial-services sector and whether it has hurt the industry’s performance.

The Israeli banking sector today is at a crossroads. Banks are no longer just competing with each other, but with giants of global high-tech like Amazon, Facebook and Apple. Next to these U.S. behemoths, even the biggest Israeli bank is a pipsqueak.

To meet the challenge, Israeli banks have to hire the best high-tech talent they can get in areas like big data, cybersecurity and information systems. Leumi, for one, has taken a step forward on that front: Its new collective labor agreement gives the bank the right to hire 450 people for tech jobs on personal contracts. They won’t enjoy seniority that effectively prevents them from ever being fired and won’t be entitled to automatic pay raises.

That should enable the bank to hire quality people; whether it will be able to retain them has yet to be seen.