Rubber-stamp Directors

Haim Samet, Bank Hapoalim director, wrote a column for TheMarker in support of high executive pay at the bank. "The remuneration system for the top management at Bank Hapoalim is based on a formula determined back in 1998, when Amiram Sivan was CEO of the bank," he wrote.

"Only after knowing these basic facts can one argue whether the bonuses the top management received were merited or not. The Bank Hapoalim board of directors decided they were merited. If it had been up to be, I'd have been happy to pay a bonus like that every ear, on sky-high returns and profits for the public of shareholders. To this day I have not found a more appropriate system to reward successful managers."

Certainly, Samet is consistent. In the last three years he has happily distributed NIS 107 million in wages and bonuses to the three top people at Bank Hapoalim: chairman Shlomo Nehama, vice chairman Danny Dankner, and chief executive Zvi Ziv. The pace of growth in these outlays is pure Star Trek material: in 2002 the three got NIS 6.4 million, in 2003 it reached NIS 11 million, in 2004 they got NIS 24 million and in 2005, they received NIS 72 million. Certainly, when it comes to salaries at the top, Bank Hapoalim presents enviable growth indeed.

It is nice that Samet is so happy to pay; but most of Bank Hapoalim's shareholders seem less pleased at the wages he lavished on the top trio in their name, and at their expense. One is tempted to temper his bliss with decidedly unhappy questions, on issues that Samet ignored in his article published in TheMarker.

Unhappy questions

For instance, why did Samet accept the incentive package (which he says the bank has had in place since 1998), without ever asking (in those eight years) how much it would cost the bank? It is one thing to accept a mathematical formula that links the bank's profits to the bonus; on paper that sounds fine and dandy. But in practice, Samet should have wondered how much it would actually come to.

The fact is that most of Bank Hapoalim's shareholders were not happy with the result, as is evident in their enraged reactions to the NIS 33 million pay that Zvi Ziv received, or NIS 23 million to Shlomo Nehama, or NIS 15 million to Dankner. They evidently do not feel that sums like that are merited. They feel that it is too much and that there's no reason they should pay it.

Even Bank Hapoalim chairman Shlomo Nehama admitted that it was a "deviation from the desirable", created by automated use of the formula, as profits had climbed to new heights - heights for which Bank Hapoalim could thank economic growth and soaring share prices, not necessarily managerial brilliance.

But that formula had been operated blindly, because none of the talents on the Bank Hapoalim board had stopped to wonder whether it shouldn't be. Or, at least, how much it would cost the bank.

Even in October 2005, when the board updated the remuneration formula for Dankner and Nehama (setting tighter terms for their bonuses - one has to wonder what they would have made in 2005 if not for that), the board never asked HOW MUCH the formula was going to cost the bank.

The directors agreed to give the managers a bonus without once wondering how much they were handing over. With behavior like that, it is no surprise that six months later, when it turned out that the bonus had been worth tens of millions of shekels to each of the managers, Samet can only shrug.

But he's not the exception, he's the norm. All the Bank Hapoalim directors, who had agreed on the number-free bonuses unanimously, are cut of the same cloth. That includes the directors representing the public.

The same is true of all the directors at Bank Discount, who agreed to gigantic bonuses without asking how much they were worth under varying profit scenarios.

The board didn't ask embarrassing questions and avoided dealing with embarrassing answers. That is some way to approve matters at Israel's biggest bank: Don't ask, so you won't know and won't have a problem saying Yes.

It is yet another proof that directors are feeble and puling before power; proof that their horse sense cannot be relied upon, not when it comes to a penny, and certainly not when it comes to billions of pounds.