Finally a Blow to Overblown Israeli Banker Salaries

The Knesset has decided to intervene in the salaries of senior executives in the banks, insurance companies and investment houses.

Bank Leumi CEO Rakefet Russak-Aminoach, left, and her former boss, Galia Maor. Banking is the only sector in which top female executives earn more than men.
Aviv Hofi

At long last, after years of strong public criticism, the Knesset has decided to intervene in the salaries of senior executives in the banks, insurance companies and investment houses, which shows that in spite of everything, when someone overdoes it in plain sight, he gets it in the end.

And really, the time has come to put an end to the moral corruption embodied in the insane salaries at the top, which has led to tremendous gaps between those at the top and those at the bottom – a malignant social disease that has given rise to frustration, anger and a desire for revenge.

The draft bill, which has been approved by the Knesset Finance Committee, should be divided into two parts. The first part states that if the bank pays a salary of over 2.5 million shekels ($649 million) annually, the addition will not be recognized as a tax-deductible corporate expense. That is the right step. This is a noninvasive measure that avoids administrative interference in deciding the proper salary for a CEO. It maintains that if the CEO goes overboard, the government will not recognize the surplus expenditure, and then every additional shekel will cost the bank 1.36 shekels (corporate tax and profit tax that is unique to banks).

This approach is actually not new. Even today, if a CEO flies first class, the tax authorities will not recognize the ticket as a tax-deductible expense. They will only recognize the price of business class. If the CEO still wants to fly first class, he can do so, but the public will not participate in the expenditure, in other words, the ticket will not be recognized as an expense for tax purposes. And there are other such examples.

Logic says that the additional tax will put pressure on the CEO to lower his salary to a more reasonable level, and that this will to some extent cure the disease of exorbitant salaries at the top. On the other hand, if we still want to take the CEO of a major bank and transfer him to manage a small bank and he demands a very high salary, that will be possible. It will only cost more.

The problem is that this did not satisfy the MKs. They introduced another very problematic element to the draft bill, which does not exist in any other country. According to the proposal, the salary of a CEO can be no higher than 44 times the lowest salary in the company. This is already populistic, superfluous and damaging intervention by those who dont understand much about economic theory.

There is no connection between the salary of the CEO and that of the lowest-paid employee. Each of them receives according to his contribution to the company, according to the degree to which he is in demand, according to the value of his output.

Although it is desirable to fight to improve salaries at the lower levels, that should not be tied to the salary of the CEO. Why shouldnt the worthy MKs pass, for example, a draft bill to the effect that the next salary increment in the economy will be channeled solely to those with low salaries? Its the right thing to do in social terms, but the Histadrut labor federation and the large workers committees would oppose it, which is why the MKs are remaining silent.

MKs should also understand that our financial system is composed of business companies that compete among themselves and try to improve their profits. These are not government corporations like the post office, the ports and the Israel Electric Corporation, whose entire goal is to improve the employees salaries – and let the public pay.

If a given bank is not efficient and profitable, it is liable to go bankrupt. Thats why the restriction that creates a connection – which lacks business logic – between the salary of the CEO and that of the junior employee should be removed from the bill. The CEO should not be restricted in managing his manpower.

We must be satisfied with the more moderate intervention, that any sum above 2.5 million shekels a year wont be tax-deductible. This decision in itself will create a new norm, making it very difficult for the banks boards of directors to approve a salary higher than that sum. After all, the time really has come to stop the great salary robbery.