Banking on the Watchdog

The banks supervisor dared intervene in the senior executives’ club to protect the interests of the system he oversees and its clients.

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“I think the system has matured and I hope bankers will act responsibly. Public opinion and international regulations cannot be ignored,” Banks Supervisor David Zaken said on Wednesday, in announcing his decision to cap the compensation paid to banking executives and to limit what he termed their “unreasonable” bonuses. Limiting variable compensation (bonuses and stock options) to 100 percent of fixed compensation, subject to certain targets being met, is part of the implementation of the Basel III recommendations adopted by banks in European Union member states in order to maintain the stability of the banking system. By limiting bonuses, Zaken seeks to limit bank executives’ incentives for excessive risk-taking that could jeopardize the stability of the banking system.

There is a symbolic reason for these measures that is no less important than these practical reasons. The customers of Israel’s banks – a sector with very limited competition, in which the two biggest banks control two-thirds of the market – are fed up with paying for the inflated salaries of bank executives (chairmen, CEOs and deputy CEO), to the tune of hundreds of millions of shekels a year.

Bonuses, including retention bonuses, noncompetition bonuses and acclimation bonuses, are added to the enormous salaries that some individuals receive. They can add up to as much as NIS 5.3 million or NIS 4.9 million a year – the variable component of the compensation of the CEO and the chairman, respectively, of Bank Hapoalim in 2012. The performance targets for receiving variable compensation is sometimes quite low. The costs of this remuneration are borne by the customers, most of whom pay banking fees in reverse proportion to their economic situation – poorer customers pay higher fee rates than wealthier ones, or than employees of a workplace with “muscle.”

Banks are different than other private concerns, in which caps on salaries constitute intervention that could impair a firm’s right to hire the best executives and remunerate their efforts accordingly. That is because the state and the Bank of Israel, that is, taxpayers, give banks a public safety net in case the bank fails or a serious crisis ensues.

The banks supervisor dared intervene in the senior executives’ club to protect the interests of the system he oversees and its clients. It is to be hoped that after addressing the wages of the senior executives, he will address the excessive salaries of certain bank employees, particularly ones with the most seniority. These costs, too, are in the end also passed on to the customers.