Taking Stock / The Victorian Era

Victor Medina is under attack.

Knesset member Yossi Sarid launched a bombardment on the retiring chief executive of United Mizrahi Bank, who is ending a nine-year stint with a NIS 13.5 million special bonus. That lifts his total remuneration during his term to NIS 45 million.

Sarid's assault landed at an especially sensitive time for the bank and the man. Mizrahi has been massively cutting jobs in the name of streamlining, so the spotlight on Medina's generous severance package naturally is highly embarrassing to the management and board. It is even more embarrassing for Medina himself, who hopes to be Israel's next Bank of Israel governor.

Naturally, the Mizrahi board couldn't care less about Sarid's bellowing. Also, the criticism that the Supervisor of Banks leveled at the banks about disclosure of the pay package left little impression. On Tuesday, the audit committee approved the NIS 13.5 million goodbye bonus for Medina. That is over and above the NIS 4.8 million compensation he is due under his employment contract.

Medina's representatives claim that the entire debate about his bonus is populist and inflammatory. They are right. So it is time for a somewhat more technical-economic analysis of Medina's remuneration, based on the facts, not the gut.

1. The timing truly was unfortunate, the sum was inflated, and the business logic in paying a bonus that massive to a CEO who's leaving is largely incomprehensible. But Mizrahi Bank is controlled by two private businessmen, Mozi Wertheim and Idan Ofer, and if they decided they should send Victor Medina off to his new life with an NIS 13.5 million check in hand, that's their business. Nobody forced them to do it. It is a free market in which private owners get to decide how much their managers will make.

2. How can the bank pay Medina that much while in parallel firing people? It can: in a free market, managers are rewarded based on results. Sometimes the way to achieve good results is to reduce the work force. Bank shares tend to rise on days the bank announces major job cuts.

3. The campaign: The miserable timing of the reward, just after the bank announced the wave of job cuts and a second before Medina leaps into the race for the central bank top seat, inspired Mizrahi management to commence a vigorous campaign praising Medina's performance as Mizrahi's chief executive to the skies.

Medina really was a good CEO. He led the bank through difficult periods and did not succumb to the temptation to lavish generous credit during the bubble days like his rival CEOs did, and the bank's results improved in his hands. His tenure was marked by battles between the shareholders, in which he became embroiled from time to time, but at the end of the day, he delivered.

4. Medina lifted the bank's return on equity from 1.3 percent to 12.7 percent, the Mizrahi people keep saying. In conversations with the press, they even said he took a languishing bank and changed it into a flourishing one.

The press obediently published the figures, but nobody checked them. Here are the facts. In the three years before Victor Medina took over, 1992 to 1994, Bank Mizrahi averaged a return of 12 percent on its equity. That period included the boom on the stock market and also the bust. Ergo, the claim that Medina took a languishing business and made it bloom is a little far-fetched.

5. Medina did keep doubtful debt provisioning low and managed to streamline the bank's operations. But the bank he leaves behind is not materially different from the one he received; he did not develop any major new areas of business; and its subsidiary Bank Tefahot remains responsible for half its profits.

6. Ostensibly, there is no connection between the job cuts at Tefahot and Medina's big bonus. The dismissals were a business decision made by the new management, and the bonus was decided by the board, a completely different organ. They just happened at the same time.

But if we accept the Mizrahi people's argument that merging Tefahot into Mizrahi and firing workers are necessary steps, one has to ask why Medina didn't do it before. Why did it take a new CEO, Eli Yones, to do it? Apparently, during his stint as CEO, Medina failed to recruit the board's support for the reorganization while Yones succeeded.

7. Medina's high pay throughout his stint can be explained through the principles of the free market. He did good work, they saw nobody better around, so they paid. But why pay NIS 13.5 million more, money not stipulated in his contract, when waving goodbye?

That question becomes all the more niggling when considering that Mozi Wertheim told the Haaretz group business magazine TheMarker that bankers in Israel earn too much. One can only conclude that Wertheim, who had been willing to pay Medina through the nose to keep him at work, was willing to pay through the nose to see him go.

Wertheim and Medina were no love story in recent years. But perhaps Medina's candidacy to be the next central bank governor was one of Wertheim's considerations.

But wait a moment. If anything, that bonus Wertheim paid to Medina just ruins his chances of the governorship, doesn't it? Yes, but anybody who knows Wertheim knows he wouldn't shed tears at the thought of Medina having to forgo his dream. Yes, the personalities involved are consummate businessmen. But at the end of the day, everything's personal.