Israel's Banks Fear Brain Drain After New Law Limits Payby
New legislation caps salary deductions at 2.5 million shekels
Salaries for top bankers have declined over past five years
Israel’s parliament effectively capped executive pay at the country’s banks last week in a nod to simmering public anger over income inequality. The new law also could touch off an exodus of top officials and scare away talented candidates for senior roles.
“I hope the law won’t prompt the early retirement of key people at the banks all at once,” Bank of Israel Governor Karnit Flug said at a news conference in Jerusalem on Sunday. "It’s preferable that such processes be gradual.”
The law, passed March 28, limits individual salaries that banks can claim as a tax-deductible expense to 2.5 million shekels ($655,000). That’s still 20 times the average Israeli wage, but is less than a third of what the chief executive officers of the two biggest banks, Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd., earned last year. Some have warned the restrictions will lead bank executives to leave for industries with no salary limits.
Flug addressed the possible fallout just days after Zion Kenan, the CEO of Hapoalim, Israel’s largest bank, said he will step down. Kenan said he was ending his seven-year tenure to embark on new business challenges.
With financial institutions worldwide coming under tougher scrutiny since the global financial crisis, the salary legislation is the latest blow to Israel’s banks, which already face the prospect of forced divestitures and increased competition. Finance Minister Moshe Kahlon has railed against banking industry pay and questioned whether banks will even exist in a decade.
"Someone who earns 100 times the average salary, and this worldview that only the strong survive and it’s every man for himself - that’s something I’m at war with," Kahlon said in March.
Income inequality has remained a hot-button issue since hundreds of thousands of middle-class Israelis demonstrated in the summer of 2011 against rising housing and food costs, their rage directed at times at tycoons and big business. Income differentials in Israel are among the highest in the developed world.
The chief bankers at three of Israel’s biggest lenders already have seen their pay decline by 35 percent or more since 2010, even as total salaries and revenue at the banks have grown. Rakefet Russak-Aminoach, CEO of Leumi, which had $107 billion in assets at the end of 2015, earned 8.1 million shekels in 2015, the highest salary among the country’s top four banks. Kenan of Hapoalim, which had $110.9 billion in assets, was next with 7.9 million shekels.
By way of comparison, Robert Wilmers, CEO of Buffalo, New York-based M&T Bank Corp., which had $122.8 billion in assets, got a total of $3.05 million last year, including salary, cash bonus and stock bonus. At Unione di Banche Italiane SpA, Italy’s fifth-largest bank with total assets of about 117 billion euros, CEO Victor Massiah earned 1.58 million euros ($1.8 million) in 2015.
Israeli banks can exceed the salary cap but would face a higher tax bill if they do. Their boards would struggle to justify the added expense to shareholders, according to the people familiar with the big banks’ thinking. The Association of Banks in Israel plans to appeal the law to the High Court in coming weeks, the people said.
The top bankers’ salaries are high by Israeli standards but less, for example, than the $2.9 million that Stefan Borgas, CEO of Israel Chemicals Ltd., received in total compensation last year. Stella Hendler, CEO of Bezeq Israeli Telecommunication Corp., earned 4.4 million shekels, while Yuval Bronstein, CEO of Azrieli Group Ltd., got 5.1 million shekels, according to the companies’ annual statements.
Trimming top executives’ income would likely lead to a general cutting of salaries throughout financial institutions to maintain payscales, the people said. Kahlon agreed, telling a Tel Aviv conference March 30 that executives below the top echelon would likely see their pay fall as well to keep the salary hierarchy intact.
Lower salaries throughout the sector would benefit the banks’ shareholders, Citigroup Inc. analyst Michael Klahr, who has buy recommendations for Hapoalim, Leumi and Israel Discount Bank Ltd., said in a note on April 6. The Tel Aviv Banking Index rose 0.2 percent to 1,269.70 at 9:59 a.m. local time.
Some said fears of a talent exodus were overdone.
“Bankers might leave in the short-term, but what is their alternative?” Efraim Sadka, a professor at Tel Aviv University and former Leumi board member, said in an April 3 telephone interview. "Going into other industries would be a challenge because it requires another set of contacts.”
Spokespeople for Leumi, Hapoalim, Discount and Mizrahi Tefahot Bank Ltd. declined to comment.
Finance executives may not be the only ones to see smaller pay slips, as the parliamentary committee suggested the rest of Israel’s listed companies are next on its list.
Still, Sadka said, sometimes companies need to pay up to attract the best talent.
“This law brings the banks and insurance companies back to reality, but it’s still a very bad law," he said. "There are just times when you need to pay a manager more.”