Israel: Authorities Act to Cap Salaries at Banks, Financial Services Companies

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June 23—After a hiatus for national elections, Israeli regulators are again acting to limit what they consider “excessive” compensation at banking and financial services companies.

The Bank of Israel issued a draft directive June 14 that will, among other actions, cap non-salary compensation for bank chairmen at about 2 million shekels ($523,000). The action followed a rare joint statement by Banking Supervisor David Zaken and the Finance Ministry's Director of Capital Markets, Insurance and Savings Dorit Salinger announcing their shared intention to step up salary controls for institutions under their supervision.

Finance Minister Moshe Kahlon is also renewing a legislative proposal that would eliminate the recognition of executive compensation at financial services companies that exceeds 3.5 million shekels ($927,000) per year as a tax deductible expense.

Salinger is expected to release details of a similar plan for insurance companies shortly.

Strengthening Boards' Independence

Under the joint directive, bank chairmen will be allowed to receive base annual compensation of 594,000 shekels ($157,000) and up to 2 million shekels for attending board meetings, excluding social benefits.

The base salary may not, however, exceed four times the pay of an outside director of the bank, and the fee for attending each meeting—up to 11,400 shekels ($3,000)—may not exceed twice what an outside director is paid.

The move to uncouple the chairman's compensation from the bank's business performance comes almost two years after the Bank of Israel told banks that bonuses and other variable components of executive remuneration could not exceed 50 percent of their basic salary packages.

“The amendment's purpose is to reinforce the position of chairman of the board as a control, to strengthen his status on the board and to differentiate it from the management of the regulated entity,” the central bank said in a statement. “In addition, the directive is expected to strengthen the board's independence in deciding executives' compensation.”

Clawback Available in ‘Exceptional Cases'

The new directives will take effect following a still-to-be-determined transition period, rather than at the end of each chairman's contract period, as previously.

If finalized in its current form, the directive could cut the pay for four of the five chairmen of Israel's largest banks by as much as 50 percent, a table attached to the order shows. The average salary cost for bank and insurance company chairmen last year was 3.8 million shekels ($1 million), and only Israel Discount Bank's Yossi Bachar earned less than 2 million shekels.

In addition to the cap on chairmen's salaries, Zaken and Salinger ruled that in exceptional cases company officials will have to return bonuses and other variable remuneration they received—for instance, if the company they manage had to pay a substantial fine or suffered a heavy loss.

The two regulators also ruled that a controlling shareholder cannot pay an office-holder's salary directly to circumvent shareholder approval. Neither can someone simultaneously fill a position in another company within the same business group except in exceptional cases.

Finance Ministry Will Resubmit Salary Limits for Tax Purposes

The Finance Ministry, meanwhile, is readying for parliamentary approval a somewhat revised version of legislation that was not passed before the December collapse of Israel's government coalition.

The new plan keeps the previous version's 3.5 million shekel ceiling for the tax deductibility of executive pay, but adds a stipulation that the value of any stock offered to executives in place of cash must be deducted from the ceiling in order to prevent a possible workaround.

Even if a company is willing to forgo the tax deduction for its senior executive salaries, it will have to obtain approval from the full board, the board's auditing committee and a general assembly of shareholders.

To contact the reporter on this story: Jenny David in Jerusalem at

To contact the editor responsible for this story: Rick Vollmar at

The draft directive is available in Hebrew at

For more information on Israeli HR law and regulation, see the Israel primer.

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