The Banking Supervision Department intends to probe bonuses paid to top commercial bank executives even as exorbitant salaries continue to be paid without disruption at the Bank of Israel. Supervisor of Banks Rony Hizkiyahu will now examine the criteria for performance-based bonuses paid to bank executives.
Bank of Israel spokesman Dr. Yossi Saadon said, "The issue of bonuses is now under discussion at the Banking Supervision Department."
The Bank of Israel is due to publish guidelines on bonuses by the end of the month. The central bank emphasizes that the guidelines are general, and will not target specific banks.
A banker said in response, "This is populism. The supervisor has kicked in an open door. In view of the situation, no bank is expected to distribute large bonuses for 2008."
Bank Hapoalim (TASE: POLI; LSE:80OA) will not distribute any bonuses because its return on equity will be less than the minimum allowed for them.
Hizkiyahu believes that there are compensation items in salary packages that encourage bank managers to take unnecessary risks. He believes that the risk is asymmetrical, and that managers' bonuses increase when a bank does well, but that managers do not face penalties if the risk is realized and the bank loses money.
The issue of asymmetrical compensation is one of the lessons of the economic crisis.
Hizkiyahu intends to thoroughly examine how each bank operates in this area, and whether the bonus mechanism affects the appetite for risk by executives. For example, if the amount of a bonus is influenced by an increase in a bank's activity, a manager could boost banking activity that is unwarranted in terms of profit. A Bank of Israel source said, "We're not talking about restraint for the sake of restraint, but the prevention of risk."
Belying media reports, the Bank of Israel has no plans to submit legislation on salaries, make a sweeping ban of bonuses, or intervene against basic salaries and existing labor agreements. Hizkiyahu has said in the past, "The Banking Supervision Department will not intervene in salary levels at the banks."
Published by Globes [online], Israel business news - www.globes-online.com - on February 2, 2009
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