Supervisor of Banks David Zaken today published regulations on remuneration for banking executives. His main innovation is a ban on bonuses and options for bank chairmen, who may now be paid only a regular salary. The measure is a joint initiative with the Ministry of Finance, which imposes the same restriction on remuneration for insurance company chairmen.
Zaken originally planned to impose more severe restrictions, including limited chairmen's salary to NIS 2 million, four times a director's pay and substantially less than most chairmen's current salary. The banks expressed strong opposition, and in a sharply worded letter to Zaken said that he had no authority to impose such restrictions. Some banking sources said they would petition the High Court of Justice if the regulations were retained.
Zaken took note of the comments, and the final version of the regulations, published for the first time a month ago in "Globes," were more moderate than the draft. The final regulations eliminated the linkage to pay for directors, merely stating that salary should be based on the directors' remuneration, without setting a linkage formula, and banning variable pay for chairmen. Theoretically, a chairman's salary could remain at its current level in the form of a fixed remuneration independent of performance. Nevertheless, it is believed that chairmen's salaries will fall, but not to the extent originally planned by Zaken.
"It is expected that the considerations in determining remuneration take value elements into account, as reflected in legislation and relevant legal memorandums," the Bank of Israel wrote, hinting at the Ministry of Finance proposal that executive salaries in excess of NIS 3.5 million be denied recognition for tax purposes. The Bank of Israel continued, "The purpose of the revision is to differentiate between the chairman of the board of directors and the management of the supervised concern, thereby reinforcing his status as a leading party in shaping strategy at the bank, in addition to his auditing function. Furthermore, the requirement is expected to make the board of directors more independent in decision making about salaries for officeholders." This regulation becomes effective today, while in cases in which the chairman already has a contract, it should be adjusted to the new conditions by the end of 2017.
Another important clause in the new rules concerns reimbursement for past bonuses. Zaken originally demanded that the banks determine criteria for officeholders to refund bonuses they had received for up to 10 years afterwards in the event of losses or heavy fines levied against the bank in respect of past events. "The reimbursement requirement constitutes an additional element in the mechanisms designed to make sure that the remuneration arrangements at a bank comply with the risk management framework and its long-term goals," the Bank of Israel writes.
The background for this provision is the affair at Bank Leumi (TASE: LUMI), in which the bank recently reached a settlement with the US authorities concerning the bank's cooperation in tax evasion by its US customers. The settlement included a $400 million fine. Following this affair, some demanded that the Bank Leumi executives at the time the acts were committed reimburse the bank for the bonuses they had received in the past. The demand is currently in the hands of an external committee established by the bank in the matter. Had such a regulation already been in effect, however, it is likely that the former executives would have been obligated to reimburse the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on August 13, 2015
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