Supervisor of Banks David Zaken and Ministry of Finance Director of Capital Market, Insurance and Savings Department Dorit Salinger today surprised the financial sector with a series of joint orders restricting executive salaries. There are several clauses in the instructions, but the main one is a dramatic salary cap for chairmen in the entities that Zaken and Salinger are supervising.
Under the new rules, a chairman of a financial entity is not eligible for variable remuneration, meaning bonuses and options; his remuneration must be fixed. The salary mechanism for chairmen will be similar to the mechanism for external directors, whose salary is currently limited to NIS 100,000 a year, plus NIS 5,000 for each meeting they attend. In the bottom line, chairmen's salaries are expected to be in the NIS 1-1.5 million range.
The instruction will become effective following a transition period to be determined by the regulators (probably 1-2 years), not at the end of each chairman's contract period, as was the case with some of the previous salary caps imposed. A table attached to the order shows a dramatic drop of more than 50%, compared with the current salary norms. The average salary cost for bank and insurance company chairmen last years was NIS 3.8 million. Company performances in the sector were better in some other years, making the salary costs still higher.
Like other countries
The decision to eliminate the bonuses and options for chairmen was taken for the purpose of separating the chairman from management, which considers both the company's performance and the cost of taking risks, and in order to strengthen the chairman's function as someone who criticizes and supervises management. The regulators therefore eliminated remuneration contingent on corporate performance.
Eliminating the link to performance, however, raises the question of whether it will make the financial concerns indifferent, and lead chairmen to advocate leaving things as they are merely in order to finish their terms without upheaval, even at the cost of mediocre results. Commenting on this problem, a source close to one of the regulators said that directors also receive salaries that are not contingent on performance, and they still support plans and initiatives that develop the concerns. Furthermore, the company executive section, i.e. management, is supposed to be performance oriented, not the board of the directors and the chairman. Regulatory sources also argued that such restrictions are used in other countries.
Other than the cap for chairmen's salaries, Salinger and Zaken ruled that in exceptional cases, officeholders will have to give back bonuses and other variable remuneration that they have received, for example in a case where the company they manage had to pay a substantial fine, or had suffered a heavy loss. This order may originate with the Bank Leumi (TASE: LUMI) affair, for which the bank recently paid a $400 million fine (for abetting tax evasion by US customers). The question has been raised of whether the bank's former executives, headed by former chairman Eitan Raff and former CEO Galia Maor, will have to give back their bonuses. In any case, the current order applies to the future, and will not apply retroactively, but it may have been inspired by that affair.
The third clause in Salinger and Zaken's rules concerns the way senior executives are paid. The two regulators ruled that a controlling shareholder cannot pay an officeholder's salary directly. The relevant example in the financial sector is the case of Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) and Oded Sarig, its chairman. Migdal Insurance and Financial Holdings owns Migdal Insurance. Sarig receives salary from Eliahu Insurance, through which Shlomo Eliahu controls Migdal Insurance and Financial Holdings. Sarig is employed by Eliahu Insurance as a consultant to Shlomo Eliahu, not as an officeholder, meaning that Sarig's salary mechanism has been determined solely by Eliahu, without any need for approval from a shareholders meeting. Nevertheless, it is not clear whether the new restriction will apply to Sarig, since Migdal Insurance and Financial Holdings is not considered an insurance company, and is therefore not supervised by the Ministry of Finance.
Zaken and Salinger also ruled that an officeholder that an officeholder cannot simultaneously fill a position in another company in the same group, other than in exceptional cases. The question arises in this case of whether the chairmen of credit card companies, who are currently also officeholders in the banks, will be able to continue in these positions.
In response to the publication of the order, Salinger today stated, "The instructions will strengthen the board of directors' independence, and improve the quality of corporate governance in the financial institutions." Zaken added, "Banks, which manage the public's money, are required to meet high standards of proper corporate governance, and these instructions will contribute to that." The third financial regulator, Israel Securities Authority chairman Shmuel Hauser, supervises public companies. The Israel Securities Authority was briefed about Salinger and Zaken's initiative, but as of now, has not decided to apply the new restrictions to all public companies.
The orders published by Salinger and Zaken come on top of another series of orders they have published in recent years aimed at restricting executive salaries in financial entities. The most important of these stated that the variable component of remuneration could not exceed 50% of the salary package (other than in exceptional cases). Former Minister of Finance Yair Lapid proposed a dramatic restriction on executive salaries in the financial sector: non-recognition for tax purposes of salary in excess of NIS 3.5 million. After the previous government collapsed and Lapid was fired as Minister of Finance, however, this initiative was buried along with the 0% VAT plan for purchasers of a first apartment.
Published by Globes [online], Israel business news - www.globes-online.com - on June 10, 2015
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