Bill is 'extreme,' will lead to brain drain from top banks, financial industry group warns

Knesset pushes stiff limits for bank CEOs’ pay

Finance Committee hammers out compromise that increases taxes on salaries above NIS 2.5 million and pegs the highest wage to the lowest

Knesset Finance Committee chair MK Moshe Gafni. (Miriam Alster/Flash90)
Knesset Finance Committee chair MK Moshe Gafni. (Miriam Alster/Flash90)

Israeli lawmakers are considering a dramatic reform of financial sector executive pay that would seek to shrink the gap between the lowest- and highest-paid employees in the nation’s banks and insurance firms.

In a raucous debate in the Knesset Finance Committee on Wednesday, committee chair MK Moshe Gafni (United Torah Judaism) backed a compromise bill that would limit CEO pay to NIS 2.5 million ($641,000) a year, or 35 times the salary of the lowest-paid worker, whichever is lower.

According to the latest version of the bill, executive pay that surpasses that cap would not be recognized as a tax-deductible corporate expense, and would thus be double-taxed through both corporate and employee income taxes.

Pegging the upper tax-deductible limit of executives’ salaries to a multiple of the lowest-paid employee’s monthly wage — all Israeli banks employ subcontracted workers who make minimum wage — would create a direct incentive to increase the pay at the bottom of the corporate ladder, Gafni said.

Rakefet Russak Aminoach (Yaniv Unger / wikipedia)
Rakefet Russak-Aminoach (Yaniv Unger / wikipedia)

The bill follows the publication of figures released by regulators earlier this month that showed the CEOs and board chairs of the country’s top five banks — 10 people in all — pocketed a combined NIS 55 million ($14.1 million) in 2014, and over NIS 58 million ($14.9 million) in 2015. The top earner was Bank Leumi CEO Rakefet Russak-Aminoach, who received NIS 8.13 million ($2.1 million) in 2015, counting salary and various benefits, the business journal TheMarker reported.

Lawmakers have been considering imposing new limits on financial sector executive pay for years, and many said they saw the single-year jump of NIS 3 million for the top 10 earners in 2015 as a slap in the face at public displeasure over the rising wages at the top — and the growing gap between salaries at the top and bottom.

The bill backed by Gafni draws from both opposition and coalition proposals for addressing the gap.

Finance Minister Moshe Kahlon (Kulanu) has expressed his support for the bill’s key measure: the NIS 2.5 million annual limit for tax-deductible salaries — a cut of NIS 1 million off the current top allowable salary (before bonuses and dividends) of NIS 3.5 million ($900,000) per year.

“Finance industry executives earn an annual income, including benefits, grants and bonuses, that can reach over eight million shekels a year,” Kahlon wrote in a letter to Gafni ahead of the latest Knesset debate.

Such figures are “unjustifiable and beyond all reason,” Kahlon insisted. “It amounts to 100 times, if not more, the average salary in the marketplace.” Describing the growing wage gap as an “ethical and moral failure,” the finance minister said its “economic, ethical and moral ramifications are felt across the width and breadth of the Israeli economy.”

Opposition lawmakers, meanwhile, called for the top salary to be pegged to a financial institution’s lowest salary.

Meretz leader MK Zehava Galon proposed one such version of the scheme, offering no limit on a CEO’s maximum salary but cutting the permitted gap between the highest and lowest salaries to 20-fold. Under her plan, CEOs would have an upper salary limit of NIS 2 million a year ($513,000), with the stipulation that it could be raised without limit as long as it was not more than 20 times the salary of the lowest-paid employee. An executive who wishes to make more than NIS 2 million per year must raise the salary of the lowest-paid employee above NIS 8,300 ($2,130) per month, fully 80 percent more than Israel’s monthly minimum wage of NIS 4,650 ($1,193).

“This way, we’re offering both a carrot and a stick,” Galon told TheMarker. “Only an executive who doesn’t raise salaries at the bottom will be subject to the rigid cap.”

Galon’s plan could drastically curb salaries at the top of Israel’s financial industry. By the time a CEO like Russak-Aminoach was earning in the NIS 8 million ($2 million) range annually, the lowest-paid employee would have to be making some NIS 33,000 ($8,500) per month, a figure that matches the salaries of executives in other sectors of the Israeli economy — and a prohibitive minimum wage for a large bank — or see a drastic spike in taxes imposed on the higher wage.

Bank Hapoalim, Israel’s largest financial institution, has some 13,500 employees.

Other opposition-led proposals called to impose the double taxation from the very first shekel on any executive’s salary that surpasses the salary cap — meaning that a salary would have to be much higher than the cap before the executive’s take-home pay matched what it would have been below the cap.

The compromise backed by Gafni combines the two measures, adopting Kahlon’s NIS 2.5 million cap and a less drastic linkage between the top and bottom salaries.

According to Gafni, Kahlon supports the newest version of the bill.

“The finance minister told me he’ll support it if the committee concludes this is the right thing to do,” Gafni told lawmakers Wednesday. “We’re talking about a step that will help the lowest earners.”

Gafni is seeking a unanimous vote to approve the compromise. “This isn’t about coalition or opposition,” he said.

Under the compromise plan hammered out by lawmakers and the Treasury — and reportedly supported by a majority of the Finance Committee’s members — a CEO making NIS 2 million annually would have to pay the lowest-paid employee just NIS 4,761 ($1,221) per month, no more than about 100 shekels above the monthly minimum wage. But to reach the upper limit of NIS 2.5 million, the same CEO would have to ensure the lowest-paid employee made NIS 5,950 ($1,526) per month, a 28% raise from the minimum wage.

Supporters of the compromise say a more modest peg makes it far more likely that executives will actually choose to raise the salaries at the bottom of the corporate hierarchy.

Israel’s banks and insurance companies have vociferously opposed the measure, calling it “discriminatory” and unwise.

“This is a problematic bill, and an extreme one,” a representative of the Association of Banks in Israel, the main banking industry advocacy and lobbying group, told the committee on Wednesday.

The bill discriminated against banks, the representative said, noting that rising executive pay in other industries was not subject to similar legislative interventions.

“These limitations are being forced on the most heavily regulated sector in the economy. As long as the bill affects only the financial sector, it discriminates even more.”

Banks, he said, feared a brain drain to industries without similar salary limits. “What will happen here, without a doubt, is that good people who work in the banks and in the insurance companies will move to other sectors. We don’t work in a vacuum.”

Some opposition lawmakers agreed with the complaint about discrimination.

Zionist Union MK Manuel Trajtenberg, a noted economist and former top economic adviser to Prime Minister Benjamin Netanyahu, said lawmakers “are not at all convinced that the focus of these efforts must be limited only to financial companies.”

During the committee’s Wednesday debate, Trajtenberg, Galon, MK Shelly Yachimovich (Zionist Union) and others suggested expanding the measure to include more industries.

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