Knesset ups tax penalties for extravagant pay to bank CEOs

A financial institution may pay its top earner no more than 35 times the salary of the lowest earner or risk double taxation

Illustrative: View of a special plenum session marking the 50th anniversary of the Knesset's current building, January 19, 2016. (Yonatan Sindel/Flash90)
Illustrative: View of a special plenum session marking the 50th anniversary of the Knesset's current building, January 19, 2016. (Yonatan Sindel/Flash90)

The Knesset on Monday passed into law a reform of financial sector executive pay that seeks to shrink the gap between the lowest- and highest-paid employees in the nation’s banks and insurance firms.

The new law sets an upper limit for the top executive’s gross salary at 35 times the gross income of the lowest-paid worker in the institution, or 44 times the lowest-paid net. With minimum wage currently at NIS 4,650 ($1,215) per month gross, the new law effectively limits executive pay to NIS 1.95 million, or some $510,000, per year before taxes. Any pay above that figure is no longer counted as a tax-deductible corporate expense, and will thus be double-taxed through both corporate and employee income taxes.

The previous bar for tax-deductible executive pay was set at NIS 3.5 million per year.

In effect, the new law has made it potentially much more expensive for the financial industry to continue the practice of paying its top CEOs salaries that reach as high as 8 million shekels per year.

The measure enjoyed across-the-board support in the Knesset, passing into law Monday by a vote of 56-0.

In a raucous debate in the Knesset Finance Committee earlier this month, lawmakers sought to find a compromise between financial sector representatives who warned that artificially curbing pay would lead to a brain drain out of the industry, and MKs who demanded much more stringent limits to executive pay.

Committee chair MK Moshe Gafni (United Torah Judaism) backed a compromise with the Treasury that would have limited CEO pay to NIS 2.5 million a year, or 35 times the salary of the lowest-paid worker, whichever was lower.

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 in early March that showed the CEOs and board chairs of the country’s top five banks — 10 people in all — pocketing 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 earned 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 in the combined income of 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.

“Finance industry executives earn an annual income, including benefits, grants and bonuses, that can reach over eight million shekels a year,” Finance Minister Moshe Kahlon wrote in a letter to Gafni last week expressing support for the law.

Such generous pay is “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 went on to insist that its “economic, ethical and moral ramifications are felt across the width and breadth of the Israeli economy.”

The idea to peg the top salary to a financial institution’s lowest salary came from opposition lawmakers, especially longtime advocate on the issue MK Shelly Yachimovich (Zionist Union), as well as Meretz leader MK Zehava Galon.

CEOs are not likely to raise the lowest wages in the company to increase their own pay. Bank Hapoalim, Israel’s largest financial institution, has some 13,500 employees. Such an across-the-board hike in salaries is prohibitively expensive for most of these institutions.

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.

Israeli banks 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 Finance Committee last week.

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, and are seeking to expand the rule to other industries..

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.”

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