Israel and Salary Caps

I've suggested exactly this idea before, so I will be most interested to see how it works out in Israel: capping salaries at a given percentage of the lowest paid person in the company.

http://www.haaretz.com/israel-news/business/.premium-1.709326

Knesset Committee Approves Bill Capping Banker's Pay

2.5 million shekels ($640,000) would be set as maximum while no executive could earn more than 44 times a bank's lowest-paid employee. 

Michael Rochvarger, Moti Bassok and Eran Azran

Mar 17, 2016 2:02 AM

 

The Knesset Finance Committee yesterday unanimously approved a proposal that would cap executive salaries at banks and insurance companies at 2.5 million shekels ($640,000) a year.

The proposal had the backing of both coalition and opposition MKs, and its passage was greeted with clapping and cheers.

Yesterday TheMarker reported that Finance Minister Moshe Kahlon had asked the Knesset Finance Committee to approve such a proposal, calling excessive pay “a moral and ethical failure.” His predecessor Yair Lapid had proposed capping salaries at 3.5 million shekels.

The proposal also states that the best-paid executive may earn no more than 44 times the salary of the financial institution’s worst-paid worker.

The move comes after Israel’s five big banks published their 2015 financial reports, once again shedding light on salaries. The average salary package for a CEO at the banks was 5.85 million shekels, while the bank chairmen had an average compensation package of 4.9 million shekels.

Committee chairman Moshe Gafni said before the vote that the process was a historic one that would help close social gaps in Israel. He praised Kahlon, and expressed hope that the companies would accept the proposal willingly.

“This will finally end the outrageous salaries. This is a first step toward fixing social inequality. Times have changed, and from this point we’ll examine imposing salary caps on all publicly-held companies,” he said.

“I have great appreciation for financial skills, management and results, but there’s no justification for a limited group of people earning amazing sums at the public’s expense,” Kahlon stated yesterday. Many people with no less responsibility, including the IDF chief of staff, the head of the Shin Bet and the High Court of Justice president, earn a fraction of what the bank chiefs make, he noted.

Zionist Union MK Shelly Yacimovich added, “What a wonderful victory. ... When I first proposed this six years ago, the CEOs called an emergency meeting and called my bill ‘hallucinatory, monstrous, crazy, idiotic and dangerous,” she said.

The banks union responded that the bill was “extreme.”

The proposal now needs to be approved on its second and third votes by the Knesset plenum in order to become law. It is expected to come up for a final vote soon, before the Knesset’s next break.

Lapid’s proposal had been approved on its first vote in the Knesset’s previous session. The current bill is a revision of the last proposal.

Should the bill be approved, banks that wish to keep paying salaries beyond the cap will face much higher taxes. However, this is unlikely to have too large an impact on their profitability.

Regulators recently restricted the salaries of bank chairmen, eliminating the option of bonuses.

The top-earning Israeli bank executive in 2015 was CEO Rakefet Russak-Aminoach of Bank Leumi, at 8.1 million shekels. The bank recently completed a process designed to improve its capital adequacy ratio, which involved converting employee share rights into shares in the bank. As part of the process, Russak-Aminoach received 3.7 million shekels. That money was in place of a grant due to the bank’s performance in 2015. Its profit totaled 2.84 billion shekels for the year.

Yet over the last few years, Russak-Aminoach had earned less than the CEO of Bank Hapoalim, Zion Keinan. Hapoalim Chairman Yair Seroussi had a compensation package worth 7.7 million shekels. Banks Supervisor Hedva Bar recently stated that the “high salary norms harm the trust in banks. We hope that this will change.”

Israel’s banks are also currently about to undergo efficiency plans. This will include scaling back their workforces. Bar had stated that banks that can present multiyear efficiency plans will receive more lenient capital adequacy ratio requirements.

Bar declined to comment on the Knesset Finance Committee’s move yesterday.