Israel Adopts New Law To Cap Bank Executives’ Salaries At Less Than $1 Million A Year

Israel is cracking down on bank executives’ salaries as part of a broader campaign to reform the country’s banks and narrow the pay gap between workers and bosses.

Israeli lawmakers this week approved one of the world’s toughest curbs on bankers’ pay, Reuters reported. Finance Minister Moshe Kahlon helped push through the law, which the Knesset (Parliament) approved overnight Tuesday in a 56-0 vote. The measure will take effect in six months.

“There is a moral significance beyond the economic significance of this law,” Kahlon, whose centrist party is key to keeping Benjamin Netanyahu in as prime minister, told Reuters Tuesday. “It symbolizes narrowing pay gaps, solidarity and consideration for the weak.”

Banks in Israel make large profits in part by collecting a wide range of fees on activities like cash deposits and withdrawals. Salaries at Israeli financial firms have soared in recent years, according to Parliament’s finance committee. About a quarter of Israel’s 40 public companies with the highest executive pay levels are financial firms, Reuters noted.

The new law, which also applies to insurance companies, will cap bankers’ total compensation at 2.5 million shekels ($652,605) per year, or no higher than 44 times the salary of the least-paid employee at the company. Anything above the cap will be subject to higher taxes.

Senior bankers’ compensation has surged to as high as 8 million shekels ($2 million) a year — roughly 70 times Israel’s average annual wage of 115,000 shekels ($30,086).

In the United States, financial firms have to disclose their ratio of top pay to bottom ranking pay under the Dodd-Frank Wall Street reforms. But banks aren’t limited to a precise ratio. U.S. banking regulators in April are expected to issue updated compensation rules requiring banks to defer executive bonuses longer than the standard three years, although how long bankers will have to wait and how much of their bonuses will be withheld is still unclear.

Swiss voters in 2013 rejected a proposal to cap pay for bank executives at 12 times that of the company’s lowest-paid employees. The so-called 1:12 initiative emerged as the gap between Swiss citizens at the top and bottom of the pay scale widened from 6-to-1 to 43-to-1 in recent years.

Critics of the Israeli pay cap argue that the law would discourage investment in Israel and tarnish the country’s business reputation around the world. Meirav Arlosoroff, a contributor to the Israeli newspaper Haaretz, said lawmakers were “persecuting senior executives” on compensation and exacerbating the country’s existing economic troubles, including stunted growth and declining exports.

“Israeli lawmakers have missed out on the wisdom of the Swiss, who understood that extremism is dangerous in a democratic form of government with checks and balances,” Arlosoroff wrote in a March 23 column. “Here we aspire to be the first. But no one has added up price the Israeli economy will pay for that.”