Financial institutions oversee an enormous amount of the public's money. In Israel, as at December 2013 the amount under management totaled more than NIS 2 trillion. Given that this is so, the activity of financial institutions clearly has a significant impact on the Israeli economy; moreover, having regard to the huge volume of money that is overseen by these financial institutions, a need arises to uphold an extremely high standard of corporate governance and also to maintain a very strict and tight system of restrictions and caps when approving the grant of executive compensation.

In 2012, amendment number 20 to the Israeli Companies Law, 1999, which regulated the structure of compensation payable to executives and the procedure for its approval, entered into force. The next stage in the process of regulating executive compensation packages is aimed at linking the actual performance of a financial institution with the rate of the compensation of its senior executives, by way of a disincentive against excessive executive risk-taking.

The Bill, which passed its first reading, contains two primary provisions:

  1. Establishing a system of corporate governance for approving compensation in an amount exceeding NIS 3,500,000 per annum, to an executive, or a key employee, of a financial institution. The proposed system contemplates that compensation exceeding NIS 3,500,000 per annum will need to be approved by the responsible bodies in the financial institution and in the following order: (i) a compensation committee, and if no such committee exists, then by the financial institution’s audit committee (if any); (ii) the board of directors; and (iii) the shareholders in general meeting. The Bill also provides that if the financial institution is required to appoint outside directors, then the approval must be confirmed by the majority of such directors. In addition, the Bill provides that if the financial institution is a public company, then the approval procedure should be conducted in accordance with section 267A(b) of the Companies Law, 1999 which requires a supermajority of the minority shareholders. Any compensation not approved pursuant to this system will have no legal effect.
  2. Stating that for the purposes of assessment of the taxable income of a financial institution, no deduction for individual executive compensation in an amount exceeding NIS 3,500,000 will be allowed.  

The Bill has now been sent to the Knesset Finance Committee for further deliberation. We will continue to track its progress and to advise.