Bank of Israel Limits Bonuses for Senior Bank Executives to Prevent Risky Incentives

The Bank of Israel's banking supervision department issued a draft directive on Thursday aimed at restricting how banks distribute bonuses and variable pay to senior executives. Unlike fixed monthly salaries, senior managers often receive variable compensation such as annual bonuses or stock options based on performance targets. The draft prohibits linking a senior bank executive's variable pay to the success of a single business line or specific project within their responsibilities. Instead, bonus criteria must broadly and proportionally reflect all areas of the manager's responsibility to align personal financial incentives with the bank's overall goals.

The regulator explained this move is intended to prevent distorted managerial judgment and protect the stability of the banking system. If an executive's bonus depends mainly on one profitable activity, they might focus exclusively on that area while neglecting other important responsibilities. Although existing law caps total senior executive compensation, the Bank of Israel is concerned that current incentive structures still encourage aggressive decisions that boost short-term profits but increase long-term risks for the bank.

For example, a division manager incentivized mainly on the success of a flagship project, such as rapid growth in a specific credit sector like real estate or consumer loans, might approve high-risk loans to meet targets, exposing the bank to future losses. The draft explicitly states the new prohibition applies even if the focused bonus component is a small part of the total compensation package. It also highlights particular concern over equity-based incentives like shares and options, which carry future value and amplify risk-taking incentives.

The banking sector and the public are invited to submit comments on the draft directive by July 16.