Bank of Israel Plans Limits on Senior Bank Executives’ Variable Pay After Leumi CEO Option Plan
The Bank of Israel is set to impose new restrictions on variable compensation for senior bank executives following the stock option plan granted to Hanan Friedman, CEO of Bank Leumi. About a week ago, the Bank of Israel published a draft directive prohibiting the linkage of a senior executive’s variable pay to the success of a single business line or project under their responsibility. Instead, the criteria for variable pay must broadly and proportionally reflect all areas of the executive’s duties to align personal financial incentives with the bank’s overall goals.
This regulatory move was triggered directly by Friedman’s compensation plan approved roughly two and a half months ago, which included the allocation of 854,700 non-tradable stock options. Unlike typical banking compensation plans where option exercise depends on the entire bank’s stock performance, Friedman’s plan ties a significant portion of his entitlement to the fair value increase of a subsidiary, Leumi Partners, the bank’s real investments arm. This structure uses a "net exercise" mechanism that offsets against Friedman’s fixed salary, reflecting a fair value of about one million shekels at grant, spread over vesting years and subject to the financial sector’s senior pay law cap of approximately 3.5 million shekels annually.
The Bank of Israel’s rationale is to prevent distorted managerial judgment and protect the stability of the banking system. Supervisors warn that if an executive’s bonus depends mainly on one profitable activity, it may skew their focus toward that area at the expense of other responsibilities, potentially encouraging aggressive decisions and excessive risk-taking to boost short-term profits. The new prohibition will apply even if the focused bonus component is not a major part of the total compensation package at the time of grant.
Following a public comment period, the Bank of Israel is expected to finalize and publish the directive soon, possibly applying it retroactively to Friedman’s approved compensation package. This move reflects heightened regulatory concern over incentive structures that could undermine prudent management in Israel’s banking sector.
