Bank of Israel Plans Limits on Senior Bank Executives’ Variable Pay After Leumi CEO Option Program

The Bank of Israel is preparing new restrictions on variable compensation for senior bank executives, prompted by the stock option plan granted to Hanan Friedman, CEO of Bank Leumi. About a week ago, the central bank released a draft directive prohibiting linking an executive’s variable pay to the success of a single business line or project under their responsibility. The criteria for variable pay must broadly and measurably reflect all areas of the executive’s duties to align personal financial incentives with the bank’s overall goals.

This regulatory move follows the approval of Friedman’s compensation plan two and a half months ago, which received 98% shareholder support at a Leumi meeting. Friedman was allocated 854,700 non-tradable stock options. Unlike typical banking compensation plans tied to the bank’s overall stock performance, a significant portion of Friedman’s options depends directly on the fair value increase of Leumi Partners, the bank’s real estate investment arm. The options were granted under a "Net Exercise" mechanism, offset by a reduction in Friedman’s fixed salary, with an estimated fair value of about one million shekels at grant, spread over vesting years. This complies with the financial sector’s senior pay law, which caps annual compensation costs at roughly 3.5 million shekels.

Variable pay usually includes bonuses or options based on meeting broad targets like growth or profitability. The Bank of Israel’s concern is that tying bonuses to specific projects can distort managerial judgment and threaten system stability. The draft directive warns that if an executive’s bonus depends mainly on one activity’s success, it may divert focus from other responsibilities. Although the senior pay law caps total compensation, regulators worry that incentive structures under this cap could encourage risky, short-term decisions harmful to the bank.

The directive will apply even if the targeted bonus component is not a major part of the overall pay package at grant. After public comments, the Bank of Israel plans to issue the final rule soon, possibly applying it retroactively to Friedman’s approved package.

Since November, Leumi Partners, led by CEO Victor Wekert, has been actively executing deals totaling nearly 4 billion shekels in equity and debt, including investments in restaurant groups Nono & Mimi and Landora, energy companies Nofar Energy and Edaltak, HOT Mobile, Delek Israel, and environmental group Bluegen. While the new restrictions stem from Friedman’s option plan, the central bank’s broader concern is preventing incentive structures that might encourage executives to prioritize rapid growth in specific sectors, such as real estate or consumer credit, by taking excessive risks that could jeopardize the bank’s long-term stability.

Friedman has led Bank Leumi since 2019, under whose leadership it has become Israel’s largest bank by credit portfolio size and market value.