Bank of Israel Challenges CEO Hanan Friedman's Equity Compensation Package at Bank Leumi

The Bank of Israel's banking supervision department issued a final directive today that casts doubt on the recently approved equity-based compensation package for Hanan Friedman, CEO of Bank Leumi. The directive states that a banking corporation cannot grant variable compensation based solely or primarily on the performance of a single business unit, especially when it involves equity-based rewards. The criteria for variable compensation must broadly and proportionally reflect all areas of responsibility of the executive to ensure alignment between personal financial interests and the overall goals of the banking corporation.

About three months ago, Bank Leumi's shareholders approved the allocation of 854,700 non-tradable stock options to Friedman. The future exercise value of these options is directly linked to the valuation of Leumi Partners, the bank's investment and real estate arm. This allocation was made through a Net Exercise mechanism, offset by Friedman waiving part of his base salary, with a fair value of approximately one million shekels at the time of grant. The accounting value is spread over the vesting period under the senior financial executives' salary law, which caps annual costs at about 3.5 million shekels.

The Bank of Israel's clarification, published following the approval of Friedman's compensation package, is a binding interpretation of existing regulations rather than a proposal for future legislative changes. It includes no transitional provisions or exceptions for existing agreements, emphasizing that the prohibition applies even if the linked component is not material at the time of grant. Although the options have been allocated, they have not yet vested or been exercised.

Given that the exercise event will occur under the updated regulatory framework, Bank Leumi's board and compensation committee are expected to reassess and adjust the plan to comply with the regulator's stance and avoid conflicts with its guidelines. The regulator's move aims to prevent managerial resource diversion and excessive risk-taking. Variable compensation is intended to incentivize executives to achieve long-term goals reflecting the bank's overall performance and responsibilities. Linking variable pay, especially sensitive equity components like options, to the performance of a single business unit may skew managerial judgment, potentially prioritizing short-term value inflation and personal gain over the bank's stability and growth.

Bank Leumi has not yet responded to the directive.