Bank of Israel Blocks CEO Stock Option Plan Tied to Subsidiary Performance

The Bank of Israel's banking supervision department issued a final clarification prohibiting the linking of senior executives' variable compensation to the performance of a single subsidiary. This follows Bank Leumi's decision to grant CEO Hanan Friedman stock options derived from the value of its subsidiary Leumi Partners, which have not yet vested. The connection between the clarification and Friedman's option plan was revealed earlier this week by Calcalist.

The directive, circulated initially as a draft about two weeks ago, is part of the bank's existing variable compensation regulations and represents an immediate binding interpretation rather than a future legislative change. It includes no transitional provisions or exemptions for existing agreements and emphasizes that the prohibition applies even if the linked component is not material at the time of grant.

Since the options' exercise is a future event governed by the updated regulatory framework, Bank Leumi's board and compensation committee are expected to reassess and adjust the plan to comply with the supervisor's stance. The banking supervisor's move aims to prevent managerial resource diversion and excessive risk-taking. Variable pay is intended to incentivize executives to achieve long-term corporate goals, but tying it to a specific business unit's performance could skew managerial judgment, encouraging focus on that unit at the expense of the bank's overall stability and growth or prompting short-term value inflation that exposes the bank to unusual risks.

Bank Leumi has not provided a response to the clarification.