New Draft Directives Regarding Remuneration Policy at Banking Corporations
Today, the Supervisor of Banks published drafts of a new Proper Conduct of Banking Business Directive and a new Reporting to the Public Directive regarding remuneration policy at banking corporations.
- The publication of the drafts is in line with the trend among supervisory authorities around the world, which has grown stronger due to the global financial crisis, and which recognizes that the issue of remuneration is an integral element of proper corporate governance at financial institutions, and that it must be ensured that remuneration does not encourage taking excessive risks that could endanger the stability of the banks and of the entire financial system.
- The Directives are intended to strengthen corporate governance and the control and documentation mechanisms in the context of remuneration policy, to ensure that remuneration arrangements are in line with the risk management framework and with the long-term goals of the banking corporation, and to expand disclosure duties such that market participants will be able to evaluate the quality of the remuneration methods.
- The drafts give particular emphasis to the variable component of remuneration:
- The Board of Directors’ remuneration committee will be required to determine in advance the maximum ratio between variable remuneration and fixed remuneration for various employee groups;
- It is required to deferat least 50 percent of the variable component of the remuneration of principal employees over a period of no less than three years;
- The granting of variable remuneration that is not pay-for-performance should be avoided, other than in extraordinary cases.
The Directives will take effect following the completion of discussions regarding them, including in the Consultative Committee on issues concerning banking business, and subject to transition directives.
Review of the remuneration situation in the banking system
The high wages also have ramifications on, among other things, the operational efficiency of the Israeli banking groups and the efficiency of the Israeli banking system as a whole, which shows inferiority in the value of the “Cost to Income Ratio” (operating expenses to total revenue) compared to other banking systems in the OECD, as well as low operational efficiency levels over time (Figures 4 and 5).
Wage levels and cost of salary of all employees in the banking system are also derived, to a certain extent, from the wage levels of its senior personnel. (For the distribution of the number of employees in the banking system by wage rank – see Table 1.) An assessment of wage developments among senior officers in the Israeli banking system indicates a high level of wages and relative downward rigidity while the business results and performance of the banking system are at lows (Figure 6). In addition, on the face of things, the large total of the variable wage component for senior officials at some of the banks in the reviewed years may indicate the potential for taking surplus risks (Figures 7 and 8).