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The Supervisor of Banks today announced that he is adopting the main points of the European Directive regarding remuneration at banks, the final text of which was published at the end of June 2013 as part of the implementation of the Basel III recommendations in Europe (Directive 2013/36/EU- Capital Requirements Directive), and the implementation of which in Europe will begin on January 1, 2014.
As such, the Supervisor of Banks has published an updated draft of Proper Conduct of Banking Business Directive (draft directive) regarding remuneration policy at banking corporations, the initial text of which was published in Hebrew on the Bank of Israel’s website on June 3, 2013. The previous announcement can be found at:
The guidelines in the draft are in line with the development among regulatory authorities around the world, which has gained strength following the global financial crisis, and which holds that remuneration is an important element of risk management and proper corporate governance at financial institutions. These guidelines are intended to strengthen the control mechanisms and ensure that remuneration arrangements are consistent with the long-term goals of the financial institution.
The following are included in the updated draft directive:
(a) As a rule, variable remuneration shall not exceed 100 percent of fixed remuneration. In exceptional cases, and subject to the requirements detailed in the draft directive, this ratio may reach 200 percent. This rule is intended to ensure that balance is maintained between variable and fixed remuneration so that taking excessive risks is not encouraged.
(b) The draft directive clarifies that remuneration that is conditioned solely on completing a pre-defined period of work (such as a retention bonus) is considered as variable remuneration that is not conditioned on performance, and is not consistent with sound risk management or with the pay-for- performance principle. Therefore, its use will not be permitted unless all of the rules applying to variable remuneration apply to it, such as deferring its payment and adjusting it to actual performance.
(c) The banking corporation’s Board of Directors committee that discusses remuneration for employees who are not office holders (pursuant to the Companies Law, 5759–1999) and are not principal employees (senior employees at a banking corporation who are not officers) may include additional directors beyond those set by the Companies Law (Amendment 20), 5773-2012. Furthermore, the definition of principal employees has been narrowed so that it will be consistent with the scope of this group under international standards.
Supervisor of Banks David Zaken: “These changes are intended to bring the method of remuneration in the Israeli banking system in line with the most up-to-date international standards. These standards are intended to encourage the awarding of fair remuneration that will encourage excellence while preventing a situation where the incentives granted will encourage taking excessive risks and going beyond the bank’s risk appetite.”
The draft directive will be discussed with the Consultative Committee on issues concerning banking business at its next meeting.
The Banking Supervision Department is acting in conjunction with the Ministry of Justice in order to ensure that the banking corporations will be able to prepare for the implementation of the draft directive as soon as possible, once the directive becomes binding, along with the implementation of the requirements of the Companies Law (Amendment 20), 5773-2012.