Following Bank of Israel directive: Leumi cancels options for CEO Hanan Friedman
Bank Leumi has announced the cancellation of an option allocation for CEO Hanan Friedman. The decision follows a directive from the Banking Supervision Department prohibiting the linkage of executive compensation to the performance of individual subsidiaries.
Alongside the publication of its financial statements for the second quarter, Bank Leumi announced on Wednesday that it has decided, at this stage, not to proceed with the allocation of options to the bank's CEO, Hanan Friedman. The bank's announcement follows a dialogue with the Banking Supervision Department and in the wake of a clarification published by the Supervision last month to the entire banking system, stating that executive compensation should not be linked to the performance of a single subsidiary.
As previously revealed by Calcalist, the Bank of Israel's clarification was born directly as a result of the unique compensation structure approved for Friedman, which was based on the performance of the subsidiary — the real investment arm, Leumi Partners. In a report to the stock exchange, Bank Leumi noted that in light of the decision not to allocate the options, there will be no change in the fixed compensation paid to Friedman, and he will return to receiving his regular salary terms without the waiver of part of the base salary that was planned in favor of the options component.
In a clarification document published by the Banking Supervision last month, the regulator determined that a banking corporation is not permitted to grant variable compensation that relies entirely or primarily on the performance of a single business activity, especially when it comes to equity-based compensation. The Supervision clarified that the criteria for receiving variable compensation must reflect, in a comprehensive and proportionate manner, all areas of the manager's responsibility, with the aim of maintaining the link between their personal financial interest and the broad goals of the entire banking corporation.
As part of the plan approved at the Leumi shareholders' meeting about two and a half months ago, an allocation of 854.7 thousand non-marketable options was intended for Friedman, whose future exercise value was derived directly from the valuation of Leumi Partners. This structure was allocated using a "Net Exercise" mechanism at the expense of a waiver of the CEO's fixed base salary, in a way that reflected a low fair value of about 1 million shekels at the date of grant, under the limitations of the law on executive compensation in the financial system, which sets an annual cost ceiling of about 3.5 million shekels.
The Bank of Israel's directive, written as part of a Q&A document accompanying the Proper Banking Management Regulations 301, clarified immediately and mandatorily that compensation based on a single business line is improper. The document did not set transition provisions or exceptions for existing agreements, and the Supervision emphasized that the prohibition applies even if the linked component is not material at the date of grant out of the total package.
This move by the Banking Supervision was determined out of fear of diverting managerial inputs and taking excessive risks. Variable compensation is intended to incentivize managers to achieve long-term goals that reflect the performance of the banking corporation as a whole. When variable compensation, especially an equity component like options, is derived from the performance of a specific business unit, the regulator fears that such a structure creates a built-in incentive to divert resources and strategic focus to that specific arm at the expense of the stability and growth of the entire bank, while exposing the banking corporation to exceptional risks.
