The executive pay law is having an impact on the financial statements of Israel's banks. Sources inform "Globes" that the banks that will report their first quarter results this week will make provisions estimated at NIS 200 million in anticipation of the law causing dozens of veteran employees to leave. The employees concerned are people whose severance pay will be higher than NIS 2.5 million, the maximum compensation level set by the new law.
Most of the provisions will be at the two big banks, Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI). Each of them is expected to provide about NIS 100 million. These two banks have relatively high numbers of employees whose severance payments will be adversely affected by the restrictions on executive pay. The provision will be in the liabilities to employees item, and will not affect the net profit line.
The banks carry out quarterly actuarial assessments of the severance pay they will have to disburse, in accordance with past data. This time, however, the assessment will involve a revaluation arising from an extraordinary event that will affect the future, namely the coming into force of the executive pay law. A few weeks ago, in a fast legislative process, the Knesset stipulated that the salary cost of employees in the financial sector could not exceed NIS 2.5 million. The legislature meant to restrict the compensation of senior managers, but because of the speed with which the legislation was passed it failed to take into account the fact that this restriction would also affect the severance pay packages of many veteran employees. There is a large number of employees whose monthly salaries are in the tens of thousands of shekels who have worked at one of the banks for over twenty years, and some are entitled to extra severance pay or a golden parachute when they leave. Their severance pay packages, based on their current monthly salaries multiplied by the number of years they have been with the bank, exceed the NIS 2.5 million threshold, and their fear is that if they wait until the retirement age they will not be paid the full severance pay. They will therefore probably prefer to leave in the next few months, before the law comes into force in October.
This is also the main reason that Bank Hapoalim CEO Zion Kenan announced that he would step down, as did Bank Leumi deputy CEO Prof. Daniel Tsiddon.
Minister of Finance Moshe Kahlon, who led the legislation on limiting executive pay, did not intend to harm employees' retirement benefits, but from the language of the law as it stands it is possible to understand that its restrictions also apply to severance pay. The banks fear that if they award the full severance pay after the law comes into force they will risk derivative actions being brought against them, and the workers will be liable to find themselves having to return the money to the banks.
The way to overcome this stumbling block is through amendment to the legislation or a legal opinion. Since the chances of amended legislation are slim, the banks have approached the Ministry of Finance and the Ministry of Justice and asked for a legal opinion on the matter. Deputy Attorney General Avi Licht is supposed to draft a legal opinion that will allow severance pay to be paid and avert the wave of resignations. It is not yet clear, however, what the legal opinion will contain and when it will be published. Employees who wish to leave and receive full severance pay must give notice by July. The banks have therefore decided to take no risks and to make provisions in their forthcoming financial statements.
Published by Globes [online], Israel business news - www.globes-online.com - on May 16, 2016
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