Knesset passes limits on finance executives' pay

The law limits tax breaks on executive salaries at NIS 2.5 million a year, or 44 times the salary of the lowest-paid worker.

March 29, 2016 17:49
2 minute read.

A WOMAN uses an automated teller machine outside a Bank Hapoalim branch in Tel Aviv three years ago.. (photo credit: REUTERS)


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The Knesset this week approved final readings of legislation that would disincentivize financial companies from paying their executives large salaries.

“This law is of moral significance that reaches far beyond its economic meaning.

It symbolizes the closing of gaps, solidarity and consideration with the weak,” Finance Minister Moshe Kahlon said.

The law, which passed unopposed with 56 votes on Monday night, limits tax breaks on executive salaries at NIS 2.5 million a year, or 44 times the salary of the lowest-paid worker, including contract workers (the figure also can be calculated at 35 times the employer cost of a worker, which includes benefits).

Assuming the companies employ minimum- wage workers, the two figures are nearly identical. The current minimum wage of NIS 4,650 would imply an annual cap of NIS 2.46m, however, the minimum wage is due to rise to NIS 5,300 by the end of 2017, which would raise the cap to about NIS 2.8m.

Every shekel paid beyond that limit will not receive tax exemptions generally given for compensation.

The law, which goes into effect immediately but gives companies a six-month window to adjust, will only apply to financial firms such as banks and insurance companies. According to the Knesset Finance Committee, about a quarter of the highest-paid executives in public companies in 2013 were in the financial sector.

Prime Minister Benjamin Netanyahu came out against expanding the rule to all publicly traded companies or private corporations, despite calls to do so from many opposition and some coalition MKs.

Knesset Finance Committee Chairman Moshe Gafni (UTJ) said the law was an important start to battling wide wage disparities.

“We will examine whether the law does indeed harm the economy as some are frightened and are threatening it will, or if it merely corrects a long-standing social woe in the wage gap,” he said.

Zionist Union MK Shelly Yacimovich said the law was, perhaps, the most moral one ever passed by the Knesset.

A similar law in the United States, however, backfired.

A 1993 law signed by President Bill Clinton sought limited tax breaks on compensation over $1m., but provided a workaround that allowed exemptions based on certain performance goals. In the following years, executive-pay packages remained high in terms of salary, but non-monetary compensation in the form of stock and options swelled dramatically.

The new Israeli law applies only to salaries.

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