Israeli-style cap on banking executive pay not an option here in Canada

In an unprecedented move, Israel just put in place the world’s toughest salary cap on bankers.

The legislation, spearheaded by finance minister Moshe Kahlon, was approved by parliament earlier this week and caps compensations for top financial institutions and the insurance sector, limiting pay at 2.5 million shekels (around CDN$857,000) a year, or no more than 44 times the salary of the lowest worker at the company. Compensation beyond will be subject to heavy taxes.

“There is a moral significance beyond the economic significance in this law,” Kahlon told reporters. “It symbolizes narrowing pay gaps, solidarity and consideration for the weak.“

Some senior bankers were earning 8 million shekels a year ($2.7 million) versus the average wage of 115,000 shekels (about $40,000).

But Robert Levasseur, managing director of human resources search firm and a consultant specializing in executive compensation at McDowall Associates says he doesn’t suspect a similar cap anytime soon in Canada – where banking CEOs often make upwards of $10 million.

“The question around Israel is just how big is the market there?” says Levasseur, whose firm published a paper in April 2015 on Canadian banks changing their compensation structure. “It’s not exactly the centre of the universe when it comes to finance.”

According to his firm’s research, four of Canada’s top banks – Scotiabank, CIBC, RBC and TD – all appointed new CEOs between November 2013 and 2014. The incumbents target total direct compensation decreased by 25, 21, 11 and 18 per cent respectively versus the outgoing CEOs.

“The question we were asking ourselves last year was ‘well, is this just because they’re onboarding them and within a year or two they’ll be at the same level as the old guys?’ ” says Levasseur. “We’re in the process of going through their proxies right now and I’m going to suggest that their (compensation) is creeping up.”

In early March, the Bank of Montreal reported that CEO William Downe’s compensation rose 2.1 per cent to $10.2 million in 2015. RBC’s CEO David McKay, earned $10.9 million for fiscal 2015 – 44 per cent more than the previous year – which included a salary of $1.3 million, share-based awards of $5.8 million, $1.45 million of stock options, $2.33 million in incentive pay and $38,893 in other compensation for the year ended Oct. 31. He banked $7.56 million in 2014, having only served as CEO for three months.

But putting a cap on those earnings could have some negative consequences, explains Frank Li, assistant professor of finance at Western University’s Ivey Business School.

“If we put a cap and the U.S. doesn’t, we are losing top talent,” he says. “Compensation will move more towards a fixed payment from incentive payment, pay performance sensitivity will drop – they may reduce effort because that’s the maximum they can get.”

For Li, the million dollar (rather, $10 million dollar) question is whether or not those Canadian bankers are efficiently paid.

“If they are then we should input any ‘frictions’ on the market,” he says. “Some people would argue that the labour market isn’t efficient because the CEOs or the bankers are very powerful so they have a say on their own compensation.”

If that’s the case, says Li, then regulators looking to limit compensation could try to improve corporate governance by creating more independent boards, or switch to incentive pay instead of fixed pay.

“The consensus in academia is that a uniform cap is not efficient,” he says. “Because there are so many better, cheaper ways, to regulate pay – that’s why no major countries have implemented salary caps.”