Leumi CEO forced to give up dessert: The bank is left with bread and butter

Alongside the publication of its second-quarter reports, Bank Leumi announced that it had decided not to proceed with the allocation of options in Leumi Partners to the bank's CEO, Hanan Friedman. Last month, the Bank of Israel clarified to all banks that executive compensation should not be linked to the performance of a single subsidiary.

As revealed in Calcalist, this clarification was a direct response to the unique compensation structure approved for Friedman in April, which was based on the performance of the real investment arm, Leumi Partners. The decision to cancel the option allocation can be seen not only as a surrender to the regulator but also as an acknowledgment of reality: ultimately, the "boredom" of the bank's regular business is not a bug, but a feature. The exceptional returns of banks in recent years do not come from the adrenaline of exits, but from the basic banking business: deposits and credit.

The business world loves drama, adrenaline, and deals. A lively trading floor where agreements are signed for the acquisition of companies, restaurant chains, or technology will always look sexier than a drab meeting room where another credit portfolio is approved or risks are managed. The equity-based compensation that Leumi sought to grant Friedman reflects precisely this human attraction to the most interesting thing in an organization.

Under the plan approved for Friedman, an allocation of 854,700 options linked to the value of Leumi Partners was designated, in exchange for a waiver of base salary, which presented a value of only 1 million shekels at the time of the grant. However, the Bank of Israel ruled categorically that a CEO cannot be compensated based on the performance of a single subsidiary, and explicitly emphasized that the prohibition applies even if the defined component appears negligible or "immaterial" at the time of its grant, especially when it comes to options whose future value could skyrocket.

"Do not pay the CEO for the most interesting thing he does — pay him for what he is responsible for," the banking supervision formulated.

Even if one can give Friedman full managerial credit for not neglecting the banking core in favor of deal hunting, the very existence of the compensation mechanism defined distorted priorities. Leumi's financial results, which show impressive record profits, demonstrate that the core banking business is a sophisticated and powerful money-making machine that does not need thrills to justify its managers' salaries. Leumi's waiver of the equity compensation and the return to normal salary terms are indeed a surrender to the regulator, but Leumi does not need to apologize for the fact that its core business sometimes looks boring. As of now, it is still the best business in town.