Political backing for curbing of top salaries and bonuses

In February 2009, the Dutch House of Representatives urged the government to finalise a gentlemen’s agreement with the banks on bonus moderation. This follows a proposal in 2008 to tax top end salaries more heavily and to deal with the manipulation of shares and options in business takeovers. While the proposal attracted a mixed response, the current financial and economic crisis has broadened political support for intervention of some form regarding excessive remuneration.

In February 2009, the Dutch House of Representatives (Tweede Kamer der Staten-Generaal) urged the Minister for Finance, Wouter Bos, to negotiate a gentlemen’s agreement with the banks to tighten remuneration policy at executive level. The House of Representatives is particularly alarmed by the lavish bonuses granted to officials at banks that were recently rescued from bankruptcy by the minister using the tax revenue of Dutch citizens. Even the People’s Party for Freedom and Democracy (Volkspartij voor Vrijheid en Democratie, VVD), usually a champion of self-regulation, is now appealing on moral grounds to the banks to moderate such bonuses. It has been highlighted that it is not the right time for bonuses, irrespective of whether bank executives are entitled to such payments by law. This is of particular concern to the Minister Bos, given that the bonuses were pledged in the previous financial year. However, influence can be exerted over those banks in which the state has now become a majority shareholder, leaving only an appeal on moral grounds with respect to other institutions.

Tax increase for highest incomes

In the summer of 2008, the House of Representatives agreed to a proposal put forward by Minister Bos to limit incomes at the top end of the salary scale. The legislative proposal includes taxing the highest incomes more heavily. Extra levies would be imposed on generous severance pay of over €500,000 and large payments to pension provisions for managers of private investment funds. In effect, employers will be facing a 30% tax increase if employees earning a salary of more than €500,000 are awarded a severance pay in excess of one year’s wages. Several thousand managers will be affected by the new tax regime, which is being brought into effect from 2009. The measure will raise an estimated €60 million in revenue for the Dutch treasury. The legislative proposal will also govern the interests of managers in takeover scenarios. Managers holding shares or share options in a company will not be allowed to take decisions on potential takeovers or mergers. In the event of potential takeover candidates emerging, supervisory directors could freeze the value of their shares or share option packages in their employment contracts.

Opposition to proposal

While a majority of the House of Representatives favour the new amendments, the more liberal VVD perceives the changes as a façade. The party’s enthusiasm is limited to plans to allow the supervisory board to intervene in cases where managers earn millions of euro through the takeover of their company. On the employers’ side, the Confederation of Netherlands Industries and Employers (Vereniging van Nederlandse Ondernemingen-Nederlands Christelijk Werkgeversverbond, VNO-NCW) is also critical, seeing the plans as a risk for businesses – including company headquarters and companies listed on the stock exchange – that are considering setting up operations in the Netherlands. By contrast, the Dutch Trade Union Federation (Federatie Nederlandse Vakbeweging, FNV) welcomes the changes. FNV has been calling for some time for fiscal measures to moderate the remuneration of chief executives. Increased transparency and moral appeals have done little to change the situation.

Failed attempts at regulation

Over the past decade, various governments have adopted measures to combat excessive remuneration. Since 2002, transparency became an obligation in annual reporting. However, instead of ensuring greater moderation, the outcome was counterproductive as best-paid colleagues served as a reference. Since then, three committees – namely, the Peters, Tabaksblat and Frijns committees, as named after their respective chairs – have assessed the issue and recommended self-regulation as the answer (NL0802049I). Nonetheless, internal codes appear to have had little impact. Although the right enjoyed by works councils to nominate supervisory directors was further strengthened in 2004, this only constituted a small step in the broader sense. Also from 2004, shareholders have had to express an opinion on company remuneration proposals. However, the expectation that their dividend interests would serve to moderate managers’ excessive remuneration appears to have been unfounded. In the private sector, shareholders continue to support remuneration proposals at annual meetings. Wage tax has been due on the share options of managers since 1998; nevertheless, instead of moderation, the measure has led to a steep rise in gross payments.

Conflicting interests of chief executives elusive

In the spring of 2008, the Dutch cabinet proposed a statutory amendment to company law to combat the excessive remuneration of chief executives. It was established that managers with conflicting interests could not have a say in the course of takeover negotiations. The intention is that – backed by law – supervisory directors devise remuneration packages in such a way that the price is frozen if a potential buyer is found for the company. However, the weakness of the arrangement has been determining what exactly constitutes a substantial and/or conflicting interest. According to the Association of Shareholders (Vereniging van Effectenbezitters, VEB), the interests of managers with shares or share options are generally similar to those of the company. VEB is not averse to managers profiting from a high sales price as well. The Dutch Corporate Governance Code – also known as the Tabaksblat Code – which took effect in 2003 and aimed to more clearly define good business management, already contained a stipulation regarding conflicting interests. Since then, at least two chief executives – namely, Rijkman Groenink of ABN Amro and Jan Bennink of Numico – have enjoyed elusively big profits on the value of their share option packages that skyrocketed through the takeover of their respective companies.

The cabinet also proposed relaxing dismissal law for company chief executives. The Minister for Justice, Ernst Hirsch Ballin, wants to differentiate between supervisory directors who are not employed by the company and operational or executive managers who are awarded an employment contract for a definite period. Their dismissal compensation is the same as that for other employees. The Tabaksblat Code limits this to one year’s salary.

Company remuneration ratios serve as new anchor

At the end of 2008, the Frijns Committee again reported on the operation of the Tabaksblat Code. The annual review now includes a proposal when determining chief executive salaries to consider what impact this will have on remuneration ratios within the company. In this manner, an internal anchor is added to counterbalance the potential ‘leapfrog’ effect – that is, where chief executives mirror their earnings against even better-paid executives. The Frijns Committee also asserts that bonuses must ‘proportionately reflect fixed remuneration’, although the committee fails to further define what this actually means. In determining bonus standards, financial objectives such as share prices and profit levels, along with other indicators relevant to long-term value creation for the company, should be taken into account. In doing so, the Frijns Committee concurs with the recommendations of the former Chief Executive of Unilever, Anthony Burgmans, on assuming corporate social responsibility. The standard criteria in this instance include dealing with climate change, scarce resources, biodiversity, human rights and fundamental labour standards that must all form part of company policy. These standards also tie in with sustainable corporate governance codes. However, for the time being, the social partners believe that the first recommendation of weighing up remuneration ratios within the company provides an adequate reference point for determining a reasonable policy on executive remuneration in the years ahead.

Marianne Grünell, Hugo Sinzheimer Institute (HSI)