Netherlands: New legislation on management pay

The entry into force of the Clawback Act at the start of 2014 in the Netherlands makes possible the reduction of executive bonuses and severance payments, and the reclaiming of payments ('clawback') after they have been awarded, if they are deemed unfair. It applies to all public limited companies, financial enterprises and cooperatives. While the act does not introduce new clawback rights as such, it does make existing rights more explicit.

Clawback Act

On 1 January 2014 the Clawback Act entered into force in the Netherlands. This act introduces the possibility of reducing bonuses and severance payments for executives that are seen as excessively large; it also makes it possible to reclaim these after the fact if the payments are deemed unfair. The act applies to all public limited companies (naamloze vennootschappen), all financial enterprises (banks, insurance companies) irrespective of their legal form, and cooperatives (coöperaties; in the Netherlands there are several very large co-operatives such as Friesland Campina, Achmea and Rabobank).

The new act adds several paragraphs to article 2:135 of the Dutch Civil Code. According to this article, public limited companies are obliged to develop a remuneration policy. This policy is established by the general meeting of shareholders (GMS). Remuneration of every individual member of the executive management should be conform to this policy.

The definition of 'bonus' is broad and covers all variable payments, including payments not in cash – payments in a pension fund or the allotment of option rights. Use of the clawback mechanism must be published in the annual report.

In the legal literature, the question has been raised to what extent the act really creates new mechanisms that did not exist before. The legislator has acknowledged that the act does not introduce new clawback rights in a material sense, but pointed to the importance of making these rights more explicit.

The act moreover contains an obligation upon the company to reclaim the increase in value of the shares held by members of the executive board after a public offer has been issued on the outstanding shares of the company, or in the case of a cross-border merger or division. This new  arrangement aims to address situations where executives have a personal interest in either the success or failure of a public offer or merger. The arrangement covers only listed companies.

Again in the legal literature, the added value of this arrangement has been questioned. Under existing legislation, members of the (executive or supervisory) board are not allowed to take part in the decision-making process if they have a conflicting personal interest in the outcomes of the  decisions. Furthermore, there are some doubts about the effectiveness of the arrangement, because it does not cover all financial rights that are related to shares.

Other legislation

Bill on the remuneration policy of financial companies

On 13 June 2014, a bill on the remuneration policy of financial companies was presented to Parliament. The bill contains a number of key elements.

  • Financial companies should develop a moderate remuneration policy, which does not encourage excessive risk-taking by executives and employees.
  • The policy should be transparent and must be published in the company's annual report and/or on its website.
  • The maximum variable part of the remuneration may not be higher than 20%; this ceiling covers all employees in the Dutch financial sector.
  • It stipulates a cap on severance payments for senior management; the maximum is 100% of fixed salary.
  • The possibility to reclaim variable payments and severance payments is included.

The bill has been criticised by the Council of State (Raad van State, the highest legal advisory body in the Netherlands), in the legal literature and by employers in the financial sector. Critics point to the risk of financial companies and/or employees leaving the Netherlands for countries such as the UK where rules on remuneration are far less strict.

Remuneration in the public and not-for-profit sector

On 1 July  2014 a bill (the WNT2) on the reduction of the maximum remuneration in the public and not-for-profit sector  was presented to Parliament. According to the bill, the maximum annual salary for 2014 (€230,474 – including pension contribution) will be reduced by 27% in 2015 to €169,245. In addition, the maximum remuneration of interim managers will be reduced. The maximum remuneration for members of supervisory boards, however, will be raised from 5% to 10% of the maximum remuneration of members of the executive board.

The Council of State has criticised this bill as well. According to the council, it is not clear why the very recent legislation (the so-called WNT1) on remuneration in the public and not-for-profit sector needs to be changed so soon, even before the effects of this act have become fully apparent. Another point of criticism is that the legislator does not make clear whether the bill may result in problems in finding sufficiently qualified personnel to lead and supervise complex organisations such as large hospitals and housing corporations.

Increased role for works councils?

On 7 March 2014, Lodewijk Asscher, the Minister of Social Affairs and Employment, announced that was considering increasing the role of works councils with regard to the remuneration of the executive board and other employees receiving top incomes. Earlier legislation has dealt with aspects of this question.

  • In 2006, works councils were given a right to information with regard to companies' remuneration policies, including the remuneration of top management.
  • In 2010, works councils of public limited companies were given the right to speak in the general staff meeting on several issues, including the remuneration policy for top management.

Commentary

Remuneration of top management is a major issue in many EU countries, in the media, among the unions and often also for the legislator. At present, the Netherlands seem to stand out, both in respect of the number of legislative initiatives and the content of several of these initiatives. The main example being the maximisation of the variable salaries in the financial sector to 20% (at the EU average and in many countries it is 100%).

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