KLM senior managers forgo controversial bonuses

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In April 2004, the members of the management board of KLM waived bonuses offered to them in the run-up to the Dutch airline's merger with Air France, under pressure from trade unions and the government. During the current agreed national wage freeze, increases in senior management remuneration are controversial, with the VNO-NCW employers' organisation joining the unions in supporting top pay moderation and the government taking the first steps towards regulation.

It was announced in September 2003 that KLM Royal Dutch Airlines was to merge with Air France. The merger process was virtually complete at the beginning of May 2004, following earlier approval from the European Commission.

In April 2004, the members of the KLM management board waived bonuses offered to them in the run-up to the merger, in the light of a threat of industrial action by trade unions at the company and a critical stance adopted by the Minister of Finance. The context is that a national pay freeze has been agreed for 2004 and 2005 by the government and social partners (NL0310103F). The Allied Unions (Bondgenoten) affiliated to the Dutch Federation of Trade Unions (Federatie Nederlandse Vakbeweging, FNV) and the Bedrijvenbond union affiliated to the Christian Trade Union Federation (Christelijk Nationaal Vakverbond, CNV) were particularly concerned by the idea of top management bonuses at KLM, because the company is currently in the throes of reorganisation, leading to around 4,500 job losses. KLM’s senior executives had planned to award themselves a bonus if specific cost savings were achieved in the wake of the merger with Air France. In the first year, this was to have amounted to 20% of their total annual salary, rising to 50% in the third year. The Minister of Finance, Gerrit Zalm, criticised these arrangements. He referred to the bonuses as lavish and, during a shareholders’ meeting (the Dutch stake owns a 14% stake in KLM), indicated that he would be addressing the issue.

In general, management remuneration appears to be largely recession-proof. While share options and shares have lost a lot of value since 2001, other aspects such as salaries, cash bonuses and pension contributions have risen slightly. The largest employers’ organisation, the Confederation of Netherlands Industry and Employers (Vereniging Nederlandse Ondernemers-Nederlands Christelijk Werkgeversverbond, VNO-NCW), is calling for great restraint in remunerating senior executives. It states that international comparison of salaries should be only one in a range of considerations in setting remuneration, and that Dutch standards also apply. VNO-NCW has commissioned a study among 1,700 senior executives at 250 large companies, in an effort to discover whether executive salaries have reached excessive levels. According to the findings, the average salary paid to managers in 2003 rose by 5%, exactly the same as for the average employee. Including bonuses, there was an average salary increase of 6%, but there were major upward and downward deviations from this level. The share options awarded are worth less than in previous years, but increasing numbers of companies are awarding shares and other incentives to their chief executives.

The Tabaksblat Committee, which advised the government in 2003 about rules of conduct for companies, has developed a code with 130 provisions. Its recommendations on management pay essentially involve more openness on the part of companies and increased influence for shareholders. Furthermore, bonuses and lump-sum payments should be limited and managers should no longer deal in shares. The government thinks that this would be going too far. However, it does favour a more significant role for the shareholders’ meeting, with greater influence over management on pay matters. The government is divided about the role of the company works council role in this respect. While the Minister of Finance is against it playing a role, the Minister of Social Affairs, Aart Jan de Geus, supports an obligation for works councils to be informed in advance about the proposed remuneration for chief executives (NL0305102F).

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