Netherlands: Remuneration And Legal Position Of Directors Of Dutch Listed Companies And Financial Institutions

Last Updated: 4 April 2011
Article by Martin van Olffen

Most Read Contributor in Netherlands, September 2017


Overview of relevant laws and regulations | General

  • Bill on revision and claw back of executive bonuses and profit-sharing
  • Explanatory Memorandum on the Bill and recent case law
  • Corporate Governance Code
  • Report of the Monitoring Commission Corporate Governance
  • Bill on Management and Supervision
  • Existing statutory rules on remuneration

Overview of relevant laws and regulations | Financial institutions

  • Bill on revision and claw back of executive bonuses and profit-sharing
  • CRD III, Controlled Remuneration Policy Decree FMSA, DNB Regulation on Controlled Remuneration Policy
  • Banking Code
  • Preliminary Report of Monitoring Commission Banking Code


From 1 January of this year, financial institutions will be subject to new rules on controlled remuneration policy. These new rules come in the form of a decree and a set of Dutch Central Bank rules.

In addition to these new provisions, there are a number of regulations and bills on the remuneration and legal position of directors of Dutch listed companies and financial institutions.

Below, we will first outline the general rules and draft legislation and then address the regulations that specifically apply to financial institutions.

Overview relevant laws and regulations | General

Bill for revision and claw back of executive bonuses and profit-sharing

On 20 September 2010, a bill on revision and claw back of executive bonuses and profit-sharing of directors (the "Bill") was submitted to parliament. The Bill contains basic provisions that are to be developed in the Dutch Civil Code ("DCC") and further extended in the Financial Market Supervision Act ("FMSA").

The basic provisions of the Bill apply to all public limited liability companies (NVs) and to banks and insurance companies that have been incorporated in the form of a private limited liability company (BV), a cooperation or a mutual benefit association. The government is aiming for an imminent debate in parliament, but it is unlikely that the Bill will take effect before July 2011.

The Bill includes the following provisions:

  • The corporate body that determines the remuneration of individual directors (often: the supervisory board) may adjust the bonus to an appropriate level if payment of the bonus were to be unacceptable according to the criteria of "reasonableness and fairness" (revisory power).
  • The company may claw back all or part of a paid-out bonus if payment took place on the basis of incorrect information concerning (i) achievement of targets underpinning the bonus or (ii) the events on which the bonus was made conditional (clawback power). The supervisory board, the non-executive directors (if applicable), or a third party especially appointed by the shareholders for that purpose may also exercise this power.
  • Where a public offer would make a bonus unconditional, the corporate body that determines the remuneration of individual directors (often: the supervisory board) must revise the bonus to a level it deems appropriate if payment of the bonus would be unacceptable according to the criteria of reasonableness and fairness (revisory duty). This change of control provision also applies to bonuses that are still conditional at the time that the offer is declared unconditional.
  • The company must mention the amount of the revision or claw back in the annual report (reporting duty).
  • The director may or may not agree with the intervention. Conflicts between the company and the director about revision or claw back will ultimately have to be resolved by the courts (or an arbitral tribunal).

In the Bill a bonus is defined as the variable part of the remuneration, payment of which is made partly or fully conditional on the achievement of certain targets or the occurrence of certain events.

The Explanatory Memorandum on the Bill and recent case law

Revisory power

The explanatory memorandum on the Bill ("Explanatory Memorandum") states that existing legislation already allows revision of agreed bonuses in certain exceptional cases, on the basis of principles of reasonableness and fairness or by invoking unforeseen circumstances. The Bill aims to explicitly confirm this option. The Explanatory Memorandum refers to provisions in the DCC regarding good employment practices. Where revision of the bonus would lead to an amendment of the terms of employment, the Explanatory Memorandum also refers to case law of the Dutch Supreme Court.

In Stoof v. Mammoet the Supreme Court ruled that the following test should be applied when determining the effect of unforeseen circumstances on an individual employment contract:

  • Did the employer as a good employer have valid reasons to propose an amendment of the terms of employment?
  • Is the employer's proposal reasonable?
  • Could the employee in the particular circumstances reasonably be required to accept the employer's proposal?

The Explanatory Memorandum argues that the Supreme Court's test criteria will be met in practice if a bonus is adjusted on the ground that it is "unacceptable according to the criteria of reasonableness and fairness", as set out in the Bill. However, this is not certain and the issue is expected to lead to numerous legal proceedings.

According to the Explanatory Memorandum, in applying the criteria of reasonableness and fairness to bonuses of directors one must assess whether a bonus should be considered to be 'excessive'. This will depend on several factors, such as the size of the company, the sector in which it operates, and the remuneration climate within the company. It may, for example, be customary for a fast-growing company or sector to pay a relatively low fixed salary but high bonuses in shares or options, in order to limit labour costs. If a company is internationally active, the remuneration climate in the foreign divisions could be also taken into account. As an example of an agreed bonus that could be deemed excessive, the Explanatory Memorandum mentions the situation in which the share price, on which payment of the bonus is dependent, rises dramatically because of unforeseen circumstances, e.g. by rumours of a potential takeover. A bonus may also be deemed excessive if the financial situation of the company or the market is unfavourable and this was not taken into account when the targets on which the bonus is based were set. According to the Explanatory Memorandum, payment of a bonus by a company that has suffered substantial losses is more likely to be deemed unacceptable. In this context, it is important to point out that the power to revise bonuses may not be limited or excluded in the company's articles of association or by contract.

In the discussion on revision of bonuses, another recent court decision should be mentioned. In September 2010, the Amsterdam Court of Appeal ruled that an employer (in this case, a bank) could not revise a severance payment and bonus that had already been promised to the employee before he was made redundant. In this case, the employer had changed its remuneration policy after making its commitment to the employee but before the redundancy. The Court ruled that the proposal to terminate the employment contract could not be considered a "proposal"' as referred to in Stoof v. Mammoet, as there had been no consultation about the manner and circumstances in which the employment contract would be terminated. Even if Stoof v. Mammoet-case would apply, the employee could not reasonably be required to accept the proposal in the light of the circumstances of the case. In response to the employer's reliance on unforeseen events, the Court ruled that the criteria of reasonableness and fairness would require a promise to be kept. This applies in particular where the employee has already met his part of the agreement. The Court held that, although unforeseen events had occurred (i.e. the financial crisis, state intervention and public criticism), they were not of such nature that a employee could not reasonably expect the commitments made to him to be met. This ruling suggests the revision or claw back of bonuses may not be easy to achieve.

Claw back power

According to the Explanatory Memorandum, a corporate body may use its revisory power for as long as it can influence the bonus (i.e. until the director owns the bonus). To exercise the claw back power on the other hand, the remuneration must be in the director's ownership. This is also the case when a lock-up period has been agreed.

The Explanatory Memorandum points out that under existing law a company can already claw back a bonus paid out without cause, on the basis of undue payment. According to the Explanatory Memorandum, the rules on undue payment – including the limitation period – apply equally to the claw back power. This means that the claw back claim expires five years after the date on which it became known that the information on which basis the bonus was paid was incorrect, and in any case after twenty years.

Revisory duty

The duty to revise a bonus does not affect the possibility of clawing back the bonus. The revisory duty pertains to bonuses that do not yet form part of the director's assets.

According to the Explanatory Memorandum, the justification for the revisory duty is that a bonus becoming unconditional upon completion of a public offer will create a personal interest of the director in achieving completion of the offer.

Reporting duty

The reporting duty applies to the so-called "open" NVs and to banks and insurance companies incorporated as a BV, a cooperation or a mutual benefit association. According to the Explanatory Memorandum, the reporting duty only exists where the revisory and claw back powers have been exercised.

The Corporate Governance Code

The Dutch Corporate Governance Code (the "Code"), which applies to Dutch listed companies, includes the following best practice provisions:

  • The maximum severance payment for a director will be the annual salary (i.e. the "fixed" amount of the remuneration). If this maximum payment would be unreasonable for a director who is dismissed in his first period of appointment, the director will qualify for a maximum severance payment of twice the annual salary.
  • The supervisory board may revise (both upwards and downwards) the amount of a conditional variable remuneration component that has been allocated in a previous financial year, if it believes that such remuneration would lead to an unfair outcome due to exceptional circumstances in the period in which the previously set performance criteria were or had to be realised (fairness test).
  • The supervisory board may claw back from directors variable remuneration that has been granted on the basis of incorrect (financial) information (claw back).

According to the Explanatory Memorandum, the Bill further clarifies and creates the power of the supervisory board to adjust the amount of the promised bonus (fairness test) and to recover a paid out bonus on behalf of the company (claw back), irrespective of principles such as "comply or explain" under the Code. The Explanatory Memorandum states that the government considers self-regulation by way of "comply or explain" insufficient when it comes to revising and clawing back bonuses and that the provisions of the Code cannot ensure that existing contracts are amended. The government therefore believes that further legislation is necessary.

Report of Monitoring Commission Corporate Governance

The findings of the Monitoring Commission Corporate Governance (the "Commission") in its December 2010 report on compliance with the Code in 2009 include:

  • Maximum severance payment: in 2009, 51 companies explained why they did not comply with this best practice provision. 8 out of the 15 listed companies that awarded severance payments in 2009 complied with the best practice provision, 6 of them explained why they did not comply with the best practice provision. The most common explanation of non-compliance is that existing contracts were recognised.
  • Claw back and fairness test: 26 companies explained the claw back, 14 companies explained application of the fairness test. Among new best practice provisions, the claw back provision is explained most frequently, often with the added remark that one is awaiting legislation on this point. According to the Commission, the plans to provide a statutory basis for claw back did in fact slow down the introduction of the claw back best practice provision. As to the fairness test, the explanation that companies most frequently offer as to why they do not comply with the fairness test is that the company endorses the new Code on this point but will not comply with it until 2010 or 2011.

On creating a statutory basis for the best practice provisions on claw back and the fairness test, the Commission's report states among other things:

  • The widespread support for the Code is at risk if the legislator selects only certain best practice provisions for inclusion in a statute (e.g. the claw back provision).
  • The decision to legislate the fairness test at this point is premature given the fact that (i) there is insufficient experience with the Code's fairness test, and (ii) companies have not (yet) proven that they are unwilling to apply the fairness test.

Bill on Management and Supervision

On 8 December 2009 the Second Chamber of the Dutch Parliament adopted the Bill on Management and Supervision. This bill is currently being debated in the First Chamber. An important change introduced in the bill is that the relationship between a listed company and its directors is no longer considered an employment relationship.

The explanatory memorandum to the bill states that the often dual relationship between listed company and director (both a corporate relationship and an employment contract) has an important disadvantage when it comes to severance payments. As directors are currently deemed to be employees of the company, the best practice provision of the Code pertaining to the maximum severance payment of one annual salary can be set aside by agreeing on a higher severance payment in the employment contract with the director. Moreover, a director may, in the case of a dismissal, claim a higher severance payment in court under Dutch employment laws relating to unfair dismissal.

Existing legislation regarding remuneration policy

All public limited liability companies (NVs) have a statutory duty (set out in the DCC) to have a remuneration policy for directors, to be adopted by the general meeting of shareholders. If the remuneration of directors is set by a corporate body other than the general meeting of shareholders, any stock option plans for the directors (including maximum amounts) must be approved by the general meeting.

Overview relevant laws and regulations | Financial institutions

Bill for revision and claw back of executive bonuses and profit-sharing

As explained above, this Bill contains basic provisions which are to be incorporated in the DCC. These basic provisions apply to public limited liability companies (NVs) and to banks and insurance companies, and to their directors.

In addition, the Bill will bring about a change in the FMSA that would widen the revisory and claw back powers in financial institutions in two ways:

  • under the Bill, both powers apply to all financial undertakings not merely to banks but also for example to investment firms and investment institutions, irrespective of their legal form)
  • in all financial undertakings, these powers pertain to all day-to-day policy makers (not just directors, as is the case under the basic provisions to be introduced in the DCC)

In the financial undertakings, the powers will be vested in the corporate body which or person who determines the remuneration. The reporting duty that we mentioned above does not apply to financial undertakings unless this duty exists under the basic provisions of the DCC (i.e. in open NVs and in banks and insurance companies with a different legal form).

CRD III, Controlled Remuneration Policy Decree, and DNB Regulation on Controlled Remuneration Policy

As we mentioned in the introduction to this newsletter, other regulations with regard to executive remuneration in financial institutions took effect on 1 January 2011. The CRD III Directive obliged EU member states to introduce rules on the remuneration policy of credit institutions and investment firms by 1 January 2011. In the Netherlands the Directive was implemented by the introduction of the Controlled Remuneration Policy Decree (the "Decree") and the DNB Regulation on Controlled Remuneration Policy (the "DNB Regulation"). The Decree and the DNB Regulation apply to all financial institutions (therefore not just to credit institutions and investment firms as required by CRD III).

The Decree provides that financial institutions have to draw up a remuneration policy and to implement and maintain the policy in their business operations. The financial institution has to publish a description of its remuneration policy. Other provisions of the Decree include the following:

  • All financial institutions must carry out a remuneration policy aimed at preventing that the remuneration of those that determine or co-determine the policy of the institution, its employees and other individuals who render financial services or other activities under its responsibility would lead to negligent treatment of consumers, clients or participants
  • Financial institutions under prudential supervision of DNB must also ensure that this remuneration policy does not encourage more risk taking than is acceptable for the financial institution in question.

The DNB Regulation sets out fairly detailed rules for the remuneration policy and remuneration culture in the organisation to guarantee risk control. The DNB Regulation applies to financial institutions under prudential supervision of DNB (including premium pension institutions, but excluding payment institutions). In its notes on the regulation, DNB explicitly refers for further explanation to the CEBS Guidelines on Remuneration Policies and Practices.

Banking Code

The Decree and the DNB Regulation partly overlap with the Banking Code, a form of self-regulation that came into force on 1 January 2010. The Banking Code applies to all banks with a banking licence based on the FMSA. The Banking Code contains a chapter on remuneration policy, which includes the following provisions:

  • the bank must pursue a prudent, controlled and sustainable remuneration policy that is in line with its strategy, risk appetite, objectives, and values, and which takes into consideration the long term interests of the bank, the relevant international context and public support
  • the supervisory board is responsible for the execution and evaluation of the remuneration policy with regard to the members of the managing board
  • the total income of a managing director must be in a reasonable proportion to the remuneration policy that has been adopted in the bank
  • the remuneration paid to a managing director on his dismissal must (in principle) not exceed the amount of his annual salary
  • the grant of variable remuneration is partly linked to the bank's long term objectives
  • every bank determines a suitable maximum proportion between variable remuneration and fixed remuneration
  • the annual variable remuneration of a managing director should not exceed 100% of the fixed remuneration
  • in exceptional situations, the supervisory board will be free to revise the variable remuneration of a managing director if it believes that this remuneration will lead to an unfair or unintended outcome
  • the supervisory board may claw back variable remuneration awarded to a managing director if this remuneration was awarded on the basis of incorrect (financial) information

Preliminary Report of Monitoring Commission Banking Code

In December 2010 the Monitoring Commission Banking Code issued a preliminary report, which included the following points:

  • approximately 74% of surveyed banks indicate that they will set the variable remuneration of their managing directors to the maximum of 100% of the fixed remuneration
  • approximately 82% of the banks state that they apply the principle that a director's remuneration should be in reasonable proportion to the adopted remuneration policy
  • most banks are currently applying a claw back provision or are considering to do so in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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