In previous newsletters we reported on the series of Dutch and European measures regulating remuneration policy at financial institutions and listed companies (see, for example, our newsletters of 9 August 2010and 29 March 2011). The latest government proposal is a ban on the payment of bonuses by financial institutions receiving State aid.
The Minister of Finance has proposed a statutory measure to prohibit the payment of variable remuneration to the management board members of State-aided financial institutions and freeze their fixed remuneration. This proposed measure has been incorporated in a memorandum of amendment (of 26 October 2011) to a bill currently under consideration by the lower house of the Dutch parliament (bill no. 33 058). It is not known when the legislation will enter into force (probably not before 1 July 2012) or whether further amendments may still be made.
The proposed measure partly implements a private member's motion (the Van Vliet motion, Parliamentary Papers II 2010/11, 31 980, no. 30). This motion calls on the government to levy payroll tax at a rate of 100% on a once-only basis on all bonuses paid by a number of State-aided financial institutions since 2008, or otherwise to refuse to allow tax relief on the amount of the bonus for corporation tax purposes. According to the Minister, implementing the motion in full would give rise to legal problems as it would have to be made retroactive to a period in which there was still no knowledge of the (forthcoming) bonus prohibition. However, the Minister also announced a measure that would make all taxable banks (i.e. not only State-aided banks) liable to higher banking tax if they pay a management board member variable remuneration exceeding 100% of his fixed remuneration (such a payment is also contrary to the Banking Code).
The proposed measure is relevant to financial institutions that receive aid from the Dutch State for their financial stability. Such aid includes all measures that must be reported to the European Commission under the Treaty on the Functioning of the European Union. At present this covers the following: (i) the guarantee scheme for the issue of medium-term debt securities by banks, (ii) strengthening the capital of two financial institutions with non-voting core Tier 1 securities and (iii) the nationalised financial institutions.
The draft legislation includes transitional provisions which take into account the extent to which the new rules could have been foreseen by State-aided institutions and their management board members. It is relevant in this connection that the Minister announced the bill in the lower house of the Dutch parliament on 6 October 2011 and that the bill was submitted on 26 October 2011.
The proposed provisions are not relevant to financial institutions which received State aid before 6 October 2011 if such aid ends before the date on which the provisions enter into force. This also applies to cases in which such aid has continued until after 6 October 2011.
As already noted, State aid had already been granted to some financial institutions before 6 October 2011. Insofar as they are still in receipt of this aid when the new legislation enters into force, they will be subject to mitigating provisions (see below) under which retroactive effect is limited to 26 October 2011.
Financial institutions to which State aid is granted after 6 October 2011 will be subject to the proposed provisions in full with retroactive effect to that date. This also applies to any cases in which such aid has been terminated by the time the provisions enter into force.
Applicable to variable and fixed forms of remuneration
The draft legislation refers to (i) the non-fixed remuneration component the award of which is wholly or partly dependent on achieving certain goals or the occurrence of certain circumstances and (ii) other remuneration components. The category (ii) is fixed remuneration only, both in money (such as salary) and in kind (such as a lease car). In view of the definition of the non-fixed remuneration referred to in (i), this must include every form of variable remuneration (whether in money or in kind) such as performance bonuses, guaranteed bonuses, profit sharing, year-end bonuses and severance pay (unless awarded by the courts). This newsletter uses the terms variable and fixed remuneration.
No variable remuneration for period of State aid
The bonus ban means first of all that no variable remuneration may be awarded or paid to management board members in respect of the period in which State aid is received. Second, no variable remuneration may be awarded or paid for the period prior to the provision of State aid.
The date on which bonuses are awarded or paid is irrelevant. It follows that prohibited bonuses may also not be awarded or paid for the period concerned after the State aid has ended.
The above applies to financial institutions granted State aid after 6 October 2011. Such institutions are therefore not permitted to award or pay bonuses on or after that date, even if the award or payment pre-dates the entry into force of the legislation.
Mitigating provisions apply to financial institutions granted State aid before 6 October 2011, assuming such aid has not ended on the date when the legislation enters into force. If these institutions have paid a bonus before 26 October 2011, it need not be repaid. Similarly, if they have awarded a bonus before 26 October 2011 but have not yet paid it, it may still be paid. However, these institutions may not award or pay a bonus in respect of the period in which they are in receipt of State aid on or after 26 October 2011.
Freezing of fixed remuneration
To ensure that the rules on prohibited variable remuneration cannot be circumvented by paying some other form of compensation, the fixed remuneration (such as salary) of the management board members will be frozen during the period in which State aid is received. In principle, the fixed remuneration will remain at the same level as immediately before the State-aid measure took effect. Only extra percentage increments will be permitted, insofar as these increments are also paid to the other staff of the institution concerned. Pension allocations that have already been agreed may be paid.
Here too, mitigating provisions apply to financial institutions granted State aid before 6 October 2011, assuming such aid has not ended on the date when the legislation enters into force. In the case of these institutions, the fixed remuneration will remain at the same level as when the new legislation enters into force, subject to the proviso that the remuneration may not exceed 120% of the value on 26 October 2011.
Monitoring by supervisory board / nullity sanction
Responsibility for monitoring compliance with the new rules will rest with the supervisory board of the financial institution concerned or (if the institution is not a company) some other supervisory body.
Under the draft legislation, any agreements between a financial institution and its management board members that are contrary to the above are null and void. If the remuneration were nonetheless to be paid, the payment would not be owed and could, in principle, be clawed back by the institution.
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.