Compensation Policy in the Financial Supervision Act
We have previously written in this newsletter about the Regulation on Restrained Compensation Policies Dutch Financial Supervision Act 2011 ("Wft") of the Dutch Central Bank ("DNB") that entered into force on 1 January 2011. Starting from 1 January 2012, DNB's powers of enforcement in the field of compensation policy are also enshrined in the Wft. Implementing Directive 2010/76 (Capital Requirement Directive III), the "Act amending the Wft to implement the amended and revised Banks Directive and the amended and revised Capital Adequacy Directive" incorporates DNB's powers of enforcement in respect of compensation policies into Section 3:111a under f and g of the Wft. The new Act provides that if a bank or investment firm fails to meet the requirements for its business operations, liquidity or regulatory capital, the DNB may dictate that:
- the variable compensation of directors is limited to a specific percentage of total net revenue; and
- the bank or investment firm has to use its net profits to strengthen its regulatory capital (instead of using it for paying compensation).
The scheme applies to staff whose professional activities have a material impact on the risk profile of the financial undertaking. As was announced before, further rules for compensation policies have been incorporated as of 1 January 2011 in the Regulation on Restrained Compensation Policies.
Bill on Adjustment and Claw-Back of Executive Compensation
The second interesting development in the field of executive compensation we wish to discuss is the bill called "Adjustment and claw-back of executive compensation". This bill provides for the addition of subsections 6, 7 and 8 to Section 2:135 of the Dutch Civil Code ("DCC"), including a real option to reclaim ('claw back') bonuses.
Subsection 6 of the new Section 2:135 of the DCC provides – in accordance with the Corporate Governance Code – that the corporate body authorized to fix the remuneration shall have the power to adjust the amount of a bonus of the board of directors, if paying out the bonus would be unacceptable according to the standards of reasonableness and fairness (the "test of reasonableness").
To top it all, subsection 8 provides that a bonus may be claimed from the director in whole or in part as far as it was paid on the basis of incorrect information about the achievement of the targets on which the bonus was based, or about the circumstances on which the bonus was conditional (the "claw-back scheme").
As it is, Section 2:135 of the DCC only relates to the compensation policy of public limited companies, but in the bill this section is declared applicable by analogy to banks/cooperatives and to insurance societies/mutual insurance societies, as well as to banks and insurance societies having the legal form of a BV (private company). In addition, the test of reasonableness and the claw-back scheme are made applicable to all financial undertakings within the meaning of the – administrative-law – Wft. This is done by adding a new Section 1:111 to the Wft, which declares subsections 6 and 8 of Section 2:135 of the DCC applicable by analogy. However, the difference still remains that Section 1:111 of the Wft, as opposed to Section 2:135 of the DCC, also applies to other day-to-day policymakers than directors.
Bill Banning Bonuses for State-Supported Financial Enterprises
The bill submitted on 26 October 2011 entitled "Bill banning bonuses for state-supported financial enterprises" provides for a new Section 1:112 in the Wft. This section prohibits financial enterprises that are receiving or have received state support from paying out any bonuses to directors. Such enterprises are also banned from implementing excessive salary increases during the period when, and as long as, they are receiving support.
Consequently, Section 1:112 of the Wft has two components. Firstly, the section regulates that all payments of the variable part of the compensation – the "bonus" – of directors of state-supported financial institutions are set at EUR 0 by operation of law. Secondly, the other components of directors' compensation – the fixed salary – are frozen.
At present, financial institutions that have been nationalized due to the crisis are beyond the scope of this bill. Nationalization is not capital support, and can therefore not be qualified as "state support". However, on 6 February of this year, the Finance Minister stated that he considers this unacceptable; he thinks that nationalized financial institutions too should be included in the bill. The parties in government VVD and CDA, together with their supporting party in Parliament PVV, have meanwhile prepared an amended version of the bill.
Bill on Standardization of Top Officers' Compensation in Public and Semi-Public Sector
On 6 December 2011, the Lower House of Parliament agreed to the bill that binds compensation of directors and executive officers in the public and semi-public sector to a statutory maximum. According to this bill, the salaries of directors and executive officers in the public sector and in semi-public institutions may not exceed 130 percent of the gross annual salary of a government minister. Severance pays are capped at EUR 75,000. The written preparation of the discussion of this bill is currently in the hands of the Parliamentary Committee of the Interior/General Affairs.Conclusion
All in all, a lot is going on in the compensation world. The legislator, DNB and AFM (the Netherlands Authority for the Financial Markets) have clearly made efforts aimed at eradicating "perverse pay incentives". It is worth monitoring how these efforts and the supervision of DNB and AFM in the field of compensation will work out in practice.
First published in the Kennedy Van der Laan newsletter - February 2012
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.