Further restraints on remuneration in the Dutch Financial Sector

The Dutch government released a draft legislative proposal relating to remuneration in the Dutch Financial Sector (the “Proposal”) earlier this week.

The Proposal is part of the Dutch government’s wider endeavours aimed at a sound and sustainable Dutch financial sector serving the public good. It introduces all-encompassing legislation that requires financial undertakings to maintain sound remuneration policies and to curb excessive variable pay. According to the Dutch government, it is imperative that the financial sector, and everyone working in it, takes responsibility in this regard.

The Proposal is subject to public consultation until the end of this year. The government plans to submit it to the Dutch parliament next spring. As it currently stands, there seems to be majority support for the Proposal.

The Dutch government aims to implement the new rules on 1 January 2015. However, it is early days and the final rules are likely to change as the upcoming legislative process unfolds.

Summary of the proposed key changes

Although the proposed bonus cap has received most of the headlines, the Proposal provides a legislative basis for a variety of rules and extends the scope of some rules that currently exist. A summary of the bonus cap, and the other proposed key changes is set out below:

1) 20% bonus cap

This places a limit on variable pay of 20% of the fixed salary of employees as well as all other persons working under the responsibility of financial undertakings (e.g. contractors and secondees).

This proposed cap is much more stringent than the bonus caps of 100% or 200% introduced by CRD IV for certain staff, which take effect on 1 January 2014.

Under the Proposal, transitional rules apply to current employees. Pursuant to these rules, variable pay in relation to the year 2014 may still exceed the 20% cap, provided that such pay is based on contractual agreements entered into prior to 2015. As from 1 January 2016 the 20% bonus cap will also apply to existing employees, so that their variable pay relating to the year 2015 may not exceed 20% of their fixed pay.

Exceptions apply, for example to persons not covered by a collective labour agreement. This exception allows variable pay to such persons in excess of the 20% bonus cap, as long as the average variable pay to such persons does not exceed the 20% cap.

Another exception relates to persons working at least 50% of their time outside the Netherlands. Their variable pay can be increased to 100%, if they work in an EEA Member State, and to 200% if they work in a non-EEA Member State. The government does emphasize that shareholders should exercise restraint in this regard and only choose to apply these higher caps on an individual basis if this is necessary.

A bonus cap of 100% will apply to international holding companies having their seat in the Netherlands and the majority of its activities outside the Netherlands. However, this cap may be exceeded at the level of the holding company, if at least 75% of the group’s employees work outside the Netherlands during 3 out of 5 years (i.e. in view of the international nature of such a group).

The government acknowledges that the 20% bonus cap may trigger a further increase in fixed pay in view of compensatory measures. It emphasizes that such compensation should always be plain and sober given (i) the challenges the sector is facing, (ii) the already high levels of fixed pay compared with other sectors and (iii) the public disquiet relating to remuneration in the financial sector. It continues by stating that refraining from increasing fixed pay, or only doing so in a limited manner, will contribute to repairing the breach of trust between the financial sector and its customers.

Relevant to: all Dutch financial undertakings, their subsidiaries (including foreign subsidiaries), group companies of Dutch financial holding companies (under certain conditions), as well as Dutch branch offices of foreign financial undertakings (with the exception of branch offices of foreign banks and investment institutions to which the 100% or 200% bonus cap of CRD IV will apply).

The proposed bonus cap does not apply to managers of investment institutions, managers of UCITS and to investment firms which only trade for own account without external customers.

2) Retention payments

Under the Proposal, a retention payment resulting in a breach of the 20% bonus cap is permitted only in exceptional circumstances (such as takeovers) and under strict conditions (including prior approval by the regulator).

3) Controlled remuneration and disclosure requirements for all financial undertakings

Already introduced by CRD III for a selected number of financial undertakings, the obligation to have a controlled remuneration policy and related disclosure requirements are now extended in scope and size.

Relevant to: Dutch financial undertakings, subsidiaries of Dutch financial undertakings (including foreign companies), group companies of Dutch financial holding companies (under certain conditions).

4) Severance payments

CRD III already introduced the principle of ‘no reward for failure’. Under the Proposal a severance payment may not be paid to any person working in the financial undertaking if the contractual relationship terminates at the initiative of the individual, in case of the individual’s negligence or in case of failure of the company if the individual held a controlling position. A mandatory cap on severance payments is introduced for directors. The maximum severance payment to such persons is limited to 100% of fixed annual pay. This cap will also have an impact on certain existing contractual arrangements (e.g. golden parachutes). Severance payments awarded by a court are not caught by this cap.

Relevant to: Dutch financial undertakings, subsidiaries of Dutch financial undertakings (including foreign companies), group companies of Dutch financial holding companies (under certain conditions).

5) Ban on guaranteed variable payments

Already introduced by CRD III for a selected number of financial undertakings, the ban on guaranteed variable pay is expanded in scope under the Proposal. A guaranteed variable payment (such as a signing bonus or “golden hello”) is only permitted under three conditions: (i) when hiring new staff, (ii) when limited to the first year of employment and (iii) in case the financial undertaking has a sound level of equity.

Relevant to: Dutch financial undertakings, subsidiaries of Dutch financial undertakings (including foreign companies), group companies of Dutch financial holding companies (under certain conditions).

6) Clawback and malus requirements

A legislative proposal introducing the possibility to allow clawback and malus has been pending in the Dutch parliament for several years. The Proposal now introduces an obligation for financial undertakings to actually apply clawback and malus in case for example the undertaking’s financial position has deteriorated substantially as a result of an individual’s actions. In addition, the scope for clawback and malus is widened to all persons working in the financial undertaking (i.e. not just identified staff and now also including for example contractors and secondees). Moreover, the Dutch government re-confirms that clawback and malus arrange-ments also capture severance payments.

Relevant to: Dutch financial undertakings, subsidiaries of Dutch financial undertakings (including foreign subsidiaries), group companies of Dutch financial holding companies (under certain conditions).

7) Ban on variable pay in case of State support

The ban on variable pay in case of State support was introduced in 2012. Under the Proposal, a few technical changes are to be made.

Relevant to: Dutch financial undertakings receiving State support.

The Proposal obviously raises many questions. We will continue to closely monitor its progress and keep you abreast of relevant developments as they appear. If you have any questions in the meantime, please do not hesitate to contact us.