Remuneration Policy: Vision Rather Than Box Ticking
Public outrage about ‘greediness at the top’ and headlines on exorbitant bonuses have largely simmered down. In many boardrooms, remuneration policies have turned into a ‘check-the-box’ exercise under pressure from shareholders and proxy advisors who advise institutional investors on how to vote at shareholder meetings. Remuneration policies at AEX-listed companies have become one-size-fits-all, with companies generally practicing what the rules dictate. This might seem unproblematic at first glance: prudent and not offensive to anyone. This seemingly safe policy is in fact questionable, as there is no solid evidence that the model is the right one and it is unclear what its effects are on executive behavior. An authentic remuneration policy could, in contrast, play a crucial role in attracting and retaining the right talent for an organization.
Incomprehensible
It repeatedly transpires that compensation based on strict frameworks is far from ideal. Most recently, ABN AMRO's supervisory directors warned that the low remuneration package will complicate finding a suitable successor for the bank’s departing CEO. The financial framework is becoming increasingly restrictive, noted Het Financiële Dagblad, as Dutch executive remuneration, measured against international standards, is particularly low. This is in part caused by bonuses not forming part of remuneration packages.
The limited use of bonuses is unique to the Dutch financial sector and results from a bonus cap of 20 percent of the base salary, introduced in response to the financial crisis. This has led to an uneven playing field, making it difficult for Dutch financial institutions to attract international top talent. Moreover, the 20 percent cap has caused a larger fixed proportion of the remuneration than before, which has limited flexibility in salary costs. Incomprehensible.
Discomfort in supervisory boards
The time investment as well as the scope of responsibility for supervisory directors in the Netherlands are increasingly expanding, while reputational risks have escalated. This from time to time leads to concern. Understandably, a bank like Triodos wanted to increase the remuneration of supervisory directors in the run-up to its IPO. That plan was recently voted down after criticism from investors. The question arises whether the level of remuneration is still appropriate. The perception of a supervisory board position as merely an honorary title seems no longer relevant.
An effective remuneration policy
Note: this is no blind advocacy for higher compensation. It is overly simplistic to assume that higher remuneration automatically results in better performance, with no direct evidence that it leads to better leaders or decisions. However, it is essential for leaders to feel compensated fairly, both in relation to the organization and compared to their (international) peers. It is necessary to look beyond the current one-size-fits-all model of remuneration. A re-evaluation of the Dutch compensation policies is overdue, allowing for more customization. Each company, after all, has its unique strategy, culture, and risk profile.
Less standardization, more authenticity
An effective remuneration policy should, optimally, align with the organization’s identity and values. This requires less standardization and more authenticity. A positive example of authenticity is how sustainability criteria are integrated into remuneration policies, as companies increasingly do. Initially, the introduction of these criteria often occurred under pressure from external stakeholders and often were still quite general in nature. Now that sustainability has become more measurable, the criteria have become more refined and specific, aligning more closely with the specific sustainability strategies and objectives of individual companies. This allows them to drive long-term value creation in a far more tailored manner. A step in the right direction.
This trend will hopefully continue, now that Anglo-Saxon investors start pushing back on the importance of sustainability and on how Dutch companies have integrated it into their remuneration policies.
Taking a stand
Although in many cases remuneration policy has devolved into a check-the-box exercise, there are, fortunately, encouraging signs that companies are shifting towards greater authenticity. Hopefully companies will take a stronger stand soon, with shareholders affording them the necessary room to do so.
Essay by Roel van der Weele, Director Executive Reward Advisory Practice at Deloitte. Published in Management Scope 09 2024.