Arjen Dorland on the Increasing Complexity of Remuneration

'You can fall flat on your face with remuneration policies'

Arjen Dorland in conversation with Aniel Mahabier

Arjen Dorland on the Increasing Complexity of Remuneration
Executive remuneration attracts a great deal of attention. In his supervisory roles supervisory director Arjen Dorland searches for reasonableness in the remuneration of executive directors and takes a stand against the increasing complexity, especially in variable remuneration components. The question is always whether any remuneration component can be justified.

The desire to ‘broaden his horizon’ after a long career at Shell was the reason for Arjen Dorland to become a supervisory director. Nowadays he combines supervisory directorships at ABN AMRO, energy company Essent and insurance company Bovemij. Dorland is also a supervisor at a hospital and two museums. No matter how different these organizations are – from the regulated ABN AMRO to Essent with its remuneration tradition of the German parent company E.ON – executive remuneration is part of the supervisory review everywhere.

At Essent and ABN AMRO, Dorland chairs the remuneration committee at a time when there is an increased focus on remuneration: since last year, European rules for listed companies have provided that shareholders have to endorse the remuneration policy with a qualified majority. Dorland is also a supervisor at the hospital Haaglanden Medical Center, the Biodiversity Center of Museum Naturalis and Japan Museum SieboldHuis. What executive directors earn is subject to government rules here, but the balance between remuneration, the managerial qualities that are required and work pressure remains a point of discussion.

Dorland sees that executive remuneration is increasingly becoming part of the social debate. And he is pleased about that. Companies must be able to indicate how the remuneration of the CEO and the board contributes to long-term value creation. Interviewer Aniel Mahabier, founder and CEO of governance data specialist CGLytics, agrees. In his view, shareholders’ voting behaviour shows increasing readiness to take action.  Shareholders and other stakeholders expect remuneration to reflect performance.

How do you combine your various supervisory directorships?
‘Museums, insurance companies, banks and energy companies all have their challenges, but I also see many similarities. As a supervisory director, I always want to know what kind of executives there are, whether they are capable and whether they work as a team. I also look at the financial situation, the strategy and how IT fits in with the strategy. I want to know if there are compliance and risk management problems, how the relationship with a supervisor is and how sustainability is included in the strategy. At this juncture, the strategy around COVID-19 is important for all these companies and organizations – these issues arise everywhere.’

An important task for the supervisory board is the supervision of the remuneration policy. How do you navigate between these different expectations?
‘In all strategic decisions – certainly the remuneration policy – supervisory directors must assess whether what the company is doing is reasonable. The supervisory board must keep in touch with all levels within and outside the organization. As a supervisor, you can fall flat on your face with remuneration policies. I want to know how the various stakeholders feel about the remuneration policy. I therefore consult with the executive board itself, the works council, the shareholders and – in an increasing number of sectors – the supervisor.
Executive remuneration occasionally arouses social resistance. The question arises whether I should take that to heart or not because supervisory directors have various interests to take into account. It is not just about the executive directors’ pay but about the company's entire remuneration structure. Any change in executive remuneration has an impact on the rest of the remuneration structure. You strike the right balance by learning from the things that go well, but also from what goes wrong.’

Since the introduction of a new European directive in 2019, listed companies have been under an obligation to submit a new remuneration policy to shareholders. They have to endorse this policy with a majority of at least 75 percent. Our voting data show that the number of remuneration proposals that are rejected at the general meeting of shareholders is increasing.
‘Supervisory directors who fail to get 75 percent of the shareholders behind the remuneration policy still have some homework to do. How you reward executives must be transparent and justifiable. I always discuss this with the shareholders, whether or not there is a directive. I sit around the table with major investors, but also with the Dutch Association of Stockholders and the umbrella organization for investors Eumedion. We have to take the members they represent seriously. I don't always agree with their criticism, but I do need to be able to explain the company's remuneration policy and make sure that we continue our dialogue.’

As a result of COVID-19, several companies are forced to pay no dividend or a lower dividend, or to dismiss employees. A substantial proportion of them still pay out the CEO bonuses. This leads to social debate. Is the board's remuneration still appropriate in the environment in which we now find ourselves?
‘We make long-term agreements with shareholders about the remuneration of executive directors. I don't think it's wise to change things in a difficult year. In that case you would also have to increase executive remuneration in a top year, as in the American model: for example, a fixed salary of one hundred thousand euros and variable remuneration that can run into millions. That entails other challenges, and the policy may then be focused on the short term too much. By the way, I expect that as a result of the current crisis, the variable component of executive pay – if any – will fall very sharply based on the 2020 results. So there is already a moderating factor in variable remuneration structures.’

What vision underlies the way in which you supervise executive remuneration?
'I think we should reward good people well, but we don't always have to push the limit. The argument ‘this person is indispensable’ does not appeal to me very much; the cemetery is full of indispensable people. A good executive director is important, but it's also about teamwork. If a remuneration system isn't designed for that, we give a few too much and the rest too little.
I prefer to be moderate, especially when it comes to the variable components of remuneration. In my experience, variable remuneration always leads to a discussion. For example, what performance justifies the payment of variable remuneration? How shall we deal with the situation where the executive director has achieved 98 percent of the agreed target, or 102 percent? These are almost mathematical discussions. As you can see, I am in favour of a good basic salary, possibly with a moderate variable component.’

Executive remuneration must be in line with the market, but in practice a discussion arises about what the market is.
‘I notice that too. First and foremost, it is important to consider what someone at the top has achieved. Does he or she allow the company to grow and is value created for all stakeholders? The remuneration must be in line with the market, but should a Dutch bank compare itself with the American bank JPMorgan Chase, or an energy company with Shell? It is better to search in all reasonableness for a peer group of comparable companies, where necessary within the relevant international context. This is what we are experiencing with Essent, which has a German parent company. Time and again I have been informed about the salary scales of the successive German owners RWE, Innogy and E.ON. I want to know how that works. For shareholders, it is important that a company succeeds in keeping talent onboard, partly because of the attractiveness of the remuneration package. Choose a reward that is acceptable, appropriate and transparent.’

This transparency is disappointing; in the remuneration section the most important information is often found in the small print underneath the charts.
‘Dutch executives sometimes have difficulty with the transparency about individual remuneration. American companies report much more openly on remuneration: American CEOs have no problem with everyone knowing exactly what they earn. At the companies where I am a supervisory director, we try to be as transparent as possible in the remuneration section of the annual report. Openness is important; if you have questions from analysts or journalists, you have to be able to give clear explanations.’

Many companies have included sustainability criteria in their strategy. It seems logical that executives should be rewarded for long-term value creation. How can this be translated into remuneration policies?
‘We're working on that, but it's not easy. Certain non-financial criteria are easy to measure, such as, in the area of safety, the number of accidents in relation to the hours worked. For other sustainable criteria, an objective measurement system is still lacking. For example, how do you measure improvements in the company culture or the effects of a good compliance policy? If a specific metric has been chosen, the question is whether the external auditor or the internal finance & accounting department should audit this. Or should we have a specialist independent expert assess this, for example the compilers of sustainable indices like RobecoSAM or the Dow Jones Sustainability Index? What's more, we're looking for a standard that doesn't need to be updated every year. Continuity in reporting is important: annual reports must show what the company has achieved over a longer period of time.’

How do you ensure that you take the right decisions on these aspects of remuneration policy?
‘We seek advice where necessary, but we also take a close look at how others address it. I talk to fellow supervisory directors on a regular basis. As a result of stricter legislation, the reporting of many companies is now so good that it is of great use to us. I look with admiration at the companies that have properly incorporated ESG criteria into their remuneration policies. This also provides an insight into the challenges this entails. For example, Shell was removed from the Dow Jones Sustainability Index in 2010 [the oil producer is no longer among the 10 percent most sustainable companies in its category, ed.]. This had a direct impact on its remuneration policy, as the board could no longer be held accountable for this KPI.’

We have discussed the remuneration of the executive board, but I am also curious to know how the remuneration of the supervisory board develops. Does the increased responsibility of the supervisory director affect remuneration levels?
‘The remuneration of the supervisory board always triggers a social debate. As soon as a company decides to pay the supervisory directors more, the debate starts again. Responsibility has increased and there are strict availability requirements. The risk of reputational damage is also high. Everybody has been able to see how some supervisory directors received devastating criticisms after, according to the public, they had misjudged a situation. This does not mean that the remuneration for supervisors must be raised immediately: it must remain proportionate and this is different for each company.
In my opinion, supervisors are structurally underpaid in areas such as healthcare, housing associations and education. These supervisory roles have also become much heavier in recent years. It is precisely these organizations that want to attract young people as supervisors, but these young people get in trouble when the job proves to be time-consuming, as  they also have a mortgage and children at college. It is good if we –  also in government and semi-government –  consider what constitutes  reasonable compensation for a supervisor. A decent level of remuneration for the requirements set, the responsibility that supervisors bear and the work this entails.’

This interview was published in Management Scope 09 2020.

This article was last changed on 31-08-2021