Dutch senate approves bonus cap relaxation in financial sector

The Dutch parliament's upper house has adopted an amendment that narrows the personal scope of the bonus cap at financial institutions in the Netherlands to certain categories of staff. The amendment forms part of a broader bill amending the Financial Supervision Act and related legislation. The bill is expected to enter into force on 1 January 2027.

Background

In the Netherlands, a bonus cap – at 20% of fixed remuneration – applies that is considerably stricter than the EU's minimum standard under the Capital Requirements Directive (CRD). The CRD caps bonuses at 100% (or 200% with shareholder approval) and only applies to identified employees whose professional activities materially influence the institution's risk profile. Covering all Netherlands-based employees – including employees of group companies headed by a Dutch parent company – and nearly all financial institutions, the 20% Dutch bonus cap has long exceeded what European law requires.

A 2024 evaluation confirmed the practical consequences of this discrepancy. The bonus cap makes it more difficult to attract and retain specialist employees within the financial services industry – including IT professionals essential to the sector's security and innovation capacity – and acts as a brake on the Netherlands' attractiveness as a business location. The rules also appear to have been a factor in decisions by certain parties not to relocate to the Netherlands following Brexit. This evaluation, together with calls for action from market participants to boost the Dutch competitive climate, have now led to the relaxed remuneration rules as adopted.

Key change: scope of relevant remuneration rules narrowed to identified staff

The central change is that certain restrictive remuneration rules, importantly including the 20% bonus cap, will no longer apply to all employees. The cap will only cover identified staff: those whose professional activities materially influence the risk profile of the financial institution. Employees who do not qualify as such – non-identified staff – will no longer be subject to the cap.

For the definition of identified staff, the amendment generally aligns with section 92(3) CRD, covering:

• all members of the management body (that is, both the management board and the supervisory board) and senior management;

• staff with managerial responsibility over internal control functions or material business units;

• staff entitled to significant remuneration (equivalent to at least EUR 500,000 or the average remuneration of members of the management body and senior management) who perform their activities in a material business unit and have a significant impact on that unit's risk profile; and

• staff otherwise identified as risk-takers based on pre-described quantitative and qualitative criteria

Except where the persons in category (a) are concerned, the responsibilities and activities actually carried out by the person in question, rather than the job title, will be the decisive factor in determining if someone qualifies as identified staff.

In addition to the narrowed scope of the bonus cap, the amendment also limits the personal scope of several related obligations to identified staff only. This includes requirements on the use of at least 50% non-financial criteria for variable remuneration (article 1:118 FSA); annual remuneration reporting requirements in the management report (article 1:120 FSA); conditions for retention bonuses (article 1:122 FSA); and the five-year retention period for financial instruments forming part of the fixed remuneration (article 1:130 FSA).

Clarification on the scope for non-banks

The introduction of the identified staff concept raises an important practical question for financial institutions outside the banking sector: which definition should they apply? The banking definition as set out above – developed under the CRD framework and calibrated for banking-specific functions – is relatively detailed and may not be well-suited to the activities of insurers, payment institutions, investment firms or other types of financial institutions.

The government addressed this question in its response to the Senate's written questions, adopting a tiered approach:

• Banks continue to apply the established banking definition.
• Institutions that already operate under a sector-specific definition – such as insurers, asset managers and investment firms – apply their own definition.
• Institutions encountering the concept for the first time, including payment institutions, e-money institutions, and financial service providers, are expected to determine for themselves which employees qualify as identified staff. For these entities, the general concepts of the banking definition can (and should) of course serve as a good indicator for regulatory expectations of the staff members who are to be included as identified staff.

In our view, this is a workable and pragmatic outcome. It preserves regulatory coherence within each sector, avoids the imposition of an ill-fitting framework on institutions with different business models, and prevents situations in which an institution would need to navigate multiple competing definitions simultaneously. To prevent regulatory divergence (or regulatory arbitrage) via the third category, we believe it that the regulator(s) should preferably make clear that the general boundaries of determining identified staff are expected to be applied in a way that is consistent with the rules for other financial institutions. This is even more important now that, after amendment, the application of all relevant rules will revolve around the identified staff concept, and this concept can therefore not be left ambiguous. According to the parliamentary history, DNB and the AFM will assess whether it is opportune to issue a supervisory policy on the definition of identified staff, while any such policy would only be binding on the regulators themselves and not on financial institutions.

Availability of relevant exceptions

Existing exceptions to the bonus cap and other remuneration rules remain available; these importantly include the possibility to increase variable remuneration up to 100% (or 200% with shareholder approval) on an individual basis, provided that

• on average, the variable remuneration within the aggregate captured employee pool does not exceed 20% (known as CAO-uitzondering), and

• it does not concern a person responsible for an internal control function.

The narrowed scope of the bonus cap also means that if an institution wants to allocate a higher (above 20%) variable remuneration to a specific person in accordance with article 1:121 (2) FSA, there is a smaller pool of persons to "even out" the average score between fixed and variable remuneration. This is needed to achieve an overall average of 20% of fixed annual salary. In other words, if the pool of identified staff becomes smaller, it becomes harder to even out any excess variable remuneration with the remainder of the pool.

Impact in the context of transactions

The legislative overhaul will not only impact remuneration structures itself but also directly impact remuneration aspects of M&A transactions.

First, the restrictions applying to the use of retention bonuses will only apply in relation to identified staff. In practical terms, this means that retention bonuses granted to other staff are no longer subject to a cap or potential regulatory approval. While this may sound like a relaxation of rules, our expectation is that those who usually receive a retention bonus because of their essence to the undertaking, are also likely to qualify as identified staff. The practical impact of this change may therefore be limited.

The new rules do offer some more flexibility – but also restrictions - in structuring or revising management incentive plans (MIPs) and employee participation plans in a transaction context. Where they qualify as variable remuneration – that is, if no full or partial fair market value is paid for participation – MIPs are expected to fall within the category of variable remuneration rewarded to identified staff, in each individual case subject to confirmation that the recipient is able to influence the institution's risk profile. Although the legislative amendment is therefore unlikely to bring major changes to MIP arrangements, the pool of individuals covered by the new rules will become much smaller. This could lead to an outcome in which current management remuneration needs to be revised via a different allocation between fixed and variable remuneration before the new rules take effect.

On the flipside, the increased flexibility to award variable remuneration to non-identified staff leaves more room to structure the post-acquisition remuneration policies and incentive packages for employees – where necessary by involving the relevant works council on the purchaser's as well as the target's side. When integrating remuneration packages and policies of two companies, it may become easier to reconcile remuneration practices between entities once the regulatory framework leaves more room for this (outside of the pool of identified staff)

Outlook

Overall, this reform is a positive and logical development, particularly from a Duch business and investment climate perspective. It brings Dutch law more closely into line with the underlying rationale of the European framework and removes an unjustifiable burden from the majority of financial sector employees. As such, we expect the relaxation to foster a more level playing field in attracting talent between financial institutions and other market players (such as digital platforms) and between financial institution in the Netherlands and other EU member states. That said, financial institutions will need to maintain separate remuneration systems for different categories of staff. For identified staff itself, the consequences may moreover be impactful due to the individual exceptions to the bonus cap being more limited (as the average variable remuneration for this group cannot exceed 20% and the pool of staff included in this weighting is likely to become smaller).