On 1 January 2023, the Financial Markets Supervision Act will change, introducing a new scheme on remuneration at financial enterprises (such as banks and insurers). The new scheme includes a five-year statutory retention period for shares and other financial instruments that managing directors or employees receive as part of their fixed pay. In their remuneration policies, financial enterprises will also have to account for the relationship between the remuneration of their directors and employees and their social function. The new legislation includes a transitional regime. We describe the key features of the new law below.
Statutory retention period
Under the new law, financial enterprises will have to ensure that shares or other financial instruments which value depends on the company's performance and which form part of the fixed remuneration of a person working under the company's responsibility, are retained for at least five years after being acquired. The aim of this retention period is to align the interests of managing directors and employees with the company's long-term interests, and to mitigate short-term risks. The retention period will apply to all financial enterprises, listed on a stock exchange or not.
The measure coincides with the guidelines of the European Banking Authority on sound remuneration policies for banks and certain investment firms. Under those guidelines, shares and other financial instruments received as part of variable remuneration are subject to an appropriate retention policy that aims to align financial incentives with the company's long-term interests.
A transitional one-year regime applies. During that year, companies are expected to renegotiate new contracts and terms of employment with individual employees (and trade unions). This includes adjusting special arrangements made before the statutory retention period takes effect. The retention period does not apply to shares or other financial instruments, in fixed remuneration, acquired before the end of the one-year transition period.
Accountability for relationship between remuneration and social function
The Dutch legislature's aim is for the financial sector to be mindful of its social function and to involve stakeholders in drawing up the remuneration policy. In that context, the new legislation requires financial enterprises to describe in their remuneration policy how they take into account the relationship between the remuneration of their directors and employees and their social function, and how this relationship is established. According to the legislature, the purpose of this measure is to ensure that supervisory boards take greater account of the function of the financial enterprise in the financial sector and its position in society before making remuneration proposals. Financial enterprises that are required to prepare a management report under the Financial Markets Supervision Act must publicly account for this, and the Dutch regulator will monitor that this remains part of the company's remuneration policy and its public accountability.
As the new legislation enters into force on 1 January 2023, financial enterprises may need to table an amendment of their remuneration policies at the next general meeting. For a listed financial enterprise, an amendment requires a majority of at least 75 percent of the votes, unless the articles of association provide otherwise.
Bonus cap for staff not covered by collective bargaining agreements
In 2017 and 2018, the Dutch Central Bank conducted a survey into the remuneration practices of financial enterprises, including the option to deviate from the statutory bonus cap when granting bonuses to staff not covered by a collective bargaining agreement (non-CBA personnel). The survey showed that this option is often used for staff making important risk assessments. This practice is considered to be incompatible with the intention behind the bonus cap. To underline the exceptional nature of this non-CBA personnel option and to prevent it from being used frequently for personnel who actually make important risk assessments, the legislature has sought to tighten the option to deviate from the bonus cap.
This tightening includes an explanation that the bonus cap may only be deviated from under exceptional circumstances and may not be used for those who: (i) perform internal control functions, or (ii) are directly engaged in providing financial services to consumers. In addition, financial enterprises will have to annually report to the regulator on the use of this option.
The new legislation introduces several further remuneration measures which financial enterprises need to be aware of, and which must be approached with care. Not least because of the direct involvement of multiple stakeholders, including employees and shareholders. Financial enterprises continue to be subject to an evolving regulatory landscape, including in the field of remuneration.