Executive Remuneration in the Netherlands 2018

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EY’s 2018 Executive Remuneration Report contains observations on remuneration trends within Dutch listed companies. The major findings reveal how Dutch listed are balancing their executive pay decisions in a time of changing thoughts on corporate governance, transparency, reporting quality and fairness. By identifying these key findings, EY aspires to continue promoting the debate on executive compensation.

Key findings:

  • Bonus payments exceed target levels

    We analyzed how the actual bonus (STI) payment related to the target bonus amount. The graph below shows the average actual pay-out as a percentage of target pay-out per index. We found that the average bonus payout over 2017 across all positions and indices was 110% of target. This is the highest average over the past 3 years, with averages in 2015 and 2016 of 103% and 106%, respectively.

    EY - Executive Remuneration in the Netherlands 2018

    Last year we investigated whether bonus payments at Dutch listed companies are actually variable enough to effectively incentivize performance. We found that 55% of CEOs (based on same sample data) consistently obtain more than half of their maximum STI opportunity. This finding raises the question whether bonus payments are truly variable.

    This year we analyzed per position and index how the actual bonus (STI) payment related to the target bonus payment. The table below shows the percentage of incumbents who received at least the specified percentage of their target STI opportunity.

    Index

    Position

    Actual/Target STI Ratio spread 2017

    0%

    < 50%

    < 100%

    < 150%

    < 200%

    Average

    AEX

    CEO

    0%

    11%

    32%

    84%

    100%

    115%

    CFO

    0%

    6%

    50%

    89%

    100%

    111%

    OM

    0%

    11%

    56%

    89%

    100%

    107%

    AMX

    CEO

    0%

    12%

    41%

    88%

    94%

    103%

    CFO

    6%

    19%

    44%

    94%

    100%

    91%

    OM

    0%

    10%

    50%

    90%

    90%

    107%

    AScX

    CEO

    0%

    0%

    45%

    82%

    91%

    121%

    CFO

    0%

    0%

    60%

    90%

    90%

    112%

    OM

    0%

    0%

    25%

    75%

    75%

    154%

    For illustration purposes, 11% of CEOs in the AEX received less than 50% of their target STI opportunity in 2017, while 52% (84% - 32%) of CEOs in the AEX received an STI amount between 100% and 150% of target.

    In 2017, on average 55% of all incumbents (61% of all CEOs) received a bonus payment of at least 100% of their target opportunity. When taking a closer look at the CEO position, we find that 34% of CEO’s (42% of CEOs at AEX companies) received a bonus payment of at least 125% of their target opportunity.

  • The total direct compensation levels of CEOs and CFOs are diverging

    Last year we pointed out that total direct compensation (TDC) levels of CEOs and CFOs were diverging. This year we observe that this trend is continuing.

    The graphs below show the development of median total direct compensation (TDC) levels from 2015 to 2017, excluding financial sector companies.

    EY - Executive Remuneration in the Netherlands 2018

    The graph above reveals increasing median TDC levels in all indices. The ratio between TDC levels of the CEO and CFO in 2017 was 1.7.

    EY - Executive Remuneration in the Netherlands 2018

    The graph above shows that the median TDC levels hava increased for the CEO and CFO positions in the AMX, but not for the OM position. In 2017 the median TDC level for CEOs was roughly 1.5 times that of CFOs.

    The total direct compensation levels of CEOs and CFOs are diverging: the ratio of CEO to CFO compensation increased by 11% from 2015 to 2017 across the three indices.

  • Pay differences between indices are significant

    The table below shows the target remuneration levels for all positions and indices in 2017, excluding financial sector companies.

    Index

    Remuneration levels at target

    CEO

    CFO

    OM

    AEX

    Fixed salary

    € 978,000

    € 654,000

    € 605,000

    STI

    € 925,000

    € 440,000

    € 421,000

    LTI

    € 1,074,000

    € 724,000

    € 597,000

    TDC

    € 3,759,000

    € 2,208,000

    € 1,815,000

    AMX

    Fixed salary

    € 570,000

    € 416,000

    € 449,000

    STI

    € 370,000

    € 224,000

    € 256,000

    LTI

    € 565,000

    € 291,000

    € 360,000

    TDC

    € 1,479,000

    € 1,012,000

    € 1,024,000

    AScX

    Fixed salary

    € 450,000

    € 326,000

    € 354,000

    STI

    € 232,000

    € 141,000

    € 202,000

    LTI

    € 240,000

    € 135,000

    € 178,000

    TDC

    € 875,000

    € 533,000

    € 909,000

    The table above shows target remuneration levels for each of the four remuneration elements. The TDC values represent the median of the individual TDC observations and will therefore deviate from the sum of median fixed salary, STI and LTI.

    Pay differences between indices are significant: the TDC ratio between AEX and AMX is approximately 2.4, and between AEX and AScX this value is approximately 4.2 when looking at CEO and CFO positions.

  • Few companies discuss whether their internal pay ratio is justifiable in the context of their own organization

    The revised Code requires Dutch listed companies to take into account the internal pay ratios within the company when formulating the remuneration policy for the Executive Board, and to disclose and discuss these ratios in the remuneration report.

    Most companies did not specifically address this topic in their 2016 reports from last year, which was not required at the time. Instances in which internal pay distributions were explicitly mentioned were hard to find, as we observed that internal pay ratios were often not outlined in the remuneration reports themselves.

    However, many reports did include at least one sentence dedicated to the company’s promise to include and discuss the pay ratio from the next year on. Therefore, the expectation was that more companies would include this in their 2017 annual reports.

    Before we present the results of this year, a few side notes must be mentioned. First, pay ratios across industries are impacted by the varying workforces from one industry to another. Even within the same industry, comparing pay ratios is challenging due to different market conditions (i.e. a mix of high- and low-paying countries) and organizational models.

    Second, pay ratios of individual companies can be quite volatile over time. They can vary with exchange rate movements and are dependent on a company’s annual performance, since this impacts the remuneration of the Executive Board much more than it influences the remuneration of employees.

    Third, it is important to note that a uniform approach regarding the disclosure of and methodology behind internal pay comparisons is currently non-existent. As a result, companies use different methodologies to calculate their pay ratios.

    The table below shows the disclosure of pay ratios in the 2017 remuneration reports.

    Index

    Disclosure

    Development

    Companies

    AEX

    83%

    13%

    23

    AMX

    84%

    5%

    19

    AScX

    77%

    9%

    22

    The number of companies disclosing their internal pay ratios increased significantly in 2017, but there is room for improvement. In general, companies are not yet addressing the change in the pay ratio compared to the previous year (development as shown in the table).

    More importantly, companies are not (yet) discussing their view on whether the pay ratio is justifiable in the context of their own organization.

  • TomTom impresses with a complete and transparent remuneration report

    The Dutch Corporate Governance Code requires companies to comply with the principles and best practices regarding remuneration. We found that few remuneration reports reflect the spirit of the revised Code. This section closes with our perspective on the reporting quality of remuneration designs and an overview of the companies which we have deemed outstanding in terms of their disclosure.

    The revised Code, applied for the first time in FY17, contains numerous adaptations in relation to the previous Code. It includes fewer rules and more room for companies to concentrate on transparency and long-term value creation, with the key message from the Commissie van Manen being to go back to the core: a simple and transparent remuneration policy with a clear and understandable justification.

    We have observed that many companies follow the Code to the letter, without taking the aforementioned spirit into consideration. Few reports start by clearly outlining the company’s policy before discussing the execution.

    The reigning misconception around the “comply or explain” principle also does not enhance existing transparency or simplicity levels. Merely mentioning a deviation from the Code does not suffice as an explanation.

    While several organizations made impressive changes to act and report in accordance with the Code, others are far from meeting the Code’s intended objectives.

    From this perspective, different indicators were considered in order to examine remuneration disclosure quality. We first analyzed the completeness of disclosure, focusing specifically on whether a clear overview of the different remuneration elements was provided (e.g. fixed salary, STI, LTI and pension benefits). These different elements need to be discussed separately.

    Second, we examined the readability and simplicity of the remuneration reports and checked whether specific KPIs were described (including related weights). Other indicators included “comply or explain statements” and whether explanations of often poorly disclosed elements were present (e.g. LTI and pensions).

    Last year, we considered three reports to be outstanding: PostNL was praised for its disclosure of actual remuneration levels, ASML Holding for its structure and readability, and ABN Amro for its adherence to the revised Code. These remarks still hold true this year.

    Also, like last year, the remuneration report of Heineken impresses with its overall completeness. The Heineken report fulfills an exemplary role in showing what transparency could look like, but also how hard it is to make this accessible for a broader public.

    In addition to the above, by fully revising the structure and content of its report, TomTom surpasses mere compliance and shows its aspirations for full transparency.

 

About this report

EY’s 2018 Executive Remuneration Report provides insights into trends in executive remuneration levels and practices over the last three years. Furthermore, the report offers interesting views and perspectives on reporting quality and the implementation of the new Corporate Governance Code in remuneration reports.

The data and analyses contained in this report are based on information from the annual reports of 2015, 2016 and 2017 and other relevant public disclosures.

This report is not intended to be used as a benchmarking tool.

 

Further information

Tailored analysis or advice: what is the reporting quality of your remuneration report?

This report is intended to provide insight in trends in executive remuneration levels and practices for listed Dutch companies. Tailored analysis concerning reporting quality or of the data presented in this report is available by request.

For further information, please contact one of the EY members of the Executive Remuneration Team.