The Executive Remuneration Review: Netherlands
Executive2 remuneration in the corporate field in general, and specifically within financial markets, attracts wide interest in the Netherlands. Key developments are, among others:
- the implementation of the Shareholders Rights Directive II (SRD II),3 enhancing shareholder engagement;
- the adoption of the Balanced Labour Market Act (Wab), which came into force on 1 January 2020, aimed at narrowing the gap in employment protection levels between flexible employees and employees on indefinite employment agreements; and
- the status of Dutch remuneration rules in the financial and insurance markets including a 20 per cent bonus cap, which extend the scope of European norms substantially and which are subject to debate within the Dutch parliament ever since Brexit came into play, and which the parliament has again proposed to strengthen even further.
i Income tax for employees
Dutch income tax is levied from individuals who are (deemed to be) resident in the Netherlands (Dutch-resident taxable persons), as well as from individuals who are not (deemed to be) resident in the Netherlands but receive Dutch-sourced income (foreign taxable persons).
Dutch-resident taxable persons are, in principle, taxable on their worldwide income, although (partial) exemptions may apply in specific cases. Foreign taxable persons are taxed on certain statutorily defined types of Dutch-sourced income, which, for instance, include directors' remuneration and income from employment in the Netherlands. Bilateral tax treaties to avoid double taxation may limit the taxation rights of the Netherlands.
The Dutch Income Tax Act 2001 makes a distinction between three classes ('boxes') of taxable income. Each box has its own rules for calculating the taxable base and its own applicable rates.
Box 1 income
Box 1 income includes, among other things, income derived from business activities in the Netherlands, income from employment and income from miscellaneous activities.
On income that qualifies as income from employment, employers are usually obliged to collect and remit Dutch wage withholding tax. The wage withholding tax withheld can be credited against the Dutch income tax liability of employees. Wage withholding tax and box 1 income tax rates are progressive, and the maximum rate is 49.5 per cent for income exceeding €68,507 gross. Other than Dutch-resident taxable persons, foreign taxable persons with Dutch-sourced income are generally not subject to Dutch national insurance contributions. The wage withholding tax and box 1 income tax rates for Dutch-resident taxable persons and foreign taxable persons are as follows for 2020:
|Bracket||Yearly box 1 income (including income from employment)||Income/wage withholding tax rates (including national insurance contributions) for Dutch-resident taxable persons and certain foreign taxable persons (per cent)||Income/wage withholding tax rates (excluding national insurance contributions) for certain foreign taxable persons (per cent)|
|1||€0–€68.507||37.35||9.70 (up to €34,712) |
|2||€68,508 or more||49.50||49.50|
As state pension contributions are only levied from individuals that have not yet reached the state pension age, lower national insurance contribution rates apply if a Dutch-resident taxable person is older than that.6
On the other sources of box 1 income, such as income derived from business activities in the Netherlands and income from miscellaneous activities, no Dutch wage tax is withheld. The income tax and national insurance contributions are payable against the same box 1 rates as set out above.
Executive directors, supervisory board members and non-executive directors
Generally, the remuneration of an executive director qualifies as income from employment in the Netherlands. As such, wage withholding tax will be withheld on his or her remuneration, which can be credited against his of her income tax liability.7
An individual can also fulfil the position of a supervisory board member in a two-tier board, as well as the position of non-executive director in a one-tier board. The concept of non-executive director is relatively novel in the Dutch market.
As of 1 January 2017, Dutch private limited liability companies and public limited liability companies are no longer obliged to withhold wage withholding tax on the remuneration paid to a supervisory board member. There was uncertainty as to whether a non-executive director in a one-tier board for the purposes of this rule is considered similar to a supervisory board member. As of 1 January 2018, following a change in law, non-executive directors of listed companies are not considered to have a deemed employment relationship for Dutch wage tax purposes and parliamentary explanatory notes confirm the same treatment for non-executive directors of non-listed companies. Thus, a non-executive director taking seat in a one-tier board is treated similarly to a member of the supervisory board for Dutch wage tax purposes and no Dutch wage tax needs to be withheld on the remuneration paid to them.
Depending on the activities of the supervisory board member or non-executive director, his or her remuneration may qualify as profit from business activities or income from miscellaneous activities. Alternatively, a company and a member of its supervisory board or non-executive director may opt for treatment as income from employment, resulting in the company being obliged to withhold and remit wage withholding tax. This is particularly used if the 30 per cent expatriate tax ruling can be applied for.
Box 2 income
Box 2 income includes taxable income derived from holding a substantial interest in an entity. This substantial interest is generally present if an individual together with his or her partner holds an interest of 5 per cent or more of (a class of shares in) the total issued capital of an entity. This income (including capital gains) is subject to a rate of 26.25 per cent. In addition, an individual working for a company in which he or she holds a substantial interest is deemed to earn a wage of at least €46,000 (for 2020), which wage is taxed as income from employment in box 1. Upwards and downwards corrections to this amount may apply, as well as a full exemption for companies that perform activities of a passive nature (e.g., holding companies).
Box 3 income
Box 3 income concerns taxable income derived from a deemed return on savings and investments. This deemed return on savings and investments is fixed at a percentage of an individual's yield basis at the beginning of the calendar year (1 January), insofar as the individual's yield basis exceeds a statutory threshold (in 2020, €30,846). The individual's yield basis is determined as the fair market value of certain qualifying assets held by the individual less the fair market value of certain qualifying liabilities on 1 January. The deemed return percentage to be applied to the yield basis increases progressively depending on the amount of the yield basis. In 2020, the marginal deemed return percentage ranges between 1.789 and 5.28 per cent. These percentages are revised annually. The deemed return on savings and investments is taxed at a rate of 30 per cent.
ii Stock options, stock appreciation rights, restricted stock and restricted stock units
Stock options are taxable for wage tax purposes when they are exercised, sold or transferred. Thus, no tax is due upon the grant of the options. Tax will be levied on the option benefit. The option benefit is the difference between the exercise price of the option and the fair market value of the underlying shares at the time of exercise minus the option premium paid (if any). This is also true if the option is cash-settled.
The option benefit will be added to the other income from employment received by executives in the year of exercise and is taxed in box 1 (i.e., progressively up to a maximum rate of 49.5 per cent). Employers should withhold the appropriate amount of wage withholding tax and pay this amount to the Dutch tax authorities on behalf of employees. Assuming that the wage withholding tax will be recovered from the employees, this is typically done by having the employing company holding back a number of shares at the time of the exercise and using the proceeds of those shares to satisfy the withholding obligation. If the withholding tax would not be recovered from an executive, the taxable benefit needs to be grossed up, which would result in considerable additional cost to the employing company.
Stock appreciation rights
If an executive receives stock appreciation rights, then no actual shares will be transferred to the executive. Instead, a cash payment is made to the employee, the amount of which is linked to an increase in value of the shares in the company (i.e., the shares are tracked). A cash payment in relation to stock appreciation rights is taxed at the time the payment is made, and the employer will need to make the necessary wage withholdings at the time of payment.
Stock awards, restricted stock and restricted stock units
According to Dutch tax law, the grant of shares is subject to wage withholding tax at the moment the rights on the shares have become unconditional.8 If time is the only remaining condition for the transfer of the shares, then the employer will need to withhold wage withholding tax based on the value of the shares at that time. The fair market value of the underlying shares at the moment these shares become unconditional, minus any purchase price to be paid by the executive, is treated as income from employment (box 1). Restricted stock units (RSUs) are also taxed upon vesting of the underlying shares (i.e., at the moment the employee receives an unconditional right to receive shares). If the RSUs are cash-settled at the moment of vesting, the amount in cash received constitutes the income from employment.
Under certain conditions, a discount for wage withholding tax purposes can be applied on the value of listed shares granted if a lock-up period has been agreed on. For example, for 2020, a 13.5 per cent discount applies in respect of a lock-up period of three years, and a 18.5 per cent discount for a five-year period. If the employment of the recipient of the shares terminates during the lock-up period, a mandatory redelivery against a value lower than market value should constitute deductible 'negative income' for the recipient.9
If the shares increase in value after vesting, no more additional taxes are due on dividends and capital gains. Capital gains and dividends received in relation to the shareholding are generally not taxed provided that a executive together with his or her partner does not hold a substantial interest (5 per cent or more) in a company. Instead, the fair market value of the shares will be included in the box 3 yield basis as discussed above.
iii Social security contributions
The Netherlands maintains a broad system of social security measures. The social security contributions can be divided into three categories:
- National insurance contributions, which cover state pension payments, widows' and orphans' benefits, long-term healthcare and child benefits. These contributions are levied in conjunction with the wage withholding tax and box 1 income tax rates as shown in Section II.i over an income of, at most, €34,712 gross. As such, these contributions are levied on all sorts of compensatory payments, whether in cash or in kind. In the event a foreign taxable person earns Dutch-sourced income, supranational regulations may restrict the Netherlands in levying these contributions.
- Employee insurance contributions. These relate to social security aimed at employees, such as sickness benefits, incapacity insurance and unemployment insurance. These contributions are payable by employers calculated as a certain percentage of the gross salary paid to employees, with a maximum gross salary of €57,232 (for 2020). Remuneration paid to executive directors is generally subject to employee insurance contributions, and remuneration payable to supervisory board members and non-executive directors is in principle not subject to employee insurance contributions.
- Income-dependent health insurance contributions to be paid by self-employed individuals.
iv Tax deductibility for employers
Remuneration paid in cash to employees is generally deductible for Dutch corporate income tax purposes.10 No corporate income tax deduction is available for Dutch companies in respect of share awards and employee share options. If the stock options will be cash-settled in each circumstance, arguments exist that the option scheme in fact should be considered a cash bonus, which may result in a tax deduction for corporate income tax purposes at the level of the Dutch company.
The costs of certain rights, of which the value is directly or indirectly mainly determined by the change in value of those rights such as (but not limited to) stock appreciation rights, are also not deductible. The latter restriction only concerns rights that are granted to employees who earn more than €581,000 gross (2020).
v Other special rules
For employees hired from abroad, or seconded to a Dutch company or branch, under circumstances a special provision applies that – upon request – provides for a tax-free payment of up to 30 per cent of an employee's employment income, which is then considered as a compensation for extraterritorial costs. As a result of this 30 per cent ruling, the effective maximum income tax rate is reduced from 49.50 to 34.65 per cent. The most important conditions to be satisfied are:
- an annual gross wage exceeding €54,781 (for 2020), which amount is inclusive of the 30 per cent tax-free payment;
- that the employee has resided outside a 150-kilometre radius from the Dutch border for a minimum of 16 months during the 24 months preceding commencement of employment; and
- that the employer qualifies as a withholding agent for wage withholding tax purposes.
Employee and employer need to file a request for a 30 per cent ruling jointly. The 30 per cent ruling can be effective for a period of five years, which period is reduced by any period spent in the Netherlands during the past 25 years, irrespective of whether an employee actually enjoyed Dutch-sourced income from employment. As the term of the 30 per cent ruling was decreased from eight years to five years as from 1 January 2019, transitional rules apply for employees who currently have the 30 per cent ruling for an eight-year period.
In respect of supervisory board members and non-executive board members, employers and supervisory board members or non-executive board members need to opt for wage withholding in order to apply for the 30 per cent ruling.
i Non-competition covenants
In principle, non-competition covenants, including a penalty clause, are permitted and enforceable in the Netherlands. In certain sectors and for certain professions, the use of non-competition covenants in employment contracts is common practice. Under the laws of the Netherlands, a covenant restricting the employee's right to work in a certain way after the end of the employment agreement is only valid if the employment agreement is entered into for an indefinite period; and if the restrictive covenant is agreed upon in writing with an adult employee.
A non-competition covenant in an employment agreement for a definite period can only be enforced if it becomes apparent that the non-compete restrictions are necessary on compelling grounds in the interests of a business. These grounds need to be substantiated in writing at the time the covenant is agreed. Furthermore, employers may not derive any rights from non-competition clauses if an employment agreement's ending is a consequence of culpable behaviour of the employer. Non-competition covenants must be reasonably limited in terms of a time frame and territory.
While the laws of the Netherlands only regulate non-competition clauses, it is commonly understood that contractual restrictions on non-solicitation (of business relations) fall within the scope of its legislation.
ii Enforcement of restrictive covenants
In the Netherlands, restrictive covenants can be enforced against a former employee if the employee does not comply with its contractual restrictions. Restrictive covenants may also be enforced against an employer: the court may (partially) set aside a stipulation if the clause is not deemed to be necessary on compelling business grounds or if the interests of employees are unfairly prejudiced by it in proportion to the interests of the employer. This could include, inter alia, a limitation of the time frame or the regional scope in which the provision applies. In addition, if a non-competition clause significantly restrains an employee from working other than in the service of his or her employer, the court may order the employer to pay a compensation for the duration of the restrictive covenant.
In the Netherlands, there is a distinction between the dismissal of statutory directors (i.e., directors under the articles of association) – which offers a more flexible dismissal regime – and non-statutory executives.
Listed limited liability companies (NVs) are prohibited from entering into an employment agreement with a statutory director. Instead, an agreement to provide services, commonly referred to as a management agreement, would typically be entered into. Dismissal rules following from Dutch employment law do not apply to such management agreements. An alternative is that an executive is employed by another group company while being appointed at the level of a listed company as a statutory director. For NVs that are not listed, as well as for private limited liability companies (BVs), it is permitted and common practice to enter into an employment agreement with a statutory director. With respect to statutory directors, note that a statutory dismissal by a resolution of the corporate body that appointed him or her also results in the termination of his or her employment agreement by operation of law (unless a prohibition to give notice applies, for example, in the case of sickness). It is generally assumed that a management agreement will also terminate by operation of law in cases where a director is dismissed by the competent corporate body, but this has not yet been confirmed by the Dutch Supreme Court.
If a company has a works council, the advice of the works council should be requested prior to the unilateral dismissal of a director – that is, other than in a case of termination by mutual consent. A works council must be requested to render its advice in a timely manner – in any event before the competent corporate body resolves to dismiss a director – by means of a written request for advice in order for the works council to be able to exercise influence on the decision. The works council does not actually have the possibility to block a dismissal in the event that all procedural aspects of the consultation process have been complied with. If no request for advice has been submitted, a works council can ask a court to force a company to request advice and to prohibit all further steps until the consultation process has been completed. In cases where a company is an NV and the shareholders' meeting is the corporate body that has the right to appoint and dismiss members of the board of directors, in the event of an intended dismissal, the works council should be given the opportunity to determine its position prior to the meeting's decision to dismiss a board member. The shareholders' meeting needs to be informed of the works council's position in due time prior to the meeting. In addition, in this situation, the works council has a right to provide its views during the shareholders' meeting. Failure to enable the works council to exercise these rights does not impact the meeting's authority to pass a resolution; it could, however, impact the relationship with the works council.
With respect to executives that have not been appointed as a statutory board member, the following applies. In principle, employment contracts may be terminated at any time by mutual consent between an employer and employee. This also applies to executives that have been appointed as a statutory board member and that are engaged on the basis of an employment agreement. Parties may agree if, and to which extent, as part of the settlement agreement, notice periods and statutory compensations are taken into account. Note that it is mandatory to provide employees (statutory directors excluded) a two-week reflection period with effect from the moment a settlement agreement is signed by both parties. In this period, employees have the right to dissolve settlement agreements.
Except for an urgent cause such as theft, fraud or serious misconduct, unilateral termination by an employer is not permitted without the prior approval of the Employee Insurance Agency (UWV) (for economic reasons and long-term sickness absence) or a subdistrict court (for personal reasons such as underperformance or culpable behaviour). A subdistrict court or the UWV shall only dissolve an employment agreement if the employer has a reasonable ground for termination, as exhaustively stipulated in the Dutch Civil Code (DCC). The dismissal system has become slightly less rigid with the introduction of the Wab. The Wab introduced a new dismissal ground, the cumulative ground, which enables employers to combine two or more individual dismissal grounds. As a result, where an employee is unable to fully build its case for one of the statutory dismissal grounds, it may attempt to fulfil two grounds in part. If a subdistrict court applies the cumulative ground, an additional severance may be awarded of up to 50 per cent of the statutory severance.
By the introduction of the WAB, since 1 January 2020, if an employer wishes to unilaterally terminate an employment contract, a statutory severance fee is payable as of the first day of employment, amounting to one-third of a monthly salary per year of tenure, calculated per day, while the (more generous, temporary) severance calculation for those aged 50 plus with tenures in excess of 10 years will cease to apply. The statutory severance is based on the age of an employee and the number of years of employment, and is capped at €83,000 for 2020 or one year's salary if the employee's annual salary exceeds the aforementioned amount. Further to that, it is common practice that executives agree on contractual severance packages: see Section VI on corporate governance and Section VII on specialised regulatory regimes.11
This Section is relevant to executives of listed companies.
i Offering listed securities to employees as part of stock option plans
Pursuant to the Prospectus Regulation (PR), it is prohibited to offer securities to the public in the European Union unless an approved prospectus has been made generally available. The PR contains various exemptions to this prohibition, three of which are worth mentioning in the context of employee stock option plans:
- an offering of securities is exempt if the securities are offered to fewer than 150 persons per EU Member State;
- an offering of securities is exempt if the securities are offered by an employer to employees (including executives), provided a document containing certain specified information regarding the offering has been made public; and
- an offering does not fall within the ambit of said prohibition when the instruments awarded under the plan are non-transferable.
ii Market abuse regime and disclosure of transactions
The market abuse regime as established under the Market Abuse Regulation (MAR) applies to, and imposes restrictions on, the ability of executives to effect transactions in company securities. In practice, the prohibition on insider trading is most restrictive. In addition to the market abuse regime, the MAR contains rules on insider lists, disclosure of transactions by persons discharging managerial responsibilities (PDMRs) and their closely associated persons and mandatory closed periods.
Under the Financial Supervision Act (FSA), each executive (and non-executive director) of a Dutch company listed in the EEA has to notify the Dutch Authority for Financial Markets (AFM) within two weeks of his or her appointment of the number of shares and votes held by him or her upon his or her appointment; and immediately of every change in the number of shares or votes held by the executive.12 This obligation applies in parallel to the aforementioned notification obligations for PDMRs. The AFM maintains a public register of these notifications on its website.
There are no legal requirements that executives must hold securities of their employer and there are no anti-hedging rules – other than the restrictions pursuant to the MAR – prohibiting executives from engaging in transactions that are designed to hedge to lock in the value of holdings in the securities of a company.
Pursuant to the DCC,13 Dutch companies14 must disclose15 in the explanatory notes to their (consolidated) annual accounts the total amount of remuneration, including pension costs and other awards, of their (former) managing directors and (former) supervisory directors in the relevant financial year. This information must be disclosed on a group basis rather than for individual managing or supervisory directors. For the purpose of the DCC, these disclosure obligations relate to the members of the statutory board only. Consequently, it does not apply to members of the executive committee or other senior employees who are not formally part of the management board. Dutch GAAP law, therefore, applies a narrower scope than IFRS, which extends this group to key management personnel.16
The DCC provides for a set of more detailed information with regard to remuneration of statutory board members of public (listed) companies. These companies must include in the explanatory notes to their annual accounts information about the composition of the separate elements of the remuneration package, the company's share option plans, and loans, guarantees and advance payments granted by them or their subsidiaries to management board and supervisory board members.17 This information must be disclosed on an individual basis to the extent that it relates to management board members or supervisory board members, whereas information about the employees' option awards can be disclosed on a group basis. Information about the stock option plans must also be provided in respect of options that have been awarded to employees who participate in the plan. Following the implementation of SRD II, Dutch-listed companies that meet certain size criteria must annually publish a separate remuneration report and will no longer be required to publish this information in the explanatory notes to their annual accounts.
The DCC does not include a definition of remuneration, but a description can be found in the Dutch Accountancy Directive. As this information forms part of the annual accounts, it is assumed that remuneration components (including perquisites) are quantified to add to the aggregate amount of awards payable to a director in a particular financial year. The DCC prescribes that the implementation of the remuneration in general is included as a discussion item on the agenda of the annual general meeting of shareholders prior to the adoption of the annual accounts.18 Implementation of SRD II will result in the general meeting monitoring (the implementation of) the remuneration policy on a regular basis (see Section VI.iii).
Obviously, disclosure of information will depend on what the law prescribes for dispersing (financial) information to shareholders and third parties. For example, a Dutch company's (adopted) annual accounts must be deposited with the Dutch Commercial Register19 and, for listed companies, must also be disclosed via publication on the company's website and should be sent to the AFM.20 Other information is often also made publicly available at the occasion of the convocation of a general meeting of shareholders. This applies to a company's remuneration policy, and any share award plans that the DCC requires to be approved by the general meeting.21 If a works council is established, it has a right to render its opinion in relation to the remuneration policy and to provide a verbal explanation of its opinion during the shareholders' meeting.
A listed company must disclose information that must be provided to the general meeting, either for discussion or approval, by making this information available on the company's website from the convocation of the general meeting of shareholders. Listed companies must keep this information available for at least one year following publication.22 For further disclosure requirements, see Section VI on corporate governance and Section VII on specialised regulatory regimes.
The principles and best practices for corporate governance of Dutch listed companies are set out in the Dutch Corporate Governance Code (Code), the DCC and sector-specific regulations (as referred to below).
i Corporate governance rules following from the DCC
With respect to all NVs, the following corporate governance rules follow from the DCC:
- a public company must have a remuneration policy in place, which must be approved by the general meeting of shareholders;
- in cases where a works council is established at the level of a public company or any of its subsidiaries (if the majority of the employees of such subsidiary work in the Netherlands), the works council should be given the opportunity to determine its position with respect to the remuneration policy and to provide the shareholders' meeting with its position, prior to the shareholders' resolution being made, under which the remuneration policy is approved. In addition, the works council has a right to provide its views during the shareholders' meeting;
- remuneration of statutory board members is set by the general meeting of shareholders, unless the articles of association state otherwise. If a supervisory board is established, the supervisory board determines the individual remuneration of a statutory board member within the boundaries of the remuneration policy;
- if according to standards of reasonableness and fairness, it would be unacceptable to pay out (part of) variable remuneration that was previously allocated to a current or former statutory board member, the corporate body that is entitled to set the remuneration may hold back (part of) the variable remuneration; and
- a company is authorised to reclaim, in full or partially, 100 per cent of the variable remuneration previously allocated to a current or former statutory board member (cash as well as any instruments), provided that the payment took place on the basis of incorrect information regarding the achievement of the goals underlying the variable remuneration or regarding circumstances on which the variable remuneration depended.23
The DCC is significantly less prescriptive with respect to BV's. In a typical Dutch private BV,24 the general meeting determines the remuneration of both the management board and the supervisory board, without further special requirements. The articles of association allow for variations.
ii Additional corporate governance rules following applicable to listed companies
With respect to listed NVs and BVs, on 2 April 2019, the parliament adopted the revised Dutch Shareholders' Directive II Implementation Act pursuant to which the requirements of the Shareholders' Directive II were implemented in the DCC. The implementation act came into force on 1 December 2019.25
The following rules follow from the DCC implementing the requirements of the Shareholders' Directive II:
- at least once every four years, the remuneration policy must be approved by the general meeting of shareholders for which at least 75 per cent of the votes need to be casted in favour of the policy unless the articles of association provide for a lower voting percentage. If the remuneration policy is not approved by the general meeting, the board members must be remunerated in accordance with the existing remuneration policy or existing remuneration practice. A revised remuneration policy must be proposed during the next shareholders' meeting;
- a works council's right to give its view on a new remuneration policy, as set out in Section VI.i point (b), will be expanded by converting said right into a right of giving advice. The advice of the works council must be presented together with a proposal for a new remuneration policy to the general meeting of shareholders. In the event that the advice of the works council is not (fully) adopted, such must be explained to the general meeting of shareholders in writing. Further to that, the chair or another member of the works council must be given the opportunity to present the works council's advice during the general meeting of shareholders. In cases where the Dutch large company regime applies, the (relevant) works council has an enhanced right of recommendation as to one-third of the members of the supervisory board. Under the DCC, one of these supervisory board members must become a member of the remuneration committee;
- the DCC stipulates that a temporary deviation from the remuneration policy is possible in exceptional circumstances as long as the remuneration policy contains governance requirements with respect to such deviation and specifies from which parts of the remuneration policy deviations can be made. In this respect, exceptional circumstances refers to circumstances in which a deviation is necessary to serve the long-term interest and sustainability of a company and ensure its viability;
- the DCC contains a list of subjects that must be reflected in the remuneration policy. The list must be included for both executives and supervisory board members. It is important to note that is not longer sufficient to include a generic description of the performance criteria that are used to set variable remuneration. The remuneration policy must be clear and easy to understand and must contain an explanation of the following subjects:
|The way that the remuneration policy contributes to the company strategy, the long-term interests of the company and sustainability of the company.|
|The remuneration policy must set out all components of fixed and variable remuneration and must state the ratio between these components.|
|The way the remuneration and employment conditions of the employees of the company were taken into account.|
|The way that the remuneration policy takes into account the identity, mission and values of the company, pay ratio's within the company and the popular support.|
|With respect to variable remuneration:|
|With respect to share-based remuneration:|
|The remuneration policy must contain a description of the agreements with its directors, the tenure of such agreements and the applicable notice periods, the most relevant terms and conditions of any supplemental pension arrangements, the conditions for termination as well as any contractual severance payments.|
|The remuneration policy must set out the governance process with respect to its establishment, amendments and operation.|
|In case the remuneration policy is amended, the remuneration policy must contain a description and explanation of material changes and a description and explanation of whether and how the votes and views of shareholders were taken into account since the previous vote on the remuneration policy during the general meeting of shareholders.|
- annually, a separate remuneration report must be presented to the general meeting of shareholders for its advisory vote. The remuneration report must set out how the company has taken into account the votes of the general meeting of shareholders with respect to the previous remuneration report. The DCC contains a list of subjects that must be reflected in the remuneration report on the remuneration of individual directors (i.e., for both the executive directors and the non-executive directors),26 which must be clear and easy to understand:
|The total amount of remuneration, split out per category.|
|The ratio between fixed and variable remuneration.|
|The way the total amount of remuneration is in line with the remuneration policy and contributes to the long term performance of the company.|
|The way the company has applied financial and non-financial targets.|
|The annual change in remuneration over at least five financial years, the development of the performance of the company and the average remuneration, based on a fulltime employment, of the employees that are not directors, presented in a way that it is possible to compare this.|
|In case the company has subsidiaries or discloses its financial statements on a consolidated basis, the remuneration that is for the account of such subsidiaries for the respective financial year.|
|The number of shares and/or share options awarded and the most important terms and conditions for exercising these rights.|
|Any remuneration that has been subject to a clawback within the meaning of the Dutch Civil Code.|
|Any deviations from the remuneration governance process as set out in the remuneration policy.|
|Any deviation from the remuneration policy, explaining the exceptional circumstances under which such deviation occurred.|
|Information as further specified in the Dutch Civil Code insofar not already disclosed on the basis of the abovementioned requirement.|
The accountant will only need to assess whether the remuneration report contains the above-mentioned information, and not whether the content thereof is correct.
Following the general meeting of shareholders, the remuneration report must be made public trough the company's website.
ii Corporate governance rules following from the Code
The rationale behind the Code is to create long-term value creation for the company, effective management and the supervision thereof, risk control, remuneration and the relation with the shareholders and stakeholders.27 Even though the Code is considered soft law – it works on a comply or explain basis – it is market practice that Dutch-listed companies generally adhere to the principles and best practice provisions of the Code.
Executive remuneration has a prominent place in the Code. The starting point is that a company must have a clear and understandable remuneration policy that applies to its management. The supervisory board is responsible for the implementation of the remuneration policy, which must be adopted by the general meeting of shareholders. The supervisory board nominates a remuneration committee, which is responsible for the preparation of a remuneration proposal for each individual board member. The proposal must be in accordance with the company's remuneration policy. Additionally, the proposal must at least describe the components of board members remuneration, the amount of fixed and variable remuneration, which performance criteria are applied, the scenario analyses that were carried out, and the pay ratios within the company and its affiliates.28 The Code furthermore requires in best practice provision 3.2.2 that each individual board member must give his or her opinion concerning his or her own remuneration proposal. The underlying thought of this provision is to create awareness among board members with respect to their remuneration.
Note that the Code requires that shares being awarded to executives as remuneration should be held for at least five years after they are awarded. In addition, the Code stipulates that if options are being awarded, they cannot be exercised within three years after they are awarded.
The Code does not contain limitations with respect to the amount of board members' fixed or variable remuneration; nor does it prohibit board members from receiving equity-related remuneration.
In the event of dismissal, golden parachutes of a board member are capped at one annual fixed salary.
Further to that, the Code contains disclosure requirements. The Code stresses the importance of a clear and comprehensible remuneration policy for which purpose it provides further specifications for the items that need to be addressed by the (remuneration committee of the) supervisory board when drawing up a company's remuneration policy. The Code applies the principle that the implementation of this remuneration policy is accounted for; the supervisory board must render account of the implementation of the remuneration policy in its remuneration report, which should be posted on the company's website, and the key elements of a management board member's management agreement must be placed on the company website.
Specialised regulatory regimes
Specific rules regulating executive remuneration have been issued in the Netherlands mainly for the financial and insurance sector and for public and semi-public sector senior officials.
i The financial sector
The executive rules for the financial sector are mainly included in the FSA. The FSA contains specific rules on the content, disclosure and implementation of a financial institution's remuneration policy, as well as a 20 per cent bonus cap, guaranteed variable remuneration, severance pay, malus and clawback.
In general, a 20 per cent bonus cap applies to all persons working under the responsibility of a financial undertaking, as defined in the FSA, regardless of whether the financial undertaking has its official seat in the Netherlands, or a Dutch branch of a financial undertaking with its official seat outside the Netherlands, which is required to have a licence for a branch in the Netherlands pursuant to the FSA (not being a bank or an investment firm to which Articles 92 to 96 of CRD IV apply). A financial undertaking is defined in the FSA and includes, among other things, banks, investment firms and insurance companies. Note that the 20 per cent bonus cap does not apply to branches located in the Netherlands of financial undertakings that are governed by the remuneration rules of Articles 92 to 96 of CRD IV (being, in short, banks or investment firms as defined in CRD IV). The following exceptions to the 20 per cent bonus cap apply:
- if the remuneration of persons working in the Netherlands does not follow from a collective labour agreement, it is possible to grant variable remuneration up to a maximum of 100 per cent of its fixed annual remuneration to such persons individually, as long as the average of the ratio between the variable and fixed remuneration of the whole group of persons working in the Netherlands whose remuneration does not follow from a collective labour agreement does not exceed 20 per cent. An evaluation of the Dutch remuneration rules shows that this exception to the bonus cap is currently commonly used throughout the financial sector whereas, according to the Minister of Finance (Minister), the purpose of the exception is that it should only be used in exceptional cases (such as for key IT staff), and not for regular staff. In December 2018, the Minister published a letter to the parliament in which he proposed limiting the scope of this exception by explicitly stipulating in Dutch law that the exception may only be used in exceptional circumstances, and that it may not be used with respect to persons performing internal control functions or persons who are directly involved in the provision of financial services to consumers. In a letter of 14 February 2019, the Minister notes that the Council of State advises against the proposal for the new legislation in which this exception was included. In July 2020, the Minister proposed a bill to the House of Representatives, in which the initial changes from the letter in 2018 are included. Also, it is proposed that financial undertakings have to report to the relevant authority how often they use this exception, on a yearly basis. It is currently not certain whether this proposal will be passed in its current form. If it does pass, however, the Minister aims that this change takes effect as of July 1 2021, with an exception for employees who already employed at the moment the bill takes effect – for which the changes would take effect on July 1 2022;
- for staff predominantly (at least 50 per cent of their time) working outside the Netherlands, an individual bonus cap of 100 per cent applies;
- for staff predominantly (at least 50 per cent of their time) working outside the EEA, an individual bonus cap of 200 per cent may apply, subject to shareholder approval and the procedure pursuant to CRD IV;
- for staff working at an international holding company (which is the top holding within the EEA but not necessarily globally) of a financial undertaking with its official seat in the Netherlands and to which Article 1:114 FSA applies, but with its activities predominantly outside the Netherlands, a bonus cap of 100 per cent applies provided that within a period of five consecutive years at least 75 per cent of all staff belonging to the international holding company's group work outside the Netherlands for three (not necessarily consecutive) years; and
- an increase of the fixed remuneration is possible as the FSA does not limit a financial undertaking in increasing fixed remuneration. In the proposed bill of July 2020 as mentioned above under a, the Minister proposes the following amendments in this respect:
- components of fixed remuneration of which the value depends on the value of a financial undertaking, such as the share price, should be subject to a lock-up period of five years. The purpose of the measure is to align the interests of management board members and employees with the long-term interests of the financial undertaking; and
- the remuneration policy of a financial undertaking should prescribe how the remuneration of both management board members and other employees is set, in proportion to the public function of the financial undertaking. This statement must be made public. The purpose of the measure is to ensure that financial undertakings take into account their public function when setting their remuneration frameworks and that they can publicly take accountability in that respect afterwards;
- it is possible to award a retention bonus of up to 200 per cent of the annual fixed salary, if the following strict conditions are met:
- the retention bonus must be necessary in relation to a sustainable change in the organisation;
- the sole purpose of the retention bonus is to retain the respective person for the organisation;
- in the year that the retention period ends and the retention bonus is effectively awarded, the sum of all variable remuneration that the respective person is awarded may not exceed 100 per cent of his or her fixed annual pay or, if shareholders' approval has been obtained in line with the requirements of CRD IV, 200 per cent; and
- the regulator has given its prior written permission: and
- it is possible to grant a sign-on bonus that is not capped at the first year of a new hire if it relates to the commencement of activities of the person and the undertaking maintains a sound solvability rate and equity capital base.
Any legal act in breach of the remuneration requirements of the FSA, including a breach of the bonus cap, is considered null and void.
It is uncertain whether the changes in (e) will enter into force.. If they do, the Minister aims that the amendment regarding fixed remuneration enters into force on 1 July 2021, with exception of rights that have already been received. The amendment concerning the description of how the financial undertaking took into account their place and function in society when drafting their remuneration policy, would enter into force on 1 July 2021 Further to (f), a retention bonus must comply with the general requirements that apply to variable remuneration (e.g., with respect to identified staff, under sector-specific legislation).Note that the Regulation on Sound Remuneration Policies under the FSA 2017 contains specific rules applicable to identified staff of banks and investment firms, which relate to the way remuneration components and structures are set up and the way a firm controls or mitigates risks arising from its remuneration policy and the implementation thereof, including specific rules on the composition, deferral and retention of variable pay.
For identified staff of insurance companies, next to the remuneration rules following from the FSA, Solvency II29 provides for an additional regulatory framework on remuneration, containing rules on payout, deferral and the structure of variable pay. As of November 2017, it is no longer required to pay part of the variable pay of identified staff of insurance companies in instruments.
For identified staff of fund managers, next to the remuneration rules following from the FSA, the Alternative Investment Fund Managers (AIFMD)30 and UCITS31 provide for an additional regulatory framework on remuneration containing rules on payout, deferral and the structure of variable pay, with specific rules on carried interest.
No severance may be paid to a person working under the responsibility of a financial undertaking in cases where the termination of the employment is at the initiative of the respective person, unless it is a consequence of:
- severe culpable behaviour or negligence on the side of an employer;
- severe culpable behaviour or negligence on the side of an employee; or
- a failure of the undertaking, in the case of a daily policymaker within the meaning of the FSA. A daily policymaker is known to the regulator and the undertaking as he or she is subject to a suitability and reliability assessment within the meaning of the FSA.
Severance of daily policymakers of financial institutions with their seat in the Netherlands is capped at 100 per cent of their fixed annual salary pursuant to the FSA. Any legal act in breach of the severance cap is considered null and void.
ii Public and semi-public sector
In the Netherlands, senior government officials' salaries cannot exceed those of government ministers. This is laid down in the Public and Semi-public Sector Senior Officials (Standard Remuneration) Act. This Act also applies to the salaries of senior officials of organisations in the semi-public sector, such as hospitals, schools and public broadcasters. The maximum salary for senior officials in 2020 is €201,000 gross, which includes holiday allowance, end-of-year allowance, pension contributions and expenses. The maximum severance for senior officials is capped at €75,000 gross.
Public and semi-public institutions must publish information in their annual financial reports on remuneration and redundancy payments paid to officials. They must also forward this information electronically to the relevant minister. An important role exists for accountants of these institutions in terms of disclosure.
Developments and conclusions
Executive remuneration remains a highly debated feature of the Dutch corporate landscape. The evaluation of the remuneration requirements under the FSA, including its 20 per cent bonus cap have been debated heavily in parliament, resulting in proposals to again strengthen the rules applicable to financial undertakings in the Netherlands.
The Senate adopted new legislation aimed at narrowing the gap in employment protection levels between flexible employees and employees on indefinite employment agreements. The Wab was adopted by the Senate on 28 May 2019 and entered into force as of 1 January 2020.
With respect to listed NVs and BVs, on 2 April 2019, the parliament adopted the revised Dutch Shareholders' Directive II Implementation Act with respect to the implementation of SRD II pursuant to which the requirements of the Shareholders' Directive II were implemented in the DCC. The changes came into force on 1 December 2019 and provide for further requirements on the remuneration policy and remuneration report.
1 Suzanne Sikkink is a partner, Sjoerd Buijn is a counsel, Max van Boxel and Naomi Reijn are associates and Olivier Valk is a senior associate at Allen & Overy.
2 For the purposes of this chapter, executive shall mean a member of a management board or an executive member of a one-tier board.
3 Directive (2017/828/EU).
4 This chapter applies to executives who for tax purposes are considered to be resident in the Netherlands or who are executive directors of a Dutch company.
5 This summary does not purport to be a comprehensive description of all Netherlands tax and labour law considerations that may be relevant.
6 The state pension age is 66 years and 4 months (for 2020 and 2021) and is gradually increased.
7 Based on most tax treaties to avoid double taxation concluded between the Netherlands and other countries, the Netherlands is, in principle, allowed to levy income tax on the remuneration received by directors, supervisory board members and non-executive directors of Dutch public and limited liability companies, although exceptions may apply depending on the specific treaty.
8 Unconditional means that there are no other conditions for the transfer of the shares to the employee, other than conditions in time. Continuing employment is also a condition in time for this purpose.
9 Supreme Court, 15 April 2016, case No. 14/06257, ECLI:NL:HR:2016:635.
10 For some expenses, deductibility is explicitly denied – for instance, for administrative fines.
11 In the Netherlands special rules apply to excessive severance payments. Insofar as employees with an annual salary starting at €559,000 (the amount for 2020, and index-linked annually) receive a fiscally defined severance payment that exceeds the benchmark salary, the employer must pay an employer's levy of 75 per cent on the part that exceeds the benchmark salary. This amount cannot be recovered from the employee, and as such it is a cost item for the employer.
12 Section 5:48 FSA.
13 Section 2:383 DCC.
14 As well as all other companies that cannot make use of the exemption for small companies set out in Section 2:396 DCC.
15 Disclosure is held to mean public disclosure by making information known to the general via publication in public registers or publicly accessible websites.
16 As included in IAS 24.26.
17 Sections 2:383c to 2:383e DCC.
18 Section 2:135 Paragraph 5a DCC.
19 Annual accounts of private (i.e., non-listed) companies do not need to be published in the Dutch Commercial Register if that company complies with the requirements set forth in Section 2:403 DCC, which includes the inclusion in consolidated accounts and the issue of form of parent guarantee by the consolidating company.
20 Sections 5:25m and 5:25o FSA.
21 With regard to the remuneration policy, it should be noted that according to the recently amended SRD II, this will have to be an annual advisory vote on the separate remuneration report, at least for large companies. Refer to Paragraph (iii).
22 Section 5:25 Paragraph 3 of the FSA.
23 Section 2:135 DCC.
24 Dutch law holds provisions on a regime specifically for large companies in the meaning of the law, that offer special rights to the works council and supervisory board.
25 Section 2:135a DCC.
26 Section 2:135b DCC.
27 The Dutch Corporate Governance Code, December 2016, Preamble, p. 7.
28 Best practice provision 3.2.1.
29 Commission Delegated Regulation (EU) 2015/35.
30 Directive (EU) 1095/2010.
31 Directive 2009/65/EC.