IKANED

It is bonus season. This year, some captains of industry will see their variable income diminish. It seems a number of the companies will cap bonuses even after the crisis is over.

Bonus payouts to corporate executives have become more than a means of monetary compensation. Today, the sizes of bonuses also serve as an indicator of public discontent over the amounts some executives can pull in. But do companies want to render account to shifting economic and political opinions?

In the United States corporate remuneration in the financial world seems to return to the levels common before the credit and economic crisis. In the Netherlands however, there are some signs a more permanent form of restraint might be taking hold.

More money, for what?

A recent report published by Dutch economic analysis bureau CPB exemplifies the increased public scrutiny large companies find themselves under. In a study seeking to analyse and explain structural developments in companies’ high-end remuneration policies, the CPB found that companies listed on public stock exchanges paid their top executives 25 to 50 percent better than privately owned companies did. Payouts to top executives grew by 9 percent annually from 1999 to 2005, "even though their added value had not substantially increased," the report found.

Ever since the credit crisis of 2007 bonus payments came to be seen as perverse incentives for reckless behaviour. In the public eye, taking home a million euros and actually earning them came to mean two entirely different things.

In recent years, investors and union leaders alike have had some success protesting remunerative policies. Investors in the Netherlands, unlike those in the US, have a say in determining employee rewards.

Paul Frentrop, head of corporate finance for the Dutch investment manager APG, said the Dutch corporate world is now seeking to engage with investors over the issue.

Avoiding public conflict

Corporate boards and executives are keen to avoid public conflict, Frentrop said, and not without reason. Last year, Shell’s plans for a new remunerative policy met with massive rejection from investors. The petrol giant was not the only major Dutch company to see its compensation plan upended. At chemical manufacturer DSM, payout plans had to be rearranged after scathing criticism from unions. This year, both companies consulted with all involved before determining remuneration.

The result: corporate Netherlands is becoming increasingly divided. "The current trend is towards more austerity," Frentrop said. "You can see this happening at [labour dependent] companies like [postal company] TNT and DSM that are more sensitive to pressure from the unions, and in the financial sector."

On the other hand, some companies are continuing in the vein of old, such as Dutch telecom giant KPN or electronics manufacturer Philips.

Looking at the recently published annual results over last year, a relationship between performance and payout can be ascertained. Philips, for example, saw its overall performance improved strongly throughout 2009. Chief executive Gerard Kleisterlee received a 962,720 euro bonus, four times bigger than the one he received in 2008. At KPN, where things did not go as well in 2009, chairman Ad Scheepbouwer received 600,000 euros, half of what he took home in bonuses over 2008.

Dutch railroad executive Bert Meerstadt had promised to donate his entire bonus to victims of the Haitian earthquake. Sadly for both himself and the Haitians, he saw his bonus halved to 71,009 euros after wintry conditions disrupted Dutch railtraffic.

The annual results also reveal other interesting developments. Some companies have introduced performance on sustainability criteria as a benchmark for bonus payouts.

A break with a long-time trend seems to underlie all these developments, Frentrop said. In the Netherlands, bonus payments had been drawing fire as early as 1980, he recalled. In 1997, politicians entered the fray when the then prime minister Wim Kok (a Labour politician) took on what he called "exhibitionistic" rewards paid to top executives.

In 2003, a government-instituted commission composed of executives and professors instituted a corporate governance code. This code of conduct stated bonus payout at listed companies should not exceed the amount of fixed salary paid. The code was mostly rejected by the Dutch corporate world then, but now it seems to be slowly becoming commonplace. TNT has already proposed capping total bonus payouts, including long-term stock bonuses, at 100 percent of fixed salary to its investors. DSM has followed suit, as have financial service providers Aegon and ING.

Selected top executives and their pay

Source: www.nrc.nl

Published: 1 March 2010 15:07 | Changed: 2 March 2010 09:35

Article by: Menno Tamminga