Executive Remuneration in the Netherlands · PDF fileExecutive Remuneration in the Netherlands...

Executive Remuneration in the Netherlands 2017Empirical Data Analysis 2014 - 2016, governance, insights and vision

Bonus payments are fairly rigid;

55% of CEOs consistently receive more

than half of their maximum opportunity

Emphasis oninternal pay ratios

is rather limited

The total compensation

levels of the CEO and CFO

are diverging

page 16

page 9

page 34The usage

of shareholdingrequirements has

increased

page 31

This report contains observations on actual trends in the Dutch executive remuneration market for listed companies. The 10 major findings express how Dutch listed companies are balancing their executive pay decisions in a time frame of changing thoughts on governance, scarcity and fairness. By identifying these key findings EY aspires to continue and inspire the debate on executive compensation.

2 | Executive Remuneration in the Netherlands 2017

Target STI levels increase for all

positions in the AEX

Majority offixed salary

increasesaround 2%

The proportion of

shares is growing in LTI plans

PostNL,ASML Holding andABN AMRO have

high qualityremuneration reports

Target LTI levelsincrease for

the CEO positionin all indices

page 10

page 8

page 33

page 35

page 17

Upcomingcompanies tend to

refrain from offeringnet pension plans

page 34

3Executive Remuneration in the Netherlands 2017 |

06 EY’S ExEcuTIvE REmuNERaTIoN TEam

07 aBouT ThIS REpoRT

Remuneration levels

08 FIxEd SaLaRY 08 majority of salary increases

around 2%

09 Emphasis on internal pay ratios is rather limited

10 ShoRT TERm INcENTIvE

10 Target STI levels increase for all positions in the aEx

13 Target STI percentages increase with fixed salary

14 The median target to maximum STI ratio remains around 1.5

16 Bonus payments are fairly rigid

14 LoNg TERm INcENTIvE

17 Target LTI levels increase for the cEo position in all indices

20 Target LTI percentages increase with fixed salary

21 The median target to maximum LTI ratio ranges from 1.25 to 2.0

22 ToTaL REmuNERaTIoN

22 The total compensation levels of the cEo and cFo are diverging

25 gLoBaL REmuNERaTIoN TRENdS aNd REguLaToRY dEvELopmENTS

contents4 | Executive Remuneration in the Netherlands 2017

Remuneration design

27 STI dESIgN

29 LTI dESIgN

32 The usage of shareholding requirements has increased

33 The proportion of shares is growing in LTI plans

34 pENSIoNS

34 most companies offer a gross allowance

35 REpoRTINg QuaLITY

35 postNL, aSmL holding and aBN amRo have outstanding remuneration reports

appendices

36 appENdIx 1: compaNIES aNd poSITIoNS

38 appENdIx 2: ELEmENTS aNd mEThodoLogIES

39 appENdIx 3: gLoSSaRY


EY’s Executive Remuneration TeamOver the past fifteen years, EY’s Dutch and Global Reward practice has become an important player on the remuneration market. Executive remuneration is a truly international discipline in EY and this enabled us to grow substantially, achieving market leadership in some of the largest economies.

Our experience in advising and working with the Netherlands’ largest companies gives us the knowledge to help you build, implement and maintain best-fit reward programs aligned with your corporate strategy. Our clients benefit from fully integrated advice.

With special thanks to Lennart Cox and Mirte Keulers.

Jan van Duren Executive Director People Advisory Services

Bas Rupert Senior Manager People Advisory Services

Stephan van de Groep Manager People Advisory Services

Hilleke Booij Senior Consultant People Advisory Services


About this reportEY’s 2017 Executive Remuneration Report will provide you with insight on trends in executive remuneration levels and practices over the last 3 years. Furthermore, it contains interesting views and perspectives on quality of reporting and global remuneration trends.

The data and analyses contained in this report are based on information from the annual reports of 2014, 2015 and 2016 and other relevant public disclosures. A list of the companies included in the analysis as well as information on numbers of incumbents and companies per reported position are provided in Appendix 1. A glossary of terms is provided in Appendix 3.

This report is intended to provide insight in trends in executive remuneration levels and practices for the above noted companies. It is not intended to be used as a benchmarking tool. Tailored analysis of the data presented in this report is available by request.

EY is happy to share these results with clients, relations and others with interest in the Dutch world of executive remuneration. EY’s Executive Remuneration Team is available for further information.

Jan van DurenExecutive Director People Advisory Services


1. Remuneration Levels

1.1 Fixed salary

In analysing fixed salary levels from 2014 to 2016, we have chosen to use all data points rather than focussing on a same sample. Therefore, the reported salary levels (see table below) include the effect of salary increases for existing executives, the effect of changing salary levels due to replacements and the effect of different salary levels due to replacement of a company in the index.

When positionS are replaced, we see that the newly nominated executives not always receive the same salary as their predecessor. Somewhat lower salaries, but also significantly higher salary levels apply to new executives. When companies are replaced in the indices as compared to the previous year, we see that in some cases this has a significant impact on the median value as well.

1.1.1 Salary levelsThe table below shows the median fixed salary levels per position in each of the indices for 2014, 2015 and 2016, excluding financial sector companies.

This section provides insight in the remuneration levels for CEOs, CFOs and other board members (OM) at AEX, AMX and AScX companies over the period 2014 until 2016. As only roughly half of the companies in our sample has other members in the board, the reported data for OM in this report is less robust than the reported data for the CEO and CFO positions. Companies in the AEX are more likely to have other members in the board than companies in the other two indices. Though the percentage of companies which have other members in the AScX has increased substantially since 2015 (from 30% to 45%), the AScX index and/or the OM position are excluded in some of our analyses as it would present a skewed representation with respect to previous years. Furthermore, in some of our analyses we have excluded financial sector companies, because these have been legally required to maximize the variable pay opportunity for executives at 20% of fixed salary.

Index position 2014 2015 2016

AEX

CEO € 863.000 € 883.000 € 914.000

CFO € 583.000 € 619.000 € 638.000

OM € 583.000 € 588.000 € 590.000

AMX

CEO € 600.000 € 586.000 € 572.000

CFO € 400.000 € 378.000 € 408.000

OM € 409.000 € 395.000 € 420.000

AScX

CEO € 372.000 € 385.000 € 434.000

CFO € 297.000 € 303.000 € 324.000

OM € 346.000 € 294.000 € 391.000

majority of salary increases around 2%; mostly due to market adjustments


The table above shows increasing values for all positions from 2014 to 2016, except for the CEO position in the AMX. Further inspection shows that this decrease is due to the new composition of companies in the index. Once a subsample with companies who have been consistently in the index from 2014 to 2016 is analysed the common upward trend in salaries is observed. In general, this applies to all the indices. Notable is the substantial increase observed for the OM position in the AScX. This increase is driven by companies offering lower salaries leaving the index (e.g. Value8, Holland Colours) and those which offer higher salaries entering the index (e.g. Nieuwe Steen Investments, ForFarmers).

1.1.2 Salary increasesWe have performed a same sample analysis on changes in fixed salaries. The same sample analysis is based on executives who remained in the same position, at the same company, and where the company did not change index. This analysis shows that the median fixed salary increases were 2.0% and 1.4% in 2015 and 2016 respectively.

When looking at average salary increases we excluded financial sector companies, because most of these companies compensated the decrease in variable pay opportunity in 2015 (20% cap) with fixed salary increases.

The average salary increases of the non-financial sector companies were 4,3% and 1,9% in 2015 and 2016 respectively. Decreases in fixed salaries can mostly be attributed to trivial reasons such as changes in exchange rates. In most cases high salary increases can be attributed to re-alignment with the salary levels of the peer group.

1.1.3 Internal pay ratiosRecent amendments to the Dutch Corporate Governance Code prescribe Dutch listed companies to report their internal pay distribution. Therefore, the expectation is that more companies will include this in their annual reports. Yet, most companies do not specifically address this topic in their 2016 report. The emphasis on internal pay comparisons at Dutch listed companies could therefore probably be labeled as limited. Instances in which the matter of internal pay distribution is actually mentioned are hard to find, as we observe that internal pay ratios are not outlined in the remuneration report itself. Moreover, a uniform approach regarding the disclosure and methodology of internal pay comparisons is currently non-existent.

Emphasis on internal pay ratios is rather limited


1.2 Short Term Incentive

Short term incentive levels as reported in each year relate to performance over that one year period. In this section we focus on the target STI and we compare these to the maximum and the actual STI.

1.2.1 Target STI levelsThe table below shows the median target STI values per position in each of the indices for 2014, 2015 and 2016, excluding financial sector companies.

The table above shows that the median target STI values have increased substantially for the positions in the AEX and the OM in the AMX from 2014 to 2016. A decrease is observable for the CFO in the AMX and the CFO and OM in the AScX. These decreases are due to changes in index composition. For the other positions the median target STI value remained roughly at the same level.


AEX

CEO € 817.000 € 897.000 € 936.000

CFO € 458.000 € 483.000 € 489.000

OM € 390.000 € 404.000 € 440.000

AMX

CEO € 306.000 € 328.000 € 319.000

CFO € 224.000 € 225.000 € 200.000

OM € 217.000 € 246.000 € 246.000

AScX

CEO € 197.000 € 203.000 € 207.000

CFO € 173.000 € 142.000 € 147.000

OM € 263.000 € 198.000 € 207.000

Target STI levels increase for all positions in the aEx


1.2.2 Development of target STI percentagesThe charts below show the development of target STI percentages at AEX and AMX companies from 2014 to 2016, excluding financial sector companies

The chart above shows fairly stable target STI percentages across all positions.

The chart above shows slightly increasing target STI percentages. Whereas the AEX chart shows significantly different percentages per position, the AMX chart above shows similar percentages per position.

AEX

AMX

Target STI % (median)

Target STI % (median)

Target STI % (average)

Target STI % (average)


1.2.3 Spread of target STI percentagesThis section shows the spread of target STI percentages in the AEX and AMX in 2016, excluding financial sector companies. Median values can be found on the intersection of the yellow and grey bars. The yellow bar represents the range of observations from the second to the third quartile (50th to 75th percentile) while the grey bar represents the range of observations from the first to the second quartile (25th to 50th percentile).

The chart above shows that the total spread between highest and lowest target STI % observations is approximately 100% (1 time fixed salary) in the AEX for the CEO and the CFO, but considerably smaller for the OM position (roughly 50%). For the CEO position the median observation is roughly between the lowest and the highest observation (midpoint). For the CFO and OM positions the median observation is below the midpoint.

The chart above shows that the total spread between highest and lowest target STI % observations is approximately 70% for both the CEO and CFO position in the AMX. For the OM position the spread is roughly half of that of the CEO and CFO, similar to the AEX. The median observations are well below the midpoint for the CEO and CFO as opposed to the median observations for the OM position.

Target STI %

Target STI %

Q2 - Q3Q1 - Q2

Q2 - Q3Q1 - Q2

AEX

AMX


1.2.4 RelationshiptargetSTIandfixedsalaryWe also analyzed the relationship between fixed salary and the target STI % for the CEO position of non-financial companies.

The graph above depicts combinations of fixed salary and the target STI %, segregated by index. The line shows the linear relationship between fixed salary and the target STI %, irrespective of index. The graph clearly indicates a positive relationship between fixed salary and the target STI % in 2016. Furthermore, it shows that both the target STI % and fixed salary increase when moving up the indices. An interesting outlier in the graph is OCI with €1.500.000 fixed salary and 75% target STI percentage. Last year, OCI was listed on the AEX index whereas presently OCI is listed as an AMX company. This may explain their relatively high fixed salary. Another interesting AScX outlier is AMG, with approximately €900.00 fixed salary and 85% target STI percentage.

Target STI percentages increase with fixed salary

AEX AScXTarget STI %

Fixed salary

AMX


1.2.5 TargetSTIversusMaximumSTIThe chart below shows averages of target and maximum STI opportunities expressed as a percentage of fixed salary in 2016, excluding financial sector companies. It also shows the ratio of the maximum STI opportunity divided by the target STI opportunity. The target STI opportunity was only included for companies that also reported a maximum STI opportunity and vice versa.

We found that the median ratio is 1.5 for all positions in all indices, excluding financial sector companies. The chart above shows that the ratios based on averages is close to 1.6 and 1.5 for respectively AEX and AMX positions and a bit higher for AScX positions. When looking at the data in more detail we see that within the AEX and the AMX no company has a ratio higher than 2.0, while in the AScX 1 company (AMG) has a ratio of 3.0.

The median target to maximum STI ratio remains around 1.5

Target STI %

Maximum STI %


1.2.6 Target STI versus Actual STI The chart below shows which percentage of the target STI was actually paid out.

The chart above shows that the average pay-out percentage improved significantly in 2016 for AScX companies. Though all the positions in the AScX received considerably more than in 2015, the pay-out percentage of the CEO position is with 143% approximately 40% higher than that of the CFO and OM, which was not the case in 2015. The average pay-out percentage at AEX companies also increased slightly in 2016, whilst a significant decrease is observable for AMX companies. This could be attributed to impaired performance and a rebalancing of the companies in the AMX index.

Actual STI as % of target


1.2.7 Variability of STI A recent publication of EY UK on redefining executive pay has posed the question whether bonus payments are actually variable enough to effectively incentivize performance. The bonus payments to 52% of FTSE CEOs have been consistently higher than 40% of the maximum pay opportunity for the period 2013-2016. Following these results, we investigated whether this also applies to Dutch listed companies for the period 2014-2016. The analysis solely concerns incumbents who are in the same position and company for three consecutive years. Note that only those incumbents are included who either have a target or maximum STI % reported.

The table above shows the percentage of incumbents who receive at least the specified percentage of their target or maximum STI opportunity each year for the period 2014-2016. For illustration purposes, 83% of the CEOs received more than 25% of the target STI opportunity in 2014, 2015 and 2016.

Though the table shows decreasing percentages as expected, the proportion of incumbents who receive more than their target pay-out each year is rather substantial. For instance, approximately 30% of the CEOs consistently receive at least their target STI opportunity. Moreover, roughly 55% of the CEOs obtain more than half of their maximum STI pay-out in 2014, 2015 and 2016.

Our results, combined with those of the UK Executive Remuneration Team, raise questions to whether bonus payments are truly variable.

position

actual/Target STI Ratio actual/max STI Ratio

> 25% > 50% > 75% > 100 % > 20% > 35% > 50% > 65%

CEO 83% 74% 57% 29% 83% 74% 55% 38%

CFO 83% 65% 43% 35% 77% 63% 50% 37%

OM 82% 55% 45% 23% 76% 56% 52% 44%

Bonus payments are fairly rigid


1.3 Long Term Incentive

Almost all long term incentives are granted conditionally at the beginning of a 3 year performance period. After this period a percentage of this conditional grant becomes unconditional (vests).

1.3.1 Target LTI levelsThe table below shows the median target LTI values per position in each of the indices for 2014, 2015 and 2016, excluding financial sector companies.

The table above shows that the median target LTI values have increased significantly for the CEO in

the AMX from 2014 to 2016. The salient stable LTI levels of the CEO position in the AEX is due to the median observation being identical each year. Although the median target LTI levels do not increase for the CEO in de AEX, we observe an increase in the average target LTI levels. Furthermore, the table shows an increase in the median target LTI values for the other positions in the AMX. Additionally, the table shows significant decreases for the CFO and OM in the AScX. However, this is in its entirety attributable to new companies entering the AScX.


AEX

CEO € 1.148.000 € 1.148.000 € 1.148.000

CFO € 612.000 € 618.000 € 620.000

OM € 541.000 € 544.000 € 537.000

AMX

CEO € 439.000 € 462.000 € 519.000

CFO € 240.000 € 251.000 € 284.000

OM € 261.000 € 298.000 € 288.000

AScX

CEO € 194.000 € 163.000 € 222.000

CFO € 174.000 € 138.000 € 148.000

OM € 349.000 € 246.000 € 182.000

Target LTI levels increase for the cEo position in all indices


1.3.2 Development of target LTI percentagesThe charts below show the development of target LTI percentages in the AEX and AMX index from 2014 to 2016, excluding financial sector companies.

The chart above shows no increase in median target LTI values, except for the CEO position from 2014 to 2015 (120% to 135%). The chart also shows that for the CEO and CFO positions the average target LTI is higher than the median target LTI.

The chart above shows increasing median target LTI values for the CEO position. The chart also shows that the median target LTI values for the CFO position have decreased in 2016, whereas the median target LTI values for the OM position in the AMX have remained stable. The target LTI percentages in the AMX are also roughly half of the percentages in the AEX.

Target LTI % (median)

Target LTI % (median)

Target LTI % (average)

Target LTI % (average)

AMX

AEX


1.3.3 Spread of target LTI percentagesThis section shows the spread of target LTI percentages in the AEX and AMX in 2015, excluding financial sector companies. Median values can be found on the intersection of the yellow and grey bars. The yellow bar represents the range of observations from the second to the third quartile (50th to 75th percentile) while the grey bar represents the range of observations from the first to the second quartile (25th to 50th percentile).

The chart above shows a large spread between the highest and lowest target LTI% observations for the CEO and CFO positions in the AEX. The spread for the OM is much smaller. This is due to the fact that a lot of the companies with a target LTI above 150% did not have OM in their board.

The chart above shows that the spread in the AMX is much smaller compared to the AEX. The chart also shows that the spread between the highest and lowest target LTI % observations is 1 time fixed salary for the CEO positions. We observe that a target LTI percentage of 100% is very common for CEO positions in the AMX. Our analysis shows that 7 out of 15 companies who provide a target LTI to their CEO set this at a 100%.

Q2 - Q3Target LTI %

Target LTI %

Q1 - Q2

Q2 - Q3Q1 - Q2

AMX

AEX


1.3.4 RelationshiptargetLTIandfixedsalaryWe also analysed the relation between salary and target LTI % for the CEO position, excluding financial sector companies.

The graph above depicts combinations of fixed salary and the target LTI %, by index. The line shows the linear relationship between fixed salary and the target LTI %, irrespective of index. The graph clearly indicates a positive relationship between fixed salary and the target LTI % in 2016. Furthermore, it shows that combinations between target LTI % and fixed salary are more to the upward right for the AEX than for the AMX and AScX. Similar as to the target STI graph, we observe in the AMX that OCI is an outlier.

Target LTI percentages increase with fixed salary

AEX AScXTarget LTI %

Fixed salary

AMX


1.3.5 TargetLTIversusMaximumLTIThe chart below shows averages of target and maximum LTI opportunities expressed as a percentage of fixed salary in 2016, excluding financial sector companies. It also shows the ratio maximum LTI opportunity divided by target LTI opportunity. The target LTI opportunity was only included for companies that also reported a maximum LTI opportunity and vice versa.

The average ratio is roughly between 1.60 and 2.10 for the CEO and CFO positions. Therefore, the LTI ratios are somewhat higher than the STI ratios. More specifically, the average ratio for the AEX and AMX is roughly 1.85, except for the OM position in the AMX. The average ratios are considerably lower in the AScX. Note that the average ratio of target to maximum LTI for the OM position in the AMX and AScX as depicted above is based on a relatively small number of observations. Only 4 AMX and 3 AScX companies which had at least one OM disclosed both a target and maximum LTI opportunity.

The median target to maximum LTI ratio ranges from 1.25 to 2.0

Target LTI %

Maximum LTI %


1.4 Total remuneration

In this section we show levels and development of Total Direct Compensation (TDC). We calculated TDC by taking the median value of the sum of fixed salary, target STI value and the LTI value at grant.

1.4.1 Target remuneration levelsThe table below shows the target remuneration levels for all positions and indices in 2016, excluding financial sector companies.

The table above shows target remuneration levels per 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. The salient TDC value for the OM in the AScX is due to a limited number of observations in addition to those companies who have OMs in their board paying relatively more.

Index Remuneration levels at target cEo cFo om

AEX

Fixed salary € 914.000 € 638.000 € 590.000

STI € 936.000 € 489.000 € 440.000

LTI € 1.148.000 € 620.000 € 537.000

Tdc € 3.313.000 € 1.917.000 € 1.693.000

AMX

Fixed salary € 572.000 € 408.000 € 420.000

STI € 319.000 € 200.000 € 246.000

LTI € 519.000 € 284.000 € 288.000

Tdc € 1.456.000 € 885.000 € 1.032.000

AScX

Fixed salary € 434.000 € 324.000 € 391.000

STI € 207.000 € 147.000 € 207.000

LTI € 222.000 € 148.000 € 182.000

Tdc € 877.000 € 663.000 € 933.000

The Tdc levels of the cEo and cFo are diverging


1.4.2 Development of Total Direct CompensationThe charts below show the development of median Total Direct Compensation (TDC) levels from 2014 to 2016, excluding financial sector companies.

The chart above shows that the TDC level has decreased slightly with respect to 2015 for all positions in the AEX. In 2016 the median TDC level for the CEO is roughly 1.7 times that of the CFO and 2.0 times that of the OM, which is similar to the ratios observed in 2015.

The chart above shows that the TDC level has increased for the CEO and OM positions in the AMX, but not for the CFO position. In 2016 the median TDC level for the CEO is roughly 1.6 times that of the CFO and 1.4 times that of the OM.

In general, we observe that the TDC of the CEO and CFO is diverging. While the TDC of the CEO and CFO was roughly equal in 2014 in the AScX, this ratio has increased to 1.3 in 2016. Similar patterns, though to a lesser extent, are observed for the other indices.

Total Direct Compensation - AEX

Total Direct Compensation - AMX


1.4.3 TotalremunerationpaymixThe total remuneration pay mix shows the relative importance of fixed salary, target STI and target LTI in the total remuneration package, based on median values of these remuneration elements. The emphasis on variable pay tends to be higher for higher positions in a company as these positions are assumed to have more influence on company performance.

The chart above on the pay mix in 2016 shows that the relative importance of variable pay is highest in the AEX. The percentage of variable pay for CFO and OM positions in the AEX is even higher than for the CEO position in the AMX.

The CEO pay mix fixed – STI - LTI is roughly 30-30-40 in the AEX, roughly 40-25-35 in the AMX and roughly 50-25-25 in the AScX.

Fixed salary STI LTI


Binding vote on policy and/or pay amounts

Non-binding (advisory) vote

Shareholders neither decide nor advise on executive pay

1.5 Global Remuneration Trends and Regulatory Developments

Globally, EY has identified the following key trends in the current executive remuneration environment.

Fit for purpose, investor influence and say on payDue to the ongoing perception that executive remuneration is excessive in relation to the company’s financial results, there is an increased focus on better aligning executive remuneration with the long term interest of the company and its shareholders. As such, executive remuneration is in general more performance based, with the weighing of multiple conditions over a period of several years. As it is becoming ever more difficult to set long term goals in a less predictable market, companies are also including other performance measurements such as relative performance compared to peers and applying discretionary adjustments. In this light, it is no longer unusual for investors to want to influence the remuneration of executives for companies they have invested in. Especially European companies are impacted by proxy advisors (e.g. ISS). This trend is strengthened by more countries introducing (further) say on pay legislation. Examples include the recent amendments made to the Corporate Governance Code in the Netherlands and the planned revision of the existing European Shareholders’ Rights Directive which establishes specific requirements to encourage shareholder engagement. The map below shows the existing differences between European countries regarding shareholder influence.

Say-on-pay


Simplification and transparencyIn order to better align executive remuneration with the (long-term) interest of the company and its shareholders, there is a strong push for simplification of executive remuneration packages. This is exemplified by the German legislative developments repealing the obligation of self-investment and performance criteria that are increasingly straightforward. The challenge in this respect is to prevent diluting the link between reward and company performance. The push for simplification of executive remuneration will enable companies to disclose on executive remuneration in a shortened and simplified manner which enhances the ever increasing emphasis on transparency, which we also identified as a trend in our 2016 report on executive remuneration. However, the aspiration of many countries to achieve the simplification and transparency that are considered desirable by shareholders through increased legislation has so far not proven to be an effective method according to monitoring committees in several countries such as the Netherlands. Therefore, ‘apply or explain’ principles are put forward to increase uniform reporting: companies either follow best practice principles or explain why they do not.

global benchmarkingAs a result of globalization, the war on executive talent is impacting the design of executive remuneration and vice versa. Recently, global cuts in bonuses of a big European company in the financial sector resulted in the departure of several senior executives in Asia. In this respect, the trend for multinational companies in Asia is to introduce local incentive plans that better suit the local market to retain and attract the right talent. This may also be the reason why state owned companies in China, generally having lower remuneration due to government regulation, are starting to explore equity based remuneration, assumedly as a response to the decreased attractiveness of state-owned companies as an employer. This global perspective can also be seen in Europe, where large companies are increasingly benchmarking their executive remuneration policies with global competitors, rather than comparing them with smaller local competitors. There is a good possibility that this trend will consequently drip down to medium sized companies.

An interesting development to follow in the near future is the effect of Brexit on executive remuneration in Europe. The potential shift of company headquarters and executive functions to other European Union countries could potentially moderate executive remuneration in the UK. Consequently, this could moderate executive remuneration elsewhere in Europe as well, as executives in the UK generally lead the European benchmark. Alternatively, one could argue that competition on mainland Europe for executive talent would increase, which in turn could drive executive remuneration upwards in an environment with scarce talent.

Remuneration design Contrary to the first three topics, where we have seen trends moving in the same direction, a discrepancy is developing with respect to the design of the remuneration package. In North America we see little indication of a major shift from executive remuneration that is largely based on equity based remuneration. As mentioned, China is exploring equity based remuneration. On the contrary, in Europe remuneration is overwhelmingly cash settled. It will be interesting to see in what direction executive remuneration design will develop following the earlier mentioned push for simplification. Based on the prevailing scientific view, simplification should enhance the effectiveness of the executive remuneration.


2. Remuneration Design This section provides insight in the practices and developments with regard to the design of variable pay plans. The most relevant disclosed design features of variable pay plans are the type, number and weight of the performance measures. In this chapter we also discuss how companies deal with the pension cap for salaries above €100,000.

This section closes with our perspective on reporting quality of remuneration designs. An overview is provided of the companies which are deemed outstanding regarding their disclosure.

2.1 STI design

Short term performance is usually defined by the companies’ annual level of profit. However, the focus on maximizing profit can have adverse consequences for sustainable profitability. Long business performance can be damaged if executives are solely incentivized to maximize the profit.

Therefore, most companies try to mitigate these risks by offering executives long term incentives. As no perfect short term performance measure exist, companies combine various short term performance measures. Finally, companies tend to place more emphasis on non-financial measures over the last years.

2.1.1 Number of STI performance measuresThe table below shows the average number of performance measures used in STI plans and the average percentage of STI pay out which depends on financial measures.

The table above shows that AEX companies use more STI performance measures than AMX and AScX companies. It also shows that the number of performance measures is (still) increasing in AEX and AMX companies. The weighted average of the STI pay out which is based on financial measures is approximately 50% for all indices.

Year

aEx amx aScx

Measures % Financial Measures % Financial Measures % Financial

2014 3,7 57% 2,7 45% 2,5 37%

2015 3,7 54% 2,8 60% 2,5 45%

2016 3,9 55% 2,8 51% 2,4 40%


2.1.2 Type and weight of STI performance measuresThe chart below shows for the AEX, AMX and AScX indices combined the percentage of companies that uses one of the listed performance measures in their STI plan. Other performance measures were also reported. These measures did not fit into any of the other depicted categories.

Over the period 2014 – 2016 we have not observed significant changes with regard to the type and weight of performance measures used in STI plans. We observe that performance measures are most frequently defined as quantitative or qualitative. This is mostly driven by the AScX and AMX companies which are somewhat less transparent in the precise performance measures which are utilized than AEX companies. More generally, AEX companies appear to disclose their performance targets more explicitly. Among AEX companies the use of performance measures such as Cashflow, Revenu, EBITA, NOPAT, net profit and EPS are more prominent. Moreover, the largest part of the STI pay-out seems to be depending on these measures. Finally, sustainability measures are considerably more popular in bigger companies. Not a single company in the AScX index uses a specific sustainability target, though some AScX companies have integrated sustainability targets in a broader qualitative performance measure. Compared to last year however, less companies include sustainability targets in their STI design. Considering our article regarding sustainability and its promising upcoming in remuneration policies published last year we would have expected an increase rather than a decrease.


2.2 LTI design

Long term incentives are offered to executives to increase focus on the longer term and thereby align the interest of executives with those of the companies’ (long term) shareholders. It is common practice that long term incentives are granted conditionally and become unconditional after 3 years based on the performance over these 3 years. In most cases an additional lock-up or holding period of 2 year applies before executives can actually sell or cash their LTI rights. This means that the most common cycle for LTI plans from grant to cash is 5 years. This is in accordance with the Dutch Corporate Governance Code.

Across the 3 indices, almost 90% of the LTI plans in place in 2016 are share plans, 6% are option plans and 5% are cash-based plans, including phantom share plans and Stock Appreciation Rights (SAR).

2.2.1 Number of LTI performance measuresThe table below shows the average number of performance measures used in LTI plans and the average percentage of which depends on financial measures.

The table above shows that the average number of performance measures has slightly increased over the years for all three indices. An interesting observation is that the average percentage of LTI financial measures in the AMX has increased substantially. Furthermore, the table above shows that companies in the AEX use more performance measures than companies in the AMX and the AScX.

Year

aEx amx aScx

Measures % Financial Measures % Financial Measures % Financial

2014 2,6 67% 1,7 70% 1,8 61%

2015 2,6 75% 2,2 66% 1,8 78%

2016 2,7 69% 2,2 79% 2,2 73%


2.2.2 Type and weight of LTI performance measuresThe chart below shows for the AEX, AMX and AScX indices combined the percentage of companies that using one of the listed performance measures in their LTI plan in 2016.

Relative TSR is still the most predominant performance measure within all indices. Roughly one third of the companies use profit and EPS measures. We see RO(I)C/ROE and sustainability measures mostly at AEX companies. The use of sustainability as LTI performance measure remains unchanged compared to last year. Combined with the development of sustainability targets in the STI design this is against our expectations.

Additionally, the terms qualitative and quantitative are most often used by AScX companies which indicates less detailed disclosure. Individual targets are primarily used by AScX companies, not a single AEX or AMX company adopts individual targets in their LTI plan.


2.2.3 Shareholding requirementsMost companies offer LTI grants every year in order to continuously provide long term incentives. This prevents that focus on the longer term is reduced if performance targets of previous grants might have become or might seem unattainable.

An alternative to strengthen the executives’ focus on the longer term is the use of shareholding requirements. Executives are then required to hold at least a certain amount of shares, often expressed in value as a percentage of fixed salary, in the company. The chart and table below show the levels of shareholding requirements in 2016 and the development from 2014 to 2016.

The table above shows that the use of shareholding requirements has increased for the CEO and CFO positions in all indices from 2014 to 2016.

Index position

2014 2015 2016

% use median % use median % use median

AEX

CEO 45% 300% 43% 300% 48% 300%

CFO 48% 175% 45% 175% 50% 200%

OM 60% 138% 50% 125% 54% 150%

AMX

CEO 9% 100% 38% 250% 35% 250%

CFO 9% 88% 42% 150% 37% 150%

OM 29% 88% 44% 125% 33% 125%

AScX

CEO 5% 400% 10% 250% 9% 250%

CFO 7% 400% 11% 250% 9% 250%

OM 20% 200% 13% 200% 10% 200%


The chart below shows the number of observations per level of shareholding requirement in 2016 for each of the three indices (excluding zero’s).

The chart above shows that shareholding requirements are most predominant at AEX companies, where approximately 67% of the companies have a shareholding requirement in place. In the AMX index approximately 30% of the companies has a shareholding requirement in place. In the AScX index this is only approximately 10%.

The usage of shareholding requirements has increased

AEX AMX AScX# of observations

% of fixed salary


The chart above shows an increase in the percentage of the LTI plan which exists of shares. This increase seems to stem from the decrease in the usage of options. Further analysis shows that this observation also holds for the companies which have been in the same index over the observed period and where the CEO has been in position since 2014.

When the indices are examined separately some interesting patterns are observable. Firstly, the weight assigned to shares in the LTI plan of the CEO is higher for AEX companies than for AMX companies and AMX companies in turn use shares much more often than AScX companies. The percentage of the CEO’s LTI plan which exists of shares is roughly 96% for AEX companies, 85% for AMX companies and only 46% for AScX companies.

Furthermore, the weight assigned to shares increases over the years for both AEX and AMX companies, while it decreases considerably for AScX companies. Once the scope is limited to CEOs who held their position from 2014 to 2016 and who were in the same index during this period, similar patterns are observable. Yet, the decrease in share usage for AScX companies is much less apparent. This is also the case for the increased usage of shares for AMX companies. It seems as if relatively newly listed companies rely more on option and cash-based plans, while more companies with a longer history in the Dutch indices favour share plans.

2.2.4 Reward elements in the LTI planDue to the increased usage of shareholding requirements as exhibited in the previous section we examined the development of LTI reward elements in the pay mix from 2014 to 2016 more closely. More specifically, we analysed the construction of LTI plans of CEOs. We categorized the reward elements into share plans, option plans and cash-based plans, including phantom share plans and SAR.

Shares Options Cash / Other

The proportion of shares is growing in LTI plans, especially amongst aEx companies


2.3 Pensions

2016 has been the year following the major pension changes in the Netherlands, when a cap on pension accrual for salaries above €100,000 was introduced. Any additional entitlements for the salary above this threshold are taxable since then. Last year we observed that most companies dealt with the cap by offering gross allowances.

The net pension plans are normally opt-in or opt-out, but due to the ambiguous reporting of companies about their pension arrangements these two options have been combined under Net Pension Plan. The category no pension plan involves foreign board members whose pensions are not accrued in the Netherlands and companies that have no pension plan for executives or did not report about the pension arrangements for executives. The table also shows the positions per index, as it is also possible for one company to have more than one individual in the same position in one year.

The table above shows that most companies still offer a gross allowance. A gross allowance contains a direct taxable element of (in general) 52%.

Furthermore, the table shows that the net pension plan is more popular for OM positions in the AEX and AMX companies. This is explained by the fact that the companies which offer a net pension plan tend to have more other members compared to those who do not offer a net pension plan.

The companies who recently became public, tend to refrain from offering net pension plans, they offer a gross allowance or no pension plan. For the companies and members who are present in the index and in position since 2014, we observe the opposite.

Since the lack in quality of the disclosure of pension costs, no information about compensation levels could be included. In general, we observed that pensions costs are not transparent. This holds especially for the AScX. Pension cost are often reported as part of other costs (benefits, severance pay and expenses).

Index position Net pension plan gross allowance No pension plan positions in Index

AEX

CEO 29% 54% 17% 24

CFO 22% 57% 22% 23

OM 42% 48% 10% 31

AMX

CEO 35% 55% 10% 20

CFO 16% 68% 16% 19

OM 56% 44% 0% 16

AScX

CEO 8% 63% 29% 24

CFO 13% 61% 26% 23

OM 0% 83% 17% 12

most companies offer a gross allowance to compensate for the €100,000 pension cap


2.4 Reporting quality

Remuneration reports differ substantially in their reporting quality. The Dutch Governance Code (‘the Code’) prescribes companies to comply with the principles and best practices regarding remuneration. We examined whether companies operate pursuant to these provisions in the 2016 annual report.

In this perspective, different indicators are considered to judge remuneration disclosure quality. We analysed the completeness of disclosure, specifically 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. Secondly, we examined the simplicity of remuneration reports and whether specific KPI’s are described (related weights included). Other indicators include comply or explain statements’ and whether explanations of poorly disclosed elements were present (e.g. LTI and pensions).

On 8 December 2016 the Corporate Governance Code Monitoring Committee published a revised version of the Code. Dutch listed companies should report in compliance with the revised Code from 2018 and onwards. Although yet not necessary, adapting some of the new best practices indicates considerable foresight. We noted that most companies are aware of the revised Code, but chose to acquaint themselves with the Code next year.

We observed that mostly AEX companies report more clearly compared to AMX and AScX companies in 2016. Furthermore, we noticed that the disclosure of actual LTI remains insufficient.

Of all the reports analysed, three reports stood out: PostNL, ASML Holding and ABN AMRO. Besides adhering to earlier mentioned criteria, the top 3 reports included some outstanding aspects. PostNL is in general very transparent about the actual remuneration levels, the report of ASML is very well structured and easy to understand, while ABN AMRO could be credited for their completeness and adherence to the revised Code.

postNL, aSmL holding and aBN amRo have outstanding remuneration reports


Appendices

appendix 1: Companies and positions

The analyses presented in this report includes remuneration data of AEX, AMX and AScX companies over the years 2014, 2015 and 2016 excluding trusts, funds and companies whose disclosure was insufficient or late disclosed. Our approach has been to assign board member remuneration in any certain year to the index where the company was listed in that year, rather than assigning remuneration based on listing in 2016. This way we obtained a relevant data set per index in each of the three observed years. The total sample consisted of 90 different companies (see below). The reason why the sample is bigger than 75 companies (3 indices * 25 companies) is that some companies were only listed in one of the indices in 1 or 2 of the observed years. This is mostly due to the fact that the set of AScX companies differs significantly from year to year.

* Financial sector company

Aalberts Industries Fagron NN Group*

ABN Amro* Flow Traders Nutreco

Accell Group ForFarmers OCI

Aegon* Fugro Oranjewoud

Ahold Delhaize Galápagos Ordina

Air France-KLM Gemalto Philips Lighting

AkzoNobel Grandvision PostNL

AMG Groothandelsgebouwen Randstad Holding

Amsterdam Commodities Heijmans Refresco

Aperam Heineken RELX Group

Arcadis Holland Colours Royal Dutch Shell

ArcelorMittal ICT Group Royal Imtech

ASM International IMCD SBM Offshore

ASML Holding ING Groep* Sif Holding

ASR* Intertrust Sligro Food Group

Ballast Nedam Kas Bank* Stern Groep

Basic-Fit Kendrion Takeaway.com

Batenburg Techniek Kiadis Pharma Telegraaf Media Groep

BE Semiconductor Industries Koninklijke BAM Groep TKH Group

Beter Bed Holding Koninklijke Boskalis Westminster TNT Express

Binckbank* Koninklijke Brill TomTom

Brunel International Koninklijke DSM Unibail-Rodamco

Corbion Koninklijke KPN Unilever

Corio Koninklijke Philips USG People

Crown Van Gelder Koninklijke Ten Cate Value8

Delta Lloyd* Koninklijke Vopak Van Lanschot*

DOCDATA Koninklijke Wessanen VastNed Retail

DPA Group Nedap WDP

Eurocommercial Properties Neways Electronics International Wereldhave

Exact Holding Nieuwe Steen Investments Wolters Kluwer


Financial sector companiesFinancial sector companies have been marked with an asterisk in the table above. The table below shows the number of financial sector companies per index and year.

dataThe data used in the analysis is collected from annual reports or audited full financial statements for the three financial years ending between 1 January 2014 and 31 December 2016. All information was obtained from annual reports or remuneration reports publicly disclosed by the companies. Important to note is that the number of companies included in an index does not equal the number of incumbents per position in that index. Most common is the case where a company has a CEO and a CFO, but no other board members. In case of replacements it is also possible for a company to have more than one incumbent per CEO or CFO position in a year.

The number of incumbents per positions and the number of companies per position are listed below.

Index position

2016 2015 2014

Incumbents companies Incumbents companies Incumbents companies

AEX

CEO 24 23 23 23 22 22

CFO 23 22 24 22 22 21

OM 31 13 26 12 23 10

AMX

CEO 20 20 21 21 25 23

CFO 19 19 20 19 24 22

OM 16 9 14 9 9 7

AScX

CEO 24 22 21 20 21 21

CFO 23 22 21 19 15 15

OM 12 10 10 8 5 5

Index 2016 2015 2014

AEX 4 4 3

AMX 2 1 1

AScX 3 1 1


Remuneration element

description

Fixed salary The sum of guaranteed annual payments including base salary and vacation pay and excluding superannuation, benefits and other allowances

Target STI Policy level of at target annual short term incentive as percentage of fixed salary

Maximum STI Policy level of maximum annual short term incentive as percentage of fixed salary

Actual STI STI paid in cash or shares including the value of any deferred portion (excluding share matching plans) whereby the reported values per year refer to the STI paid for performance year in that year

Target LTI Policy level of at target long term incentive as percentage of fixed salary

Maximum LTI Policy level of maximum long term incentive as percentage of fixed salary

Total Direct Compensation (TDC)

We have reported median TDC values which are median values of the sum of fixed salary, target STI values and LTI grant values (often equal to target LTI values)

appendix 2: Elements and methodologies

Remuneration elementsThe following executive remuneration elements have been analysed using reported remuneration data for each position.

calculating statistical valuesIn this report we present statistical values of the remuneration in the data set. In doing so, we use 1 remuneration value (e.g. salary) per position, per company in each year. This means that when we have more than 1 incumbent in a position at a company in a certain year (e.g. the current and replacing CEO) we take the average (annualized) remuneration values of these incumbents into account when calculating statistical values. Furthermore, the remuneration tables in this report present independent statistics of each remuneration element. As such, it is unlikely that the median Total Direct Compensation is equal to the sum of median fixed salary, median STI andw median LTI.

STI valuationSTI’s paid in cash do not require valuation and are disclosed in the annual report. STI deferral disclosures vary between companies. To ensure consistency, we define the actual STI earned as the sum of the cash amount and the calculated cash value of the deferred amount. As such, the STI amount as used in this report is equivalent to the amount which would have been received if the STI award were paid immediately in cash. Where the deferred component was structured as an equity award, the value was estimated using the face value at grant.

LTI valuationTo ensure the comparability of LTI grant values we used the target LTI value when the company provided an LTI grant in line with the target policy level. In this respect we treated companies where a 3 month average share price was used the same as companies where the share price on the grant date was used. Also we treated performance hurdles as having no impact on the LTI grant value as we assumed achievement of target performance levels. Furthermore, when companies provided LTI grants at the maximum policy level, we used target LTI policy levels instead. Finally, when companies provided LTI grants which led to significantly different values than the target LTI value, we included the LTI value at grant as applied by the company. In this respect we have taken into account special treatments such as discount on the share price in calculating the number of (conditional) shares at grant and average share price over periods longer than 3 months preceding the grant.


appendix 3: Glossary

Term Definition

Cash-based LTI plan Participants receive a cash payment at the end of the vesting period, whereby the value delivered is not linked to company share price

Chief executive officer (CEO) An organisation’s most senior executive

Chief financial officer (CFO) The most senior finance executive reporting to the CEO

Earnings per share (EPS) Net profit after tax divided by the weighted average number of ordinary shares on issue

Fixed salary The sum of guaranteed annual payments including base salary and vacation pay and excluding superannuation, benefits and other allowances

Long-term incentive (LTI) plan Equity- or cash-based program, with a vesting period of more than one year

Median The value of the observation below which 50% of all observations fall

Other Board Member (OM) The most senior executive of each business unit or functional discipline present in the executive board, not being CEO or CFO

Performance period Period of time over which the performance condition of an award is tested

Performance share plan LTI plan that conditionally grants shares whereby the participant cannot sell until specific performance conditions have been satisfied (‘vesting’)

Phantom plan LTI plan where participants receive a cash payment at the end of a vesting period that is dependent on the value development of the company

Relative performance measure Performance is measured against a comparator group or index

Restricted share plan LTI plan where participants are awarded shares for nil cost at the date of grant. Typically, no vesting conditions apply to the shares other than time.

Return measures Performance measures which include measures such as return on capital employed (ROCE) and return on equity (ROE).

Share option plan LTI plan that grants rights to acquire shares at a specified price (typically equivalent to market value of the shares at the date of grant) at the end a specified period of time. Share options are often granted subject to specified performance conditions that determine the extent to which the options can be exercised.

Share matching plan Plan that grants the participant (rights to) shares at the beginning of a performance period (typically at nil cost) at the end of the performance period, by multiplying an amount of shares the participant already purchased (‘purchased shares’). Typically these purchased shares are (mandatorily) acquired with a received STI, but they can also be acquired with private funds. The participant typically pays nothing for the matching shares. Often used as a vehicle to encourage the management to acquire shares in the company.

Short-term incentive (STI) plan An STI plan is any program based on the attainment of short-term performance objectives, within a one-year timeframe. At least some portion of the payment must be paid immediately or soon after achievement of those objectives.

STI deferral Deferral involves withholding payment of some or the entire STI award for a specified period of time.

Total Direct Compensation Fixed remuneration, plus target STI plus LTI grant value

Total shareholder return (TSR) The total return of a share to an investor (share price change plus dividends)

Vesting period Period between grant of an incentive award subject to conditions and the point at which all time and performance conditions are satisfied


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