Executive remuneration has been under a magnifying glass in recent years. If the Supervisory Board grants the board a bonus that is not clear is based on objectives set - and clearly explained - at the beginning of the year, this leads to a stir almost without exception. This fuss causes reputational damage that can be avoided.
This month, most supervisory boards will discuss the performance of the board over the past year. In the case of listed companies, the basis for this dialogue is prepared by the remuneration committee, which evaluates whether and, if so, to what extent the board has achieved these objectives, based on the remuneration policy approved by shareholders and the objectives based on it for the past year. Nowadays, a full-fledged evaluation of the performance provided is not just an internal matter. It is increasingly considered best practice that the chairman of the remuneration committee tests with key stakeholders how successful they think the board has been over the past year. In that conversation, you can also ask how a proposal to adjust (read: increase) the remuneration for the coming year is assessed. The outcome of the discussions is important input for evaluating the performance provided by the board and thus for the remuneration to be awarded to the board.
The implementation of the Revised Shareholders Directive into Dutch law has meant that the explanation of the remuneration policy must specify what the so-called social support for this policy is. This unclear term is applied in practice by discussing remuneration policy with a broad group of stakeholders, such as shareholders, employees, trade unions, organizations in which stakeholders have united such as customer organizations and Eumedion.
The remuneration policy must be reviewed every four years and submitted to the shareholders' meeting for approval. The remuneration policy must be approved by at least 75% of the votes cast at the shareholders' meeting.
This does not automatically mean that stakeholders should be asked every year what they think of the performance provided and any future adjustments to the remuneration, but this is starting to be best practice. And there is good reason for that.
The law and the Corporate Governance Code require, among other things, that the remuneration policy includes the objectives for the strategy to implement long-term value creation. According to the explanation of the relevant provision in the revised Code in force since 1 January, this means that particular attention is given to integrating the sustainability-oriented objectives into the remuneration policy and the relevant criteria for achieving those goals. In addition to sustainability goals, the board will also have other non-financial objectives, such as customer satisfaction, employee satisfaction, diversity and inclusion, the company's contribution to society, etc.
Institutional investors, voting advisers and other relevant groups are increasingly making it clear that non-financial objectives should be an important part of the fixed and variable remuneration of directors and that these objectives should be reported transparently both upfront and afterwards. Making all non-financial goals measurable, consistent application and reporting on all non-financial goals is not easy, but it is required. This also means that if the Supervisory Board adjusts the objectives in the meantime to (still) be able to pay variable remuneration to the board, this can lead to disapproval by shareholders.
And this disapproving vote is meaningful. Although the Supervisory Board sets the remuneration of directors, the remuneration report, in which the board accounts for the implementation of the remuneration policy, must be presented to shareholders. They have an advisory vote on this matter. If shareholders reject the remuneration report, there is no legal problem, but de facto, of course, there is. In 2022, a number of listed companies were surprised at the annual meeting by negative advice from shareholders. Even if the Supervisory Board does not have to go back on its remuneration decision, such a negative advice at least means that there is work to be done for the remuneration committee.
To prevent the Supervisory Board from being surprised and having to carry out repair work afterwards, the remuneration committee would do well to pre-test what stakeholders think of the performances and remuneration proposals provided. After all, prevention is better than cure.
De Bestuurskamer has the knowledge and expertise to both guide remuneration committees or supervisory boards in stakeholder outreach and to prepare for the remuneration dialogue at the annual meeting. The right interlocutor for directors and supervisors to avoid possible pitfalls in remuneration policy.
