26 Transparency

It must be concluded that to date the mitigating effect of the duty to disclose has proved to be an illusion. Only in the event of certain excesses does disclosure of the granted remuneration result in an ‘outrage constraint’. Thus the role of transparency in resolving the two key issues identified here is limited. In this sense, transparency can only have added value if the supervisory board becomes aware that the current way that the structure or the ex ante amount of the remuneration is determined needs to be adapted. It cannot be expected that the duty to disclose can be implemented in such a way that the view that the function of remuneration is to act as an incentive will be relinquished. However, I do see a possibility in the future where transparency obligations could contribute to more emphasis on inclusion of the internal remuneration structure when determining the ex ante amount. A pay ratio regulation, such as that recently adopted in the United States, that dovetails with the realised remuneration of the executive, is unsuitable for this aim in my opinion. A Dutch pay ratio regulation encouraging supervisory boards to design a remuneration ideology that matches their specific company would in my view open the door to less emphasis on external reference points and to fairer remuneration levels.

Implementation of the revised shareholders’ rights directive would be a good reason for the Dutch legislator to consider a Dutch pay ratio regulation. By 10 June 2019 at the latest, the Netherlands must have a legal provision in place that obliges companies to set out in their remuneration policy how they have taken the pay and working conditions of the employees of the company into account when determining the remuneration policy. To counteract the identified market failure to control the amount of remuneration received by executives, implementation of this provision could include an obligation to include a pay ratio in the remuneration policy related to the level of the total ex ante remuneration of the CEO or every individual executive, set against the average total remuneration of a representative peer group (transparency in advance). It seems obvious to explicitly include that the pay ratio is a guideline that can be deviated from in exceptional and motivated circumstances, including making public the reasons for the deviation. The pay ratio should be accompanied by (i) an explanation of the way that the values underlying the pay ratio have been calculated, and (ii) an explanation of why this pay ratio is considered suitable for the company in question. Every material change to the values underlying the pay ratio set out in the remuneration policy must be made public, accompanied by an explanation of the degree to which this change has resulted in an adaptation to the pay ratio or the remuneration.

If the legislator chooses to include a pay ratio in the remuneration policy, then this will serve as the basis for a more internally orientated analysis of the ex ante amount of executive compensation. In this way, executive compensation will form part of the remuneration structure of the company as a whole instead of being a more isolated, abstract figure. A pay ratio regulation could also act as a counterweight to the often unfounded practice of benchmarking, and serve as an internal anchor to counteract the leapfrogging effect. A predetermined pay ratio could also strengthen the negotiating position of supervisory boards. The current or prospective executives would know before entering negotiations that a certain pay ratio applies with which the supervisory board in principle conforms. Only in exceptional cases would the pay ratio as set out in the remuneration policy be deviated from, and then only based on the realistic opportunity costs of a specific executive.

The revised shareholders’ rights directive also obliges the Netherlands to design a legal provision on the basis of which the annual changes to (i) the remuneration per executive, (ii) the development of the performance of the company, and (iii) the average remuneration of other full-time employees than executives over at least the last five financial years must be published in the remuneration report. In my view, these annual changes must be linked to the ex ante remuneration levels of every executive. In addition, attention should also be paid to the obligation to include the values on which these changes are based in the remuneration report as well. It should thus be a pay ratio that is based on the ex ante remuneration levels of the CEO or every individual executive, set against the average total remuneration of a representative peer group (transparency in retrospect). If this latter pay ratio is not the same as the pay ratio included in the remuneration policy, the body mandated to set individual executive compensation must explain why there is a situation with a deviating pay ratio.

A regulation linking the calculation of the pay ratio to the actually realised remuneration (ex post remuneration), as is included in the United Kingdom and the United States, has in my opinion no added value for the Netherlands alongside the aforementioned regulations.

A strong emphasis on the internal remuneration relationships could ensure that executives, during the determination of the relative value of their remuneration, would be more inclined to concentrate on internal issues and feel a stronger link to the rest of the company. This link is precisely what has been missing in recent years, which has led to a lot of dissatisfaction within companies. In this way a new duty of disclosure could contribute to a shift in paradigm when determining the ex ante amount of executive compensation.