Restrained remuneration policy
The Remuneration Policy (Financial Enterprises) Act (Wet beloningsbeleid financiële ondernemingen, Wbfo) states that financial companies must apply a restrained remuneration policy.
What is the purpose of a restrained remuneration policy?
The aim of the Wbfo is to prevent perverse incentives that could lead to undesirable and irresponsible risks for the soundness of the company or to a disregard for clients’ interests. A restrained remuneration policy ensures that employees are not given incentives that could hinder the fair treatment of clients.
Although the Wbfo largely brought together various rules that were already in force, it also introduced new elements. The basic principle is that variable remuneration should be no more than 20% of the fixed salary (bonus cap). Variable remuneration is the portion of your income that is not fixed. Companies must also identify and manage the financial and non-financial risks associated with their remuneration policy.
Who does the restrained remuneration policy apply to?
The restrained remuneration policy rules apply to all natural persons who work for or under the responsibility of a financial company that has its registered office in the Netherlands.
Rethinking remuneration and recognition
The behaviour of employees is not driven solely by the salary they receive. Non-financial incentives such as recognition from senior or line managers in the form of compliments, status and involvement in interesting projects are also a factor. The AFM has conducted a major investigation into the influence of management on employee behaviour. Read the report: ‘Rethinking remuneration and recognition’. It is important for senior and line managers to be aware of how the way they manage employees influences their motivation and behaviour, and of the fact that remuneration and recognition may include both appropriate and perverse incentives.
Accordingly, the AFM urges financial companies to include an analysis in their remuneration policy risk assessment of how financial and non-financial incentives (remuneration and recognition) are experienced by employees and to design the policy in such a way that the fair treatment of clients is paramount.
Examples of remuneration and recognition incentives
Examples of financial incentives (remuneration) that could have undesirable effects:
• An adviser receives a bonus for every client who takes out a loan.• The employees who make the most sales earn a ‘weekend away’ if they have a higher turnover than their colleagues.
• A contracted freelancer is paid for every client they advise and sell a product to.
• A portfolio manager receives a bonus once they attract a certain number of clients, regardless of whether these clients fit the investment philosophy of the investment firm.
• A portfolio manager receives remuneration determined by the capital growth they achieve for their client.
Examples of non-financial incentives (recognition) that could have undesirable effects:
• Unrealistic goals and high target pressure, causing work-related stress and leading employees to cut corners.• A manager evaluates employees in an unfair way and favours some over others.
• The management team only praises activities that boost production and turnover.
Establishing policies
Financial companies must have a written restrained remuneration policy that applies to all employees. This obligation applies regardless of what form the remuneration policy takes. It also applies to companies with employees, including directors and executives, whose salary is 100% fixed.
When do you not have to have a remuneration policy?
A financial company does not have to draw up a remuneration policy if it does not employ any staff and if the director of the company is not on the payroll. This is the case for financial service providers who are sole traders, for example.
What must be covered in the remuneration policy?
A restrained remuneration policy is about rewards in the broadest sense of the word (including variable and fixed remuneration, promotions, a company car, a pension and training courses). It must also cover the criteria for granting remuneration, such as job profiles, performance criteria and performance targets, and the measurement and assessment of those criteria. At a minimum, the remuneration policy must consider the relationship between fixed and variable remuneration, the composition of the variable remuneration and the criteria for granting remuneration.
At a minimum, the company must include the following in the description:
• how many natural persons working under its responsibility receive a total annual remuneration of 1 million euros or more, as well as the business unit in which they primarily carry out their duties;
• the amount of variable remuneration paid each year to natural persons working under its responsibility.
Which employees are subject to the company's remuneration policy?
The restrained remuneration policy rules apply to all natural persons who perform work for the company or fall under its responsibility. In other words, the rules do not apply solely to staff in an employment relationship; they apply to all persons working under the responsibility of the financial company, including temp staff and freelancers on contracts.
It also does not matter what position those persons occupy. All positions in an organisation fall within the scope of the Act. The Act is not limited to positions in which persons are actually engaged in providing financial services. Secretaries and ICT staff, for example, are still covered by the requirement to set and apply a restrained remuneration policy.
If a financial company belongs to a group of companies, the rules may also apply to the group and to any subsidiaries.
When must you make a remuneration policy?
If the company publishes an annual report, it must include a description of the restrained remuneration policy. If the financial company has a website, the description must also be published on the website.
The purpose of publication is transparency. It makes clear to clients how your employees are remunerated and how you manage the risk of clients not being treated fairly.
The scope of publication should be in line with the size of the company. This means smaller companies are only required to publish a summary. The basic principle is that the larger or more complex the company, the more extensive the description of the policy must be. In addition, the description must not provide a false picture of remuneration practices within the company.