Op18 april trad Joanne Kellerman op als lid van een panel tijdens de - PDF document

Op18 april trad Joanne Kellerman op als lid van een panel tijdens de IBA Employment and Discrimination Law Conference in Hotel The Grand te Amsterdam. De conferentie was georganiseerd door de International Bar Association (IBA), een internationaal genootschap van juristen. Kellermann gaf bij die gelegenheid een korte inleiding over de beloning van het topmanagement in de financiële sector. Zie onder voor de volledige tekst: Presentation IBA Employment and Discrimination Law Conference on 18 April 2013 I’d like to start by saying how grateful I am to the organisers of this conference for giving me the opportunity to share some thoughts on executive compensation with this panel and audience of experts. On a more personal note, I don’t mind telling you it also feels good to be back once again on familiar grounds. For when I was still a member of the International Bar Association, I used to be a frequent visitor of these conferences Today’s theme, executive compensation in the financial services industry, has been a ‘hot issue’ for us as supervisors over the past few years, and probably will continue to be so in the foreseeable future. There is a huge on-going debate within our societies on the role the financial services industry has played in causing the current crisis. And an important topic of this debate has been remuneration, and more specifically the variable payments or bonuses, rewarded to executives within this industry. The discussion on pay is definitely not limited to the financial sector. 1

But can be seen in other sectors such as semi-government, legal services and corporates in general. I will limit myself to the financial sector. In my introduction this morning I want to share with you some thoughts on the regulatory framework and objectives of remuneration regulation, as well as on cross-border issues and ways to make regulation work even better. We all know that the financial services industry is among the most regulated industries we have. And it will probably not surprise you that from my perspective as a Supervisor, I would say with good reason. For the financial services industry plays a pivotal role our market economies Our task as supervisor therefore is to ensure that the financial system is a stable system, in which financial and non-financial risks are known and adequately controlled. One of the lessons we as supervisors have drawn from the financial crisis is that risks are not only to be found in digits, capital or liquidity buffers. But also in human behaviour, and the way in which this behaviour is influenced by the way people in the financial industry are paid. If variable payment incites staff to take risks leading to a short term profit, this may harm their company’s long-term interests. It is for this reason that regulators and supervisors across the globe have included supervision on executive payments into their toolbox of risk-mitigating measures. 2

This slide shows how global principles are translated into regional legislation, in this case European directives, for which European guidance is provided, and which in turn is translated into national law. This clearly shows that regulation of remuneration has been with us for a few years now, and builds on broadly agreed international standards and principles. Now, I don’t need to explain to you as lawyers that international standards or principles are not always legally binding – or as legally binding as we would want them to be - and therefore cannot be enforced directly But these standards and principles are translated into more enforceable regional or national law. All regulation on executive compensation that we have seen so far focuses on limiting the possible risks of short-term incentives given by variable remuneration. The regulation targets stimulating a long-term perspective in the operations of the people working for financial firms. This principle is included in their target-setting, in the way remuneration 3

consists not only of cash but also shares, in the deferral of the payments received, etc etc. Key point here is that behaviour, aimed at contributing to the company’s long-term interests, is being stimulated and that the risks that are taken are calculated into the amount of variable payment a staff member receives in the end. This also means that when a risk materialises after a few years, the variable payments has to be adjusted downward and the staff member in question will no longer receive the total amount of variable payment. This is the so-called malus , an instrument for the company to adjust the amount of variable payment after a recalculation of the performance delivered. And of course, is a staff member is involved in fraud or other undesired or illegal practices, the company may use a claw-back measure to withhold payments. All of this is made possible under the new regulations because of one important aspect of the variable payments received: they are only conditionally rewarded to the staff member. So, if certain conditions are not met, the variable payment can and should be adjusted. The staff member will not become the legal owner of the payments until after he has met all conditions governing recalculation, deferral and retention. 4

Over the past few years we have certainly built up a lot of experience in dealing with regulation on executive compensation. We have learned that it’s a ‘sensitive’ issue, probably because it directly affects people and their remuneration, something neither companies not supervisors were used to discussing with each other. And the debate on remuneration within the financial services has not come to an end, to say the least. We have all witnessed the debate in Switzerland, banning golden parachutes. The new CRD IV, adopted by the European Parliament only 2 days ago, will include more regulation on executive compensation And on national level, for example in The Netherlands, the Cabinet agreed on a further hard cap on variable payment, which is currently being further examined. The difficulty, of course, lies in companies having cross-border activities and staff working in countries where different rules and norms may apply. Our position in this regard has always been that companies will, either way, have to abide by the rules applicable to them. 5

This works in two ways. First, a company established here in the Netherlands will have to obey Dutch and European law, including its subsidiaries or branches operating in third countries. The reason is simple: risks taken anywhere in the world within the group-structure of such a company will affect the risk profile of the group as a whole, and should therefore be mitigated from a group-perspective. The other way is that, being the supervisor for the Netherlands, we cannot overrule local law. Therefore, if local legislation prohibits the enforcement of a certain part of our regulation, we can and will not enforce that part. Some thoughts at the end of this introduction. As I mentioned before, we have now built up a lot of experience in dealing with regulations on remuneration. We have also have witnessed a trend towards compliance, if often somewhat reluctant, with these regulations from the financial industry. Our main goal as supervisor is to influence the behaviour of the entities 6

under our supervision. In the end this comes down to influencing the behaviour of people, of cultures. This is a new area for supervision and it is clear both sides are only slowly getting used to this. Regulation is also meant to influence behaviour. But this goal will only be achieved, if the behaviour it seeks to establish, is also supported by the ones it is targeting. The biggest challenge for us together, therefore, is not to comply with all the rules that are being created as a check-the-box exercise. But instead to find ways to stimulate a culture within a company that supports these rules – and first and fore mostly, the spirit of these rules - from an internal and intrinsic motivation. Because in the end, it’s all about incentives for behaviour we find desirable, and the discouragement of undesired behaviour. We share the same interest here, because the bill for bad behaviour in the financial sector will go to us here in the room and to our children. After all, we are all taxpayers. Thank you. 7