Dutch bonus cap could pressure GPs

The Dutch government is planning a rigorous bonus cap for financial institutions in Holland, which could include private equity firms and pension funds.

The Dutch cabinet plans to cap variable pay at 20 percent of salary, a much stricter rule than EU plans to cap variable pay at 100 percent of salary. 

While the bill hasn’t officially been proposed yet, the policy has been put into the coalition agreement and will be debated this autumn, said Ferry Kooijman, a consultant on executive compensation at Towers Watson. If passed, the bill would come into force on 1 January 2015.

The impact of this new measure really depends on the definition of ‘financial services’, Kooijman said, as not many detailed facts are available yet. “The question is how broad this law will be. We have indications that insurers will be part of it, but it’s yet unclear whether private equity firms will be affected,” he said. 

Kooijman expects private equity will be drawn into the public debate. “Even if private equity firms will not be impacted directly, it is likely that there will be pressure on [GPs] to comply as well, as they are part of the financial services industry,” he said. 

This pressure could even come from LPs like Dutch pension fund provider PGGM, which has reduced variable pay for its executives in recent years. In 2012, PGGM’s chief executive officer had her variable pay brought down to zero. In 2013, its chief financial officer will see his 25 percent variable pay reduced to zero. 

“As PGGM, we try to influence other financial institutions to limit variable payments and therefore this has to apply to our own organization as well,” according to a spokesperson.

The Dutch financial sector has been under increased scrutiny since the government bailouts of ABN AMRO, ING and SNS Reaal. Public opinion is very much in favor of bonus caps.  

However, the measure “could have negative consequences in the years to come”, according to Kooijman. “There are still enough banks in The Netherlands with a private equity arm, which are likely to be hit by this 20 percent cap. This could create an uneven playing field. In addition, institutions that are operating abroad would have competitors that wouldn’t have to comply with this,” he said. 

GPs are obviously watching the space very carefully, according to Alex Beidas, an employee incentives lawyer at Linklaters. “Generally, people weren’t anticipating member states [like the Netherlands] would want to take it further, so the Dutch announcement will be a surprise to many,” she said.

“The Alternative Investment Fund Managers (AIFM) directive lays out how remuneration and profit share need to be handled and these [bonus cap] limitations are not mentioned in there,” Tjarda Molenaar, head of Dutch private equity industry body NVP, said, but added: “it would be odd if the Netherlands would go further than the rest of Europe; that would not be beneficial for the financial sector in The Netherlands.” 

There’s some speculation  that in the future, the AIFM directive could include a cap, according to Beidas. “Were the bonus cap to be included in the directive, [then] we would want clarity on whether carried interest, which is in some cases considered as remuneration, would be considered as variable pay for the purposes of a bonus cap,” she said. 

But while the industry should be mindful of the possible cap, it is worth pointing out the proposals haven’t gone through the Dutch parliament yet. 

“It would be interesting to see what the public opinion will be in two to four years; when perhaps GDP is growing again and the financial sector is the engine of the economy,” Kooijman said.