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Executive Remuneration in the Netherlands 2015Empirical Data Analysis 2012 - 2014, Legislation, Taxation & Vision

2 | Executive Remuneration in the Netherlands 2015

ContentsEY’s Executive Remuneration Team 4

About this report 5

1 Executive Summary 7

2 Outlook for 2015 and beyond 10

3 Board diversity 12

4 Remuneration Levels 13 4.1 Fixed salary 14 4.2 STI levels 15 4.3 LTI levels 18 4.4 Total Remuneration 20 4.5 Global Remuneration Trends and Regulatory Developments 23

5 Remuneration Design 24 5.1 STI design 25 5.2 LTI design 27 5.2.1 Relative TSR 29 5.2.2 Quality of the relative TSR measure 30

6 Tax Perspective 31

Appendices 34Appendix 1: Dutch Financial Sector Regulatory Developments 35Appendix 2: Companies Analysed 36Appendix 3: Executive remuneration methodologies 38Appendix 4: Valuation methodologies 39Appendix 5: Glossary 40Notes 43

EY’s Executive Remuneration TeamAbout EY’s Executive Remuneration teamOver the past fifteen years, EY’s Reward practice has become an important player on the remuneration market. Executive remuneration is a truly international discipline in EY and this enabled us to grow substantially, achieving market leadership in some of the largest economies.

Our experience in advising and working with the Netherlands’ largest companies gives us the knowledge to help you build, implement and maintain best-fit reward programs aligned with your corporate strategy. Our clients benefit from fully integrated HR, remuneration, tax, legal, accounting, valuation, financial modelling and corporate governance services, along with a global network of talent.

Jan van DurenExecutive Director People Advisory [email protected]

Bas RupertSenior Manager People Advisory [email protected]

Stephan van de GroepManager People Advisory [email protected]

Sander AgterhofManager People Advisory Services [email protected]

Juan VervuurtAttorney at Holland Van Gijzen [email protected]

Stefan PeijPartner Governance [email protected]


About this reportThe world’s economies are in different phases of recovery from the crisis. At the same time legislation on (executive) remuneration keeps evolving into different directions across regions. This provides an interesting mix of developments impacting executive remuneration in the Netherlands and abroad.

EY’s 2015 Executive Remuneration Report will provide you with insight on trends in executive remuneration levels and practices over the last 3 years. Furthermore, it contains interesting views and perspectives on optimizing executive remuneration.

This report differs from previous versions with respect to the depth of the data analyses. Since we based our analyses on three year data we were better able to analyse and report trends in remuneration levels and practices. Furthermore, for this report we performed deeper analyses on factual remuneration levels and practice data.

The data and analyses contained in this report are based on information from the annual reports of 2012, 2013 and 2014 and other relevant public disclosures. A list of the companies included in the analysis is provided in Appendix 2. A glossary of terms is provided in Appendix 5.

This report is intended to provide insight in trends in executive remuneration levels and practices for the above noted companies. It is not intended to be used as a benchmarking tool. Tailored analysis of the data presented in this report is available by request.

EY is happy to share these results with clients, relations and others with interest in the Dutch world of executive remuneration. EY’s Executive Remuneration Team is available for further information.

Jan van DurenExecutive Director People Advisory Services

5Executive Remuneration in the Netherlands 2015 |

1. Executive Summary


After the recent crisis, we expect that remuneration committees will place more emphasis on the competitive situation of the company to determine the appropriate pay mix. In addition, we expect that the view on executive performance will continue to broaden, meaning that measurable performance will be subject to interpretation and discretion more often and that behavioural aspects will become increasingly important. This would implicate that the role of remuneration committees will become more important with regard to the evaluation of executive performance and the explanation of executive pay.

Board diversityIn spite of existing evidence that better gender balance on boards leads to better company performance and a growing level of awareness thereof, also among men, the rate at which the number of female board members at Dutch listed companies has increased over the last years is surprisingly low. This is especially true for the CEO position.

Remuneration levels• Salary levels increased by 3.8% in 2013

and 4.1% in 2014;• On average actual STI pay out increased

by 16% per year between 2012 and 2014; • On average LTI grant size increased by 8%

per year between 2012 and 2014;• CEO total remuneration increased stronger

than that of CFO’s and Other Board Members (OM), especially in the AEX, due to increasing company performance combined with higher variable remuneration opportunities, both in absolute and in relative terms;

• Total (target) remuneration pay mix differs significantly per market group. Bigger companies place more emphasis on both short term and long term variable remuneration.

STI design• 54% of companies use a profit measure in

their STI plans;• On average one third of the STI pay-out

depends on non-financial targets;• AEX companies use more STI performance

measures (3.7 on average) than AMX (3.4 on average) and AScX companies (2.5 on average);

• The use of share matching schemes is not very wide spread and is offered most often at AEX companies where 7 companies have a share matching scheme in place.

LTI design• The use of shareholding requirements is

reported only by 9 AEX companies. Among those 9 companies the most frequently reported shareholding requirement is 300% of fixed salary;

• Of the 70 companies analysed, 80% (55 companies) has an LTI plan in place. Of the 23 AEX companies, all but 2 financial companies have an LTI plan in place. Of the 23 AMX companies, all but 3 companies (of which 2 financial companies) have an LTI plan in place. Of the 24 AScX companies, 9 companies do not have an LTI plan in place;


• Overall, the percentage of LTI plans in which shares are granted increased from 61% to 67% between 2012 and 2014;

• 74% of companies having an LTI plan use relative TSR as a performance measure;

►• On average only 8% of the LTI pay out depends on non-financial targets;

►• The average number of LTI performance measures is highest at AEX companies and has increased from 2.4 in 2012 to 2.7 in 2014;

►• The average weight of the relative TSR measure decreased at AEX from 62% in 2012 to 53% in 2014.

►• Only 26% of the companies that use relative TSR report that they use some sort of footprint (average share price approach).

Increasing focus on sustainabilityMore and more companies acknowledge the importance of integrating sustainability in the way they do business. Since sustainability is a broad concept that can be applied to many aspects of the business, the integration of sustainability takes vision, focus and time. However, we believe that developing a vision on sustainability and reporting on the

sustainability initiatives and progression has added value to companies. Not only can communication on sustainability enforce initiatives and engage employees, institutional investors are also showing increasing interest in companies that report on the integration of sustainability in their business. 10 of the 70 companies included in our analysis have related sustainability to their executive remuneration. The actual influence of sustainability on pay is rather small.

Total remunerationAn interesting observation is that at AEX companies the total remuneration for the CFO position has increased significantly from 2012 to 2014 to a level that is now significantly higher than that of the other board members, while at AMX companies the CFO total remuneration is significantly lower than that of the other board members. At AEX companies the CEO total remuneration also shows a strong increase over the period 2012 to 2014 and was in 2014 roughly twice as high as that of the OM and more than 1.5 times that of the CFO.The total remuneration of the other board members as a percentage of CEO total remuneration differs a lot from year to year

and between market groups. The reason for this might be that the diversity and company specific nature of other board member roles make it more challenging for Supervisory board members to determine fair remuneration levels for other board members.

Tax perspectiveOver the past years the opportunities for tax optimization have been reduced in the Netherlands, especially for the higher incomes. Even additional taxation for this group has been introduced. The possibilities to defer tax payment have become more and more difficult in the Netherlands. Most likely the only way to reduce and/or to defer taxation are long term incentives.


2. Outlook for 2015 and beyond


Pay mix re-assessmentBased on the trends we see in the Netherlands and based on what we learn from other countries and regions, we expect that more and more companies will re-evaluate the effectiveness of executive remuneration, especially the variable remuneration elements. Companies will keep using benchmark information on separate remuneration elements as a reference. However, after the recent crisis, we expect that remuneration committees will place more emphasis on the competitive situation of the company to determine an appropriate ratio between short and long term incentives. Due to the crisis a companies’ competitive landscape may have changed which could have implications for the required pay mix.

Broadening view on executive performanceBesides a review of the ratio between short and long term variable remuneration, we expect to see a movement towards a broader view on executive performance. In recent years we have seen the average number of performance measures for executives in the Netherlands increase, which indicates a broadening performance definition. In line with this, we expect that measurable performance will be subject to interpretation and discretion more often and that behavioural aspects will become increasingly important. These expectations are based on observed trends and on the increasing awareness that focussing on measurable targets alone does not lead to a fair evaluation of performance and can even have adverse effects.The expected broadening view on executive performance implicates that the role of remuneration committees will become more important with regard to the evaluation of executive performance and the explanation of executive pay. We feel that this development could contribute to both the effectiveness and the acceptance of executive remuneration.

CEO pay ratioA topic that hardly any company in the Netherlands has reported on yet is the CEO pay ratio. We expect that more and more companies will start to analyse and report on the CEO pay ratio since disclosure regulation is starting to evolve. As of 2017 US listed companies need to disclose the ratio between CEO total compensation versus median total compensation of employees. It will be interesting to see how regulation evolves in Europe, especially with regard to how the pay ratio should be calculated and what choices companies have in this respect. We believe that one ratio for every company would not be meaningful since

companies can be very different in terms of geographical spread and type of business. It is more relevant to see how the pay ratio of a company develops over time. Therefore, we believe that companies could benefit from obtaining insight in the current pay ratio and understanding how this fits their overall remuneration philosophy and structures in order to determine whether change is necessary.

Proportion of LTI in the pay mix and firm performanceThe majority of the pay for performance research that has been done in the executive remuneration area has been on the relation between absolute levels of variable pay (opportunity) and firm performance. Recently EY has started a research on the relation between the relative level of variable pay in the pay mix and firm performance. Our preliminary findings show a positive relation between the proportion of LTI in the pay mix and firm performance. We intend to expand our analysis over the coming year in order to be able to make substantiated conclusions. We will include our findings in next year’s report.

Executive pensions2015 is the year of major changes in pensions in The Netherlands. Especially the cap on pension accrual for salaries above Euro 100k is important for the remuneration of executives. In our analysis of next year’s remuneration reports we will have a close look at how companies dealt with this cap.

Pay regulationA significant portion of the regulatory framework for the financial sector in Europe has been implemented. As the 20% cap on variable remuneration has been implemented in the Dutch financial sector, we do not expect any major changes to Dutch regulation in the short run. However, since the regulation on controlled remuneration intends to prevent excessive risk taking, we expect to see additional regulatory developments on behavioural aspects. Since the Dutch financial sector has to deal with the most stringent cap on variable remuneration of all European countries, it will be interesting to see how Dutch companies will deal with that in an international context. We feel that authorities should shift their focus from capping variable remuneration in general to reducing short term variable remuneration while allowing extended opportunities in long term variable remuneration. This would be to the benefit of sustainable performance in the financial sector and would therefore contribute to economic stability.


1 See for instance the Credit Suisse Gender 3000 report on Women in Senior Management

Several researches have shown that better gender balance on boards leads to bettershare price and financial performance1. EY’s latest research, in which we surveyed 400 leaders of companies from a cross-section of industries in EMEIA, Asia-Pacific and North America, reaffirms a growing awareness worldwide that men and women need to work together to improve company performance and create greater economic prosperity for everyone.

In spite of existing evidence that better gender balance on boards leads to better company performance and a growing level of awareness thereof, also among men, the rate at which the number of female board members in the Netherlands has increased over the last years is surprisingly low.

The graph above shows that especially with regard to the CEO position the number of females is very low and has not increased from 2012 to 2014. For the CFO position the number of female board members increased from 6% in 2012 to 10% in 2014.

The Netherlands is one of European countries (still) without a binding percentage of females at the top which could explain the current situation. However, if such a percentage does not specifically apply to executive boards, chances are that the percentage of females will increase primarily in non-executive or supervisory boards as has happened in Norway.

3. Board diversity

2012

2012

2012

2013

2013

2013

2014

2014

2014

CEO

CFO

OM

0 10% 20% 30% 40% 50% 70%60% 90%80% 100%

NL Male Foreign MaleNL Female Foreign Female


4. Remuneration Levels

This section provides insight in the remuneration levels for CEO’s, CFO’s and other board members at AEX, AMX and AScX companies over the period 2012 until 2014. The remuneration elements analysed are fixed salary, short term incentive (STI), long term incentive (LTI) and total remuneration. Besides actual remuneration levels we have also looked at target and maximum levels for STI, LTI and total remuneration.

Most companies indicate that they use a peer group of companies against which the remuneration levels are benchmarked, also referred to as the labour market peer group or reference group. Besides this, most companies use a different peer group to compare long term company performance. This will be elaborated upon in more detail in the Remuneration Design section.


4.1 Fixed salary

There are different approaches to report fixed salary levels over a three-year period. These are to either use all data points or to exclude data points when an executive was replaced. We have chosen to use all data points. Therefore, the reported salary levels include both the effect of salary increases for existing executives and the effect of potentially changing salary levels due to replacements. When a position is replaced, we see that the newly nominated executive does not always receive the same salary as the predecessor. Somewhat lower salaries, but also significantly higher salary levels have been granted to new executives.

The table below shows the median fixed salary levels per position in each of the market groups for 2012, 2013 and 2014. The table also shows the difference between the median values expressed as a percentage of the previous year.

The table above shows increasing fixed salary levels for all positions in the three market groups from 2012 to 2014. Excluding the changes due to replacements, the average salary increases in 2013 and 2014 were 3.8% and 4.1% respectively. About half of these increase figures can be explained by a couple of high increases (>10%) due to re-alignment with market practice levels.

Market Position 2012 Δ% 2013 Δ% 2014

AEX

CEO € 845,000 1.1% € 854,000 5.3% € 899,000

CFO € 600,000 1.3% € 608,000 0.5% € 611,000

OM € 565,000 0.9% € 570,000 3.7% € 591,000

AMX

CEO € 500,000 6.8% € 534,000 12.4% € 600,000

CFO € 400,000 0.0% € 400,000 2.0% € 408,000

OM € 434,000 1.8% € 442,000 7.0% € 473,000

AScX

CEO € 360,000 6.9% € 385,000 0.3% € 386,000

CFO € 269,000 5.9% € 285,000 0.7% € 287,000

OM € 323,000 15.2% € 372,000 1.3% € 377,000


4.2 STI levels

Short term incentive levels as reported in each year relate to performance over that one year period. As company performance varies from year to year, we typically see that STI pay outs vary as well, which indicates a pay for performance relationship. However, it is not straightforward what constitutes good performance in the short term to create long term shareholder value. A strong short term pay for performance relationship therefore might not even be a positive thing.

The table below shows the median levels of STI pay out per position in each of the market groups for 2012, 2013 and 2014. Changes are expressed as a percentage of the previous year.

The table above shows that levels of STI pay out fluctuate strongly, even on an aggregate median basis. In 2013 a couple of companies performed significantly better than in 2012 which drove up the median significantly. On average the actual bonus increased approximately 16% per year from 2012 to 2014. Adjusting for salary increases, companies improved short term performance pay out by 12% per year on average.


AEX

CEO € 555,000 38.7% € 770,000 -7.1% € 715,000

CFO € 330,000 25.2% € 413,000 11.6% € 461,000

OM € 292,000 7.2% € 313,000 -15.7% € 264,000

AMX

CEO € 204,000 25.0% € 255,000 16.9% € 298,000

CFO € 147,000 28.6% € 189,000 28.6% € 243,000

OM € 166,000 22.3% € 203,000 28.1% € 260,000

AScX

CEO € 65,000 21.5% € 79,000 103.8% € 161,000

CFO € 54,000 25.9% € 68,000 32.4% € 90,000

OM € 78,000 -37.2% € 49,000 -24.5% € 37,000


Target and Maximum STI levelsThe graph below shows averages of target and maximum STI opportunities expressed as a percentage of fixed salary. It also shows the ratio maximum versus target STI opportunity. The target STI opportunity was only included for companies that also reported a maximum STI opportunity and vice versa. Target and maximum STI opportunities are equal for CFO and OM positions at almost all companies and are therefore combined in the graph below.

The graph above shows that the ratio of maximum versus target STI opportunity is approximately 1.65 across all positions and markets. For the CEO position the target and maximum percentages are sometimes higher than for the CFO and the OM positions. The graph above shows that this is more often the case in larger companies.

120%

160%

100%

80%

60%

40%

20%

0%CEO CEOCEOCFO/OM CFO/OMCFO/OM

AEX

Ratio:1.63

Ratio:1.62

Ratio:1.67 Ratio:

1.67

Ratio:1.58

Ratio:1.58

AScXAMX

Target STI MAX STI

140%


Analysis of actual versus target STI - CEOThe table below shows the target and actual STI development for CEO’s from 2012 to 2014.

Analysis of actual versus target STI - OMThe table below shows the target and actual STI development for OM’s from 2012 to 2014.

Analysis of actual versus target STI - CFOThe table below shows the target and actual STI development for CFO’s from 2012 to 2014.

The tables above show that on average executive STI pay outs became closer to target STI levels over the observed period.

Market Target vs. Actual STI

2012 2013 2014

AEX

Target ¤ 762,000 ¤ 736,000 ¤ 774,000

Actual ¤ 555,000 ¤ 770,000 ¤ 715,000

Actual/Target 73% 105% 92%

AMX

Target ¤ 274,000 ¤ 293,000 ¤ 344,000

Actual ¤ 204,000 ¤ 255,000 ¤ 298,000


AScX

Target ¤ 157,000 ¤ 164,000 ¤ 150,000

Actual ¤ 65,000 ¤ 79,000 ¤ 161,000



2012 2013 2014

AEX

Target ¤ 419,000 ¤ 421,000 ¤ 437,000

Actual ¤ 292,000 ¤ 313,000 ¤ 264,000


AMX

Target ¤ 221,000 ¤ 225,000 ¤ 244,000

Actual ¤ 166,000 ¤ 203,000 ¤ 260,000


AScX

Target ¤ 146,000 ¤ 175,000 ¤ 158,000

Actual ¤ 78,000 ¤ 49,000 ¤ 37,000



2012 2013 2014

AEX

Target ¤ 445,000 ¤ 449,000 ¤ 452,000

Actual ¤ 330,000 ¤ 413,000 ¤ 461,000


AMX

Target ¤ 203,000 ¤ 203,000 ¤ 211,000

Actual ¤ 147,000 ¤ 189,000 ¤ 243,000


AScX

Target ¤ 122,000 ¤ 134,000 ¤ 120,000

Actual ¤ 54,000 ¤ 68,000 ¤ 90,000



4.3 LTI levels

Almost all long term incentives are granted conditionally at the beginning of a 3 year performance period. After this period a percentage of this conditional grant becomes unconditional (vests). The table below shows the median LTIvalues based on the companies that granted LTI’s. The levels reported in the table below are based on the fair values at the moment of the (conditional) grant.

The table above shows the levels of the conditional LTI grants for the different positions in each market group from 2012 to 2014. Expected differences from year to year are those caused by the fact that most LTI grant values are a percentage of (increasing) fixed remuneration. The rest of differences is mainly caused by changes to the pay mix and changes due to re-alignment with market practice. On average the LTI grant size increased by 8% per year between 2012 and 2014.


AEX

CEO € 1,048,000 13.5% € 1,189,000 10.8% € 1,318,000

CFO € 704,000 -1.6% € 693,000 13.3% € 785,000

OM € 550,000 6.0% € 583,000 -3.8% € 561,000

AMX

CEO € 362,000 -8.3% € 332,000 31.6% € 437,000

CFO € 233,000 3.9% € 242,000 -1.2% € 239,000

OM € 230,000 3.5% € 238,000 37.4% € 327,000

AScX

CEO € 94,000 2.1% € 96,000 2.1% € 98,000

CFO € 35,000 28.6% € 45,000 31.1% € 59,000

OM € 32,000 -34.4% € 21,000 9.5% € 23,000


Target and Maximum LTI levelsThe graph below shows averages of target and maximum LTI opportunities expressed as a percentage of fixed salary. It also shows the ratio maximum versus target LTI opportunity. The target LTI opportunity was only included for companies that also reported a maximum LTI opportunity and vice versa. Target and maximum LTI opportunities are equal for CFO and OM positions at almost all companies and are therefore combined in the graph below.

The graph above shows that the ratio of maximum versus target LTI opportunity differs significantly per market group. This ratio is significantly higher for larger companies. This is a remarkable difference compared to the STI ratio, where no difference between market groups exists. The graph also shows that for the CEO position the target and maximum opportunity are sometimes higher than for the CFO and the OM positions.

250%

200%

150%

100%

50%

0%CEO CEOCEOCFO/OM CFO/OMCFO/OM

AEX

Ratio:1.90

Ratio:1.84

Ratio:1.64

Ratio:1.67

Ratio:1.34

Ratio:1.32

AScXAMX

Target LTI MAX LTI


4.4 Total Remuneration

Taking the fixed salary, the actual STI pay out and the LTI value at grant together we get the total remuneration as defined in this report. In this section we discuss each market group separately.

The graph above shows the median total remuneration levels for executives in the AEX. An interesting observation is that the total remuneration for the CFO position has increased to a level that is significantly higher than that of the OM’s. These levels have been more in line with each other in the past. CEO total remuneration increased even stronger and was in 2014 roughly twice as high as that of the OM and more than 1.5 times that of the CFO.

The graph above shows the median total remuneration levels for executives in the AMX. In contrast to the AEX findings, the total remuneration of the CFO was lower than that of the OM, mainly caused by a high median LTI value for OM in 2014. In line with the AEX the CEO total remuneration increased stronger than that of the CFO. In 2014, CEO total remuneration was 1.5 times that of the CFO and roughly in line with that of the OM in the AEX.

2012

2012

2012

2013

2013

2013

2014

2014

2014

CEO

AEX

AMX

CFO

OM

0 3.000.0002.500.0002.000.0001.500.0001.000.000500.000

Fixed STI LTI

2012

2012

2012

2013

2013

2013

2014

2014

2014

CEO

CFO

OM

0 1.500.0001.250.0001.000.000750.000500.000250.000

Fixed STI LTI


The graph above shows the median total remuneration levels for executives in the AScX. The pattern is quite similar to what we see in the AMX. When we look at the different components of the total remuneration, we see that in comparison to the bigger indices the LTI component is relatively small for executives in the AScX.

Analysis of total remuneration versus CEO level In the three tables below total remuneration for the different executives are shown as a percentage of total remuneration for the CEO. These tables are based on the same data as the graphs above.

The general observation is that CEO total remuneration increased stronger than that of the CFO and OM in all market groups. The main reason for this is that company performance has increased over the 3 years observed and as discussed earlier, CEO variable pay opportunities are higher than those of the CFO and the OM, both in absolute terms and in relative terms.

Position 2012 2013 2014

CEO 100% 100% 100%

CFO 67% 61% 63%

OM 57% 52% 48%

Position 2012 2013 2014

CEO 100% 100% 100%

CFO 73% 74% 67%

OM 78% 79% 79%

Position 2012 2013 2014

CEO 100% 100% 100%

CFO 69% 71% 68%

OM 83% 79% 68%

AMX

AScX

AScX

AEX

2012

2012

2012

2013

2013

2013

2014

2014

2014C

EOC

FOO

M

0 600.000 700.000500.000400.000300.000200.000100.000

Fixed STI LTI


Analysis of target total remunerationWhereas actual total remuneration can vary quite strongly from year to year, target total remuneration reflects the total remuneration policy of companies. Therefore it shows a more moderate increasing pattern.

The table below shows the target remuneration levels for the different types of executives in each market group for 2014.

Market Remuneration levels at target CEO CFO OM

AEX

Fixed ¤ 899,000 ¤ 611,000 ¤ 591,000

STI ¤ 774,000 ¤ 452,000 ¤ 437,000

LTI ¤ 1,100,000 ¤ 622,000 ¤ 602,000

Total ¤ 2,773,000 ¤ 1,685,000 ¤ 1,630,000

AMX

Fixed ¤ 600,000 ¤ 408,000 ¤ 473,000

STI ¤ 344,000 ¤ 211,000 ¤ 244,000

LTI ¤ 447,000 ¤ 280,000 ¤ 325,000

Total ¤ 1,391,000 ¤ 899,000 ¤ 1,042,000

AScX

Fixed ¤ 386,000 ¤ 287,000 ¤ 377,000

STI ¤ 150,000 ¤ 120,000 ¤ 158,000

LTI ¤ 154,000 ¤ 115,000 ¤ 151,000

Total ¤ 690,000 ¤ 522,000 ¤ 686,000

We see that target remuneration levels for CFO’s and OM’s in the AEX are quite similar. However, in both the AMX and AScX the target remuneration levels for OM’s are higher than the target levels for CFO’s.

Target total remuneration pay mixA total remuneration pay mix is determined on target remuneration or policy levels. As will be discussed in the next section of this report, getting the pay mix right is one of the most important aspects of optimizing executive remuneration.

The graph below shows the pay mix per market group and per executive position in 2014. The CFO and OM position have been combined as we have observed little to no difference in target variable remuneration for these positions.

The graph shows relatively small differences in pay mix between the CEO and the CFO/OM position within each market group. However, there are significant differences between market groups. Bigger companies place more emphasis on both short term and long term variable remuneration.

CFO/OM

CEO

CEO

CEO

AEX

AM

XA

ScX

0

Fixed STI LTI

CFO/OM

CFO/OM

10% 20% 30% 40% 50% 70%60% 90%80% 100%


4.5 Global Remuneration Trends and Regulatory Developments

United States • Remuneration quantum: Remuneration increases for (senior) executives

are anticipated to be generous compared to moderate increases (2% - 3%) for employees.

• Variable remuneration: Annual bonus pools are predicted to be static or diminishing for most banks. There is increasing pressure to improve the link between pay and performance. Moreover, hybrids of formulaic and discretionary measures are becoming more popular, allowing companies to manage costs better and enable recognition of both performance and positive behaviours.

• Regulatory: Relatively light regulation on remuneration related matters compared to other global jurisdictions. Legislators are still working through the implementation of the requirement for companies to disclose total CEO pay as a ratio to median employee total pay.

United Kingdom and Europe• Remuneration quantum: Salary increases in the larger economies between

2.5% and 4.5% on average with a significant percentage (25% - 35%) of companies not increasing salaries.

• Variable remuneration: Actual bonus pay outs over performance year 2014 are in general higher than over 2013 with significant increases in Germany (approximately 20%-25% increase).

• Regulatory: Extensive and prescriptive regulatory framework (e.g., bonus caps, claw back rules and maximum percentage of remuneration paid as cash). The EBA findings on role-based allowances states that these should be permanent, pre-determined in terms of conditions and amount and be non-discretionary, non-revocable and transparent to employees to be considered as fixed instead of variable remuneration. These guidelines will be adopted in the UK in 2016.

Asia Pacific • Remuneration quantum: Salary increases vary across the region and are

significant in some countries. Salary increases in India and Indonesia are anticipated to be approximately 10% and Vietnam is even forecasted to have 15% increases. The slowing Chinese economy is expected to lead to modest increases compared to previous year.

• Variable remuneration: Attractive guaranteed/sign-on/buyout bonuses are prevalent across the region as a strategy to attract global talent.

• Regulatory: Regulation and legislation of remuneration starting to evolve and become more prescriptive. Many countries are focusing on disclosure of either remuneration principles and/or actual remuneration levels. Hong Kong, Singapore and India having the strongest remuneration-related requirements within the region.


5. Remuneration Design

This section provides insight in the practices and developments with regard to the design of variable pay plans. The most relevant disclosed design features of variable pay plans are the type, number and weight of the performance measures. In this section we present the results of some detailed analyses into these features.

EY viewpoint: variable pay design and the quality of performance measures

A much debated topic regarding variable pay is the ratio between fixed and variable pay. And indeed it is very important to provide executives with an optimal pay mix which on the one hand provides sufficient incentives to improve (long term) business performance, and at the same time prevents excessive risk taking. However, an optimal pay mix can best be determined with having a clear understanding of what defines performance and how it can be measured. It is widely accepted that the quality of performance measures is determined by the level of control the executive has over it and the level of alignment of the performance measure with the interests of the company owners. It follows that when the quality of available performance measures is low, optimally the emphasis on variable remuneration should also be low and vice versa. Therefore, the pay mix which is optimal for an executive of a specific company cannot be determined by benchmarking alone. By taking the quality of available performance measures into account, remuneration committees can optimize a pay mix based on a benchmarked starting point. Finally, behavioral aspects are also important, which shows the challenge remuneration committees face.


5.1 STI design

Short term performance is typically measured by the level of profit a company generates in a year. However, focusing on maximizing annual profit can be very harmful for sustainable profitability. For instance, executives who are solely incentivized to maximize the annual profit might reject sound investments or cut R&D costs to increase the bottom line and thereby potentially harming long run business performance.

Most companies have tried to mitigate this risk by providing executives with long term incentives as well. In addition, in the absence of one perfect short term performance measure, companies have chosen to combine different short term performance measures to mitigate this risk. Finally, a trend that can be observed over a longer period is that companies have been placing more emphasis on non-financial measures as well.

Over the period 2012 – 2014 we have not observed significant changes with regard to the type and weight of performance measures used in STI plans. Profit measures such as EBITA, NOPAT, net profit and EPS are not only the most frequently used measures in STI plans, but also the highest weighted ones. On average approximately 40% of STI pay out depends on these profit measures.

Type and weight of performance measuresThe graph below shows the percentage of companies that use a performance measure in their STI plan. The data represent the STI plans of AEX, AMX and AScX companies, because the results are similar for each of these market groups.

Sustainability

Cashflow

Efficiency

Revenu

Other

ROI/ROE/ROIC

Profit/EPS

0%

% using Perfomance Measure

60%50%40%30%20%10%


Year AEX AMX AScX

Measures % financial Measures % financial Measures % financial

2012 3.6 70% 3.1 69% 2.5 65%

2013 3.6 68% 3.3 69% 2.5 65%

2014 3.7 67% 3.4 69% 2.5 65%

Market Companiesoffering

Compulsoryparticipation

Min % of STIto be invested

Max % of STIto be invested

Averege matching ratio

AEX 7 5 21% 57% 93%

AMX 1 1 10% 50% 100%

AScX 1 1 67% 67% 50%

Number of performance measuresThe table below shows the average number of performance measures used in STI plans and the average percentage of STI pay out which depends on financial measures.

STI plans with share matching schemesBesides type, weight and number of performance measures, we also analysed the share matching schemes offered to executives at AEX, AMX and AScX companies. Share matching schemes provide executives the possibility to invest a part of their annual STI pay out in company shares, which are matched in a certain ratio by the company after a specified time, thereby giving part of STI a more long term character. The matched shares can be regarded as an additional payment to the executive.

The table above shows that larger companies use more STI performance measures than smaller companies. It also shows that the number of performance measures is (still) increasing among AEX and AMX companies. The pay out of the STI which is based on financial measures is on average between 65% and 70% with a slight downward tendency. We need to point out that the AScX numbers are less solid than the AEX and AMX numbers because in quite some cases performance measures and weights were not disclosed resulting in a smaller data sample.

The table above shows that the use of share matching schemes is not very wide spread and offered most often by AEX companies. It also shows that participation by the executive is compulsory in most of the share matching schemes. Furthermore, most schemes offer executives the possibility to invest more than the compulsory minimum percentage. The table above shows the average of minimum and maximum percentages of STI which can be invested by the executive. Finally the table shows the average ratio in which the invested shares are matched by the company after 3 or 5 years. Two of the nine share matching schemes use a matching ratio of 2:1, which means that one free share is given for every two shares bought by the executive. The other schemes all use a 1:1 matching ratio.


The graph above shows that the percentage of share based and cash based LTI plans have increased from 2012 to 2014, while the percentage of option based LTI plans has decreased. The category cash / other represents long term cash plans, phantom share plans and Stock Appreciation Rights.

5.2 LTI design

Long term incentives are offered to executives to increase focus on the longer term and thereby align the interest of executives with those of the companies’ (long term) shareholders. It is common practice that long term incentives are granted conditionally and become unconditional after 3 years based on the performance over these 3 years. In most cases an additional lock-up or holding period of 2 year applies before executives can actually sell or cash their LTI rights. This means that the most common cycle for LTI plans from grant to cash is 5 years. This is in accordance with the Dutch Corporate Governance Code. Most companies offer LTI grants every year in order to continuously provide long term incentives. This prevents that focus on the longer term is reduced if performance targets of previous grants might have become or might seem unattainable.

An alternative to strengthen the executives’ focus on the longer term is the use of shareholding requirements. Executives are then required to hold at least a certain amount of shares, often expressed in value as a percentage of fixed salary, in the company. Although this is sound practice, we have seen that only a limited number of companies (mostly AEX companies) reports that a shareholding requirement is in place.

LTI plan typesThe graph below shows the percentages of LTI plans that are granted in shares, options and cash / other. The graph shows the combined data on LTI plans of AEX, AMX and AScX companies, since the graphs are similar for each of these market groups.

201420132012

0 10% 20% 30% 40% 50% 70%60% 90%80% 100%

Shares Options Cash/other


Type and weight of performance measuresThe graph below shows the percentage of companies that use a performance measure in their LTI plan. The data represent the STI plans of AEX, AMX and AScX companies, because the results are similar for each of these market groups.

Efficiency

ROI/ROE/ROIC

Sustainability

Revenu

Other

Cashflow

Profit/EPS

Relative TSR

0%

% using Perfomance Measure

80%70%60%50%40%30%20%10%

Year AEX AMX AScX

Measures % financial Measures % financial Measures % financial

2012 2.4 53% 1.7 49% 1.4 76%

2013 2.6 48% 1.7 49% 1.4 76%

2014 2.7 46% 1.8 49% 1.4 76%

Number of performance measuresAnother important difference between LTI plans and STI plans is the use of relative performance measures. In STI plans financial performance is in general measured in absolute terms, while in LTI plans performance is often measured relative to other companies. The table below shows the average number of performance measures used in LTI plans and the average percentage of the LTI pay-out which depends on relative performance measures.

The table above shows that – in line with STI plan findings - larger companies use more performance measures than smaller companies. In addition, at AEX companies the average number of LTI performance measures has increased from 2012 to 2014. The table also shows that the average percentage of LTI pay out which depends on relative performance measures has decreased at AEX companies from 2012 to 2014. The weight of relative performance measures is higher at AScX companies because relative TSR is frequently used, but less often combined with other performance measures compared to larger companies. Besides relative TSR examples of other relative LTI performance measures used are relative Return on Average Invested Capital and relative sales growth.

Over the period 2012 – 2014 there has been limited change in the type of performance measures used. Relative TSR is by far the most predominant performance measure. Whereas in STI plans a significant part (30%-35%) of the pay-out depends on non-financial targets, this is (still) much less the case in LTI plans with approximately 8%.


Year AEX AMX AScX

Companies Weight Companies Weight Companies Weight

2012 70% 62% 56% 74% 89% 85%

2013 70% 56% 56% 74% 89% 85%

2014 75% 53% 61% 70% 89% 85%

5.2.1 Relative TSR

Since relative TSR is the most frequently used LTI performance measure, we have analysed the development of the usage of this performance measure. The table below shows per year and per market group the % of companies using relative TSR and the average percentage (weight) of the LTI pay out that depends on relative TSR at those companies.

The table above shows that some AEX and AMX companies adopted relative TSR as an LTI performance measure in 2014. At the same time the table shows that the average weight of the relative TSR measure decreased at AEX and AMX companies. This is in line with a trend that started almost a decade ago.

Usage of thresholdsMost companies using relative TSR use a threshold performance level below which no LTI will vest based on relative TSR. The average threshold across the AEX, AMX and AScX companies that use relative TSR is the 44th percentile ranking (44% has lower TSR performance). At this ranking on average 42% of the target grant vests.

Using a threshold performance level for relative TSR below which no LTI is paid out is in line with leading practice not to pay for poor performance.


5.2.2 Quality of the relative TSR measure

In theory, the quality of the relative TSR performance measure is high. It has strong alignment with long term shareholder interests and executives should have a high level of control over relative TSR. In practice however, some issues with relative TSR reduce the level of control the executive has over relative TSR.

Performance measurement periodOne of the issues with relative TSR is that at the end of the three year performance period the ranking of a company in a peer group is very sensitive to the date at which the performance measurement starts. Starting the performance period even only one day sooner or later significantly increases the chance of ending up with higher or lower ranking within the peer group. The most common approach to reduce this effect is to use a 3-month average share price and the beginning and at the end of the performance period. These averages are often referred to as footprints. Of the 34 companies that use relative TSR across the AEX, AMX and AScX only 9 companies report that they use some sort of footprint approach. Although we think that in fact more companies have adopted this approach, we would have expected companies to be transparent about practices that enforce pay for performance.

Comparability of peer group companiesMost companies using relative TSR compare share price performance against a selected group of comparable companies (peer group) based on size and type of business. In a limited number of cases companies report that the geographical presence is also taken into account. However, companies that are really comparable in terms of size, business portfolio and geographical presence are hard to find. Therefore, in practice also less comparable companies are included in peer groups. This means that share prices of peer group companies do not respond equally to external influences. As a result, not all companies have the same chance of ending at the top of the ranking in an increasing market and vice versa.

Company responses The reduced level of control that the executive has over relative TSR has led a number of companies to reduce the importance of the relative TSR measure. Some companies have stopped using relative TSR while others have added other performance measures and thereby reduced the weight of relative TSR. We have also seen examples of companies who have added an absolute TSR requirement to the relative TSR measure. This was mostly done to prevent high LTI pay outs, when absolute share price decreases.

EY viewpoint: relative TSR

We feel that the observed company responses to the issues with relative TSR have only partially solved the issues. We believe that when there are insufficient, highly comparable peer group companies, relative TSR should not be used as a performance measure. In case the quality of the peer group is relatively high, it might still be wise to investigate and implement additional performance measures and conditions in order to create a more balanced and complete measurement of long term performance.


6. Tax Perspective


Based on the statistics of the CBS the Dutch economy is growing in the first and second quarter of 2015. Based on the same statistics we can see that the Dutch economy is almost on the same level as in 2007. This is only eight years ago but we have been confronted with significant changes in different areas.

Remuneration tax developmentsWhen we analyse the changes in the field of (executive) remuneration from a Dutch tax perspective as of 2007 we have also seen some significant changes. For example:

• In 2009 the rules regarding excessive remuneration were introduced. This includes the complex lucrative interest legislation, which could be applicable for management participations and also for specific equity based (executive) long term incentives. In addition, the rules regarding excessive remuneration contain specific rules for redundancy arrangements or packages payments.

►• In 2013 and 2014 the Dutch employers have been confronted with the crisis levy tax for high salaries paid in 2012 and 2013. This additional tax levy of 16% on income above € 150,000 is still criticized. Currently there are several ongoing court cases in which the retro-active application of this levy is argued.

• As of 2015 all employers need to apply the work-related cost scheme. This work-related cost scheme is in fact a fringe benefit tax and changed the rules regarding exempted costs/tax free payments significantly. This is currently leading to several discussions due to un-clarity and uncertainty which income elements can be regarded as work related cost, e.g. bonus payments, LTI income, costs for directors’ liability insurance etc. As of 2015 all employers are liable to a flat tax rate of 80% if the total value of certain employee benefits and personnel related business costs exceed the statutory threshold of 1.2% of the total taxable wages for all employees in a calendar year.

Deferral of taxationAlthough we have seen significant changes in the Dutch tax legislation the basic tax principles remain the same. Everybody will eventually pay tax on his/her remuneration. However, people try to reduce the tax liability or to defer tax payment to a moment the tax liability might be lower. The possibilities to defer tax payment have become more and more difficult in the Netherlands. Pension is the best example of a generally accepted vehicle to defer taxation. However, as of 2015 it is no longer possible to build up pension entitlements on income above € 100,000 in the Netherlands. Any additional entitlements are taxable and consequently since 2015 we have the so-called net pension/annuity arrangements in the Netherlands. In addition, we have also seen cancellations of Dutch tax facilities which made tax deferral possible in the past:

• the abolition of the so-called “levensloop” regulation in 2013;

• the abolition of the “stamrecht” exemption for redundancy payments as of 2014.


Long term incentivesA good, and most likely the only, way to reduce and/or to defer taxation are long term incentives. If structured properly it is easily possible to defer the taxation to the moment of vesting with Restricted Stock Units (RSUs) or to the moment of exercise with the use of stock options. Besides the possibility to defer the taxation, a stronger emphasis on long term incentives could also have a positive effect on firm performance as our research as described in chapter 6 has indicated.

However, when we only look at long term incentives from a tax perspective it might be better to pay employment tax as soon as possible. Especially, when it is expected that the share price will increase in the future. In case you pay tax at the moment of grant of the LTI award, for example with Restricted Shares (RS), the increase in value of the shares after grant is not taxable against progressive tax rates up to 52%. However, the net value of the RS will be taxable with (significantly lower) box 3 tax. In addition, in case of a sale restriction/lock-up period, the taxable value of the shares could also be reduced. Currently, the Dutch tax authorities approve a discount of 18.5% for a sale restriction of 5 years if certain conditions are met.

However, the payment of tax at grant also has disadvantages. It could lead to cash flow difficulties. In addition, there will always be the risk of the decrease of the market value of the shares. Therefore, this might not be the optimal LTI award for all executives.

Looking at the developments of the LTI awards in the Netherlands we can see that options become less and less favourable, only 19% of LTI’s are granted in options in 2014. From a global share plan survey in 2001 we learned that this was 79% in continental Europe for senior employees and even 100% in North America. When we look at our global share plan survey of 2014 we see that the Restricted Unit Plans are the most popular executive LTI plan with 60% versus 33% for Restricted Stock plans.

Example

Market value of the RS at grant: 100Sale restriction of 5 years: 18.5% discountTaxable value: 81.5Tax liability based on a 52% tax rate 42Value of the share after 5 years: 250Net income: 218

In case RSUs instead of RS were granted, the tax liability at vesting is 130 and the net income 120. This means an effective tax rate on the RS of 17% (excluding Box 3 tax) versus 52% on the RSUs.


Appendices


Appendix 1: Dutch Financial Sector Regulatory Developments

IntroductionIn August 2014 and February 2015 legislation entered into force in the Netherlands, resulting in further going restrictions on remuneration of executives in Dutch financial enterprises, including restrictions on the maximum percentage of variable remuneration, minimum requirements on the deferral period and minimum requirements on the equity component of variable remuneration. These requirements need to be taken into account when designing incentive plans for Dutch financial enterprises, both listed and non-listed.

These requirements are partially based on European legislation. Therefore, more or less identical requirements should apply in other EU Member States than the Netherlands. A substantial part of these rules, however, is purely of Dutch origin and materially deviates from European standards. As a consequence the requirements applicable in the Netherlands are complex and difficult to navigate. Financial enterprises will need to determine the applicable rules on a case by case basis and apply these taking into account the characteristics of their specific organisation, such as the size and structure of the organisation, nature, scope and complexity of its activities.

Dutch requirementsSimilar to EU legislation these Dutch rules require a written remuneration policy and contain provisions on governance and procedures, severance payments, pension contributions, transparency, and adjustment of variable remuneration, including claw backs.

In addition to the European requirements, chapter 1.7 of the Dutch Act on Financial Supervision contains several additional remuneration requirements applicable to Dutch financial enterprises. While the EU remuneration requirements are limited to Identified Staff, these Dutch requirements apply to all employees and management of Dutch financial institutions, as well as employees and management of their Dutch and non-Dutch subsidiaries or branch offices. Under circumstances these requirements may also be applicable to parent companies and to other group companies of Dutch financial enterprises if the main activities of the group consist of providing financial services.

Dutch financial enterprises must safeguard that the Dutch remuneration requirements will not be circumvented by the company or individuals in the company. Key elements of the Dutch remuneration requirements are the following. The criteria for awarding variable remuneration must consist for at least 50 percent of non-financial criteria. Variable remuneration is in principle capped at 20 % of fixed remuneration. This cap applies to all employees and officers and is not limited to Identified Staff.

In individual cases deviation is possible from this percentage, provided that the remuneration of these individuals is not exclusively governed by collective labour agreement. Even in case of such deviation a variable remuneration of 100 percent or more of fixed remuneration is not possible with respect to individuals primarily fulfilling their function in the Netherlands. With respect to individuals primarily fulfilling their function outside the Netherlands under circumstances a cap of 200 percent applies. When using this exemption, the main rule is that on average variable remuneration in the financial enterprise may be no more than 20% of the fixed remuneration.

In addition, a higher variable remuneration may be awarded in individual cases with prior written approval from the competent regulatory authority for such deviation. The competent authority will only grant such approval if, the variable remuneration is necessary in relation to an organisational change, is aimed at retention of the relevant person and does not exceed 100% of fixed remuneration.

The Dutch remuneration rules also prohibit guaranteed variable remuneration other than guaranteed variable remuneration for new employees awarded in the first year of employment. In addition to the EU remuneration rules, guaranteed variable remuneration may only be awarded if the financial enterprise is financially sound (i.e. adequate solvency or adequate own capital). Furthermore, the Dutch requirements on guaranteed variable remuneration apply to all employees and officers and are not limited to Identified Staff.


Appendix 2: Companies Analysed

The analyses presented in this report includes remuneration data for AEX, AMX and AScX companies excluding trusts, funds and companies that had not been listed for a full financial year, or whose disclosure was insufficient.

The total sample consisted of 70 companies, but not all companies had all three different types of executives (CEO, CFO & OM). Therefore the number of observations for each executive might deviate from this number.

AALBERTS INDUSTRIES EXACT HoLDING NUTRECo

ACCELL GRoUp FUGRo oRDINA

AEGoN GEMALTo pHARMING GRoUp

AkzoNoBEL GRoNTMIJ poSTNL

AMG HEIJMANS RANDSTAD HoLDING

AMSTERDAM CoMMoDITIES HEINEkEN REED ELSEVIER

AND INTERNATIoNAL pUBLISHERS HoLLAND CoLoURS RoyAL DUTCH SHELL

ARCADIS ICT AUToMATISERING RoyAL IMTECH

ARSEUS ING GRoEp SBM oFFSHoRE

ASM INTERNATIoNAL kARDAN SLIGRo FooD GRoUp

ASML HoLDING kAS BANk TkH GRoUp

BALLAST NEDAM kENDRIoN TNT EXpRESS

BATENBURG TECHNIEk koNINkLIJkE AHoLD ToMToM

BE SEMICoNDUCToR INDUSTRIES koNINkLIJkE BAM GRoEp UNIBAIL-RoDAMCo

BETER BED HoLDING koNINkLIJkE BoSkALIS WESTMINSTER UNILEVER

BINCkBANk koNINkLIJkE BRILL UNIT4

BRUNEL INTERNATIoNAL koNINkLIJkE DSM USG pEopLE

CoRBIoN koNINkLIJkE kpN VALUE8

CoRIo koNINkLIJkE pHILIpS VASTNED RETAIL

CRoWN VAN GELDER koNINkLIJkE TEN CATE WERELDHAVE

CRyo-SAVE GRoUp koNINkLIJkE VopAk WoLTERS kLUWER

DELTA LLoyD koNINkLIJkE WESSANEN zIGGo

DoCDATA NEDAp

EURoCoMMERCIAL pRopERTIES NIEUWE STEEN INVESTMENTS


DataThe data used in the analysis are collected from annual reports or audited full financial statements for the three financial years ending between 1 January 2012 and 31 December 2014. All information was obtained from annual reports or remuneration reports publicly disclosed by the companies.

Companies per market groupThe companies included in the AEX, AMX and AScX are based on the listing in 2014 by Euronext. Important to note is that the number of companies included in an index does not equal the number of the different executives in that index. Most common is the case where a company has a CEO and a CFO, but no other board members. This occurs most often in the AScX.

Currency ApproachRemuneration data for some executives disclosed in annual reports are reported in a foreign currency. To control for foreign exchange rate movements and allow for consistent analysis, all remuneration was converted to euro’s using constant exchange rates in each of the three years analysed.

Market group

Constituents of group Number of companies after exclusions

AEXAEX index companies as indexed in 2014

23

AMXAMX index companies as indexed in 2014

23

AScXAScX index companies as indexed in 2014

24


Appendix 3: positions reported

Positions reportedThe executive positions for which remuneration is reported are as follows:• CEO: An organisation’s most senior executive.• CFO: The most senior finance executive reporting to the CEO.• OM: Other senior executives appointed to the board.

Analysed elementsThe following executive remuneration elements have been analysed using reported remuneration data for each position.

Excluded from the analysis of STI, LTI and total remuneration are executives for whom there was insufficient data disclosed to value that element. The remuneration tables in this report present independent analyses of each remuneration element. As such, it is unlikely the individual at median total cash is the same individual at median long-term incentive. Consequently, it should not be expected that the sum of the median for each remuneration element will equal median total remuneration.

Remuneration mix quantumThe remuneration mix analysis is based on target compensation levels. In conducting the remuneration mix analysis, median values have been used for fixed remuneration while average values have been used for STI and LTI target levels as these are policy levels which can differ significantly around the median value.

Remuneration practices and policies analysedAnalyses of executive remuneration practices and policies of companies included consideration of:

• STI practices.• LTI practices.

STI and LTI practices have been analysed for prevalence by company as well as by plan.

A plan has been defined as follows:• An STI plan is any program based on the attainment of short-term

performance objectives, with at least some portion of the payment paid immediately on achievement of those objectives. Where a company’s STI performance measures include key performance indicators (KPIs) that vary for each participant, the STI program has been included as a single plan, irrespective of whether specific KPIs have been disclosed for some participants.

• An LTI plan is any equity or cash based program with a vesting period of more than one year and which is not connected with an STI plan. Where a plan uses multiple vehicles to make grants, for example share options and performance rights, each vehicle was included as a separate plan.

See Appendix 5 for definitions of terms applying to the analysis of remuneration practices and policies.

Remuneration element

Nature of data Description

Fixed Remuneration

As reported in annual report

The sum of guaranteed annual payments including base salary and vacation pay and excluding superannuation, benefits and other allowances.

Actual STI including deferral

STI paid in cash or shares as reported in the annual report, plus the value of any deferred portion

Remuneration reported in the financial year based on the attainment of short-term performance objectives, including any deferred component. See appendix 4 for a summary of the valuation methodo-logy used for the deferred component.

LTI Grant Valuation based on grant details reported in annual report

Value at grant of equity or cash-based awards granted during the financial year with a vesting period of more than one year and not connected with STI. The valuation assumes performance conditions are met in full. See appendix 4 for a summary of the valuation methodology used. We note that our methodology results in values different from the amortized amounts disclosed in annual reports.

Total Remuneration

Aggregate of above data.

Fixed remuneration + STI + LTI grant


Appendix 4: Valuation methodologies

STI valuation methodologyISTI’s paid in cash do not require valuation and are disclosed in the annual report.

STI deferral disclosures vary greatly between companies. Thus, the value of the deferred portion is not always easily identifiable within annual reports. To ensure consistency, we define the STI earned as the sum of the cash amount, as reported in the annual report, and the calculated cash value of the deferred amount. As such, the STI amount (as shown in this report) is equivalent to the amount which would have been received if the STI award were paid immediately in cash.

Where the deferred amount was not disclosed, the amount was estimated with reference to the cash portion and deferral policy; for example, if the mandatory deferral was 50% of the total STI, the STI deferred amount was estimated to be equivalent to the cash amount. Otherwise, where the deferred component was structured as an equity award, the amount was estimated by the face value at grant ofthe equity awards granted. In the event that disclosures were not sufficient to estimate the deferred amount, the individual was excluded from the STI, total remuneration and remuneration mix analyses.

LTI valuation methodologyTo ensure the comparability of remuneration quanta for LTI grants, a valuation was undertaken of each individual’s awards made during the financial year as at the date of grant, rather than using an accounting value representing the annual, amortized benefit to the participant. Our approach differs from the multi-year amortized accounting values disclosed in annual reports. The valuation approaches applied for each type of award are as follows:

• The Black&Scholes formula was used to calculate the value of share options. Most companies report this value, and some companies only report the required input. If only the required input is reported, the Black&Scholes formula was used to calculate the value.

• Performance shares and deferred shares were valued at face value of the grant.

• Phantom plans were valued in the same way as the underlying award type; for example, a phantom award that mimics a performance right was valued as a performance right.

• Plans which generate a potential cash payment and are not linked to share price were valued as the maximum cash value that can be earned. Where an LTI award was granted to an executive but insufficient information was disclosed to undertake a valuation, the individual was excluded analysis.

Treatment of performance hurdles LTI awards are commonly subject to performance hurdles which must be satisfied in order for the awards to vest. These hurdles may be related to measures such as TSR or EPS. For this report, we have ignored the impact of all such hurdles and any re-testing provision. The awards were valued as if all hurdles will be met at the first possible date, irrespective of the style of performance hurdle. Consequently, our valuations can be expected to differ from figures published in remuneration reports where some (though not all) performance hurdles are taken into account.

Valuation assumptionsWe used the following assumptions (as required depending on award vehicle and methodology, as set out above):

• The share price for the underlying shares of each company was based on the closing share price on each grant date.

• The exercise price was set by the company when the awards were granted.

• The expected life of an LTI award issued under a share option plan has been assumed to be the expiry date. We assumed that an LTI award issued under a performance rights plan is exercised immediately on the vesting date.

• Expected volatility over the life of an LTI award has been estimated by considering:

• The underlying share’s historical volatility (based on past share price movements).

• The tendency of volatility to revert to its long-term average level.

• Note: volatility and historical share price data have been sourced from the annual reports.

• Expected risk-free rate: For the purpose of the valuation, the appropriate risk-free interest rate was taken as expected by the company. Companies disclose the expected risk free interest in their annual reports and base this expectation on the implied zero coupon yields from Dutch government bonds.

• Dividend yield: The expected dividend was expressed as the annualized percentage yield expected to be distributed by the company over the life of the LTI award. We used the dividend as stated in the annual report.


Appendix 5: Glossary

Term Definition

Absolute performance measure Where performance is measured against an absolute target; for example, share price must reach EUR 5.00 or increase by 10% per annum.

Cash-based LTI plan Where participants receive a cash payment at the end of a multi-year vesting period. The value delivered is not linked to company share price or other notional investment in the company (see phantom plans).

Chief executive officer (CEO) An organisation’s most senior executive, including Managing Directors.

Chief financial officer (CFO) The most senior finance executive reporting to the CEO.

Earnings per share (EPS) Net profit after tax divided by the weighted average number of ordinary shares on issue.

Fixed remuneration The sum of guaranteed annual payments (including base salary, superannua-tion, benefits, other fixed pay and guaranteed allowances, as well as fringe benefits taxes) not contingent on individual, group or company performance.

Long-term incentive (LTI) plan Equity- or cash-based program, with a - typically performance related - vesting period of more than one year. We note that with LTI-plans, either grant or vesting can be determined by e.g. performance or service related conditions. See Appendix 4 for an outline of the LTI valuation methodology for the purposes of quantum analysis.

Market capitalisation A company’s share price multiplied by the total number of shares on issue. This includes any shares not freely traded.

Median The value of the observation below which 50% of all observations fall.

Other Board Member (OM) The most senior executive of each business unit or functional discipline present in the executive board, not being CEO or CFO.

Performance period (Performance) re-testing Period of time over which the performance condition of an award is tested. At least some portion of an LTI award does not lapse if the performance hurdle is not met over an initial performance period. Instead, the period is extended and performance measured again (retested) to determine whether vesting can occur at a later date. The performance period may be extended or “rolled” forward.

Performance rights LTI plan that grants rights at the beginning of a performance period to acquire shares (typically at nil cost) at the end of the performance period. Degree of vesting is typically based on the extent to which specific performance conditions have been satisfied.A performance right is effectively a share option with an exercise price of zero.

Performance share plan LTI plan that conditionally grants shares the participant holds from the date of grant, but cannot sell until specific performance conditions have been satisfied (‘vesting’). Degree of vesting is typically based on the extent to which specific performance conditions have been satisfied. The participant typically pays nothing for the shares and is generally entitled to dividends during the performance period.


Term Definition

Phantom plan LTI plan where participants receive a cash payment at the end of a vesting period that is dependent on the value of a notional investment in the company. Awards typically mimic equity vehicles; for example, options or rights. These plans differ from cash-based LTI plans (see above).

Relative performance measure Performance is measured against a comparator group or index; for example, where TSR performance of a company must exceed the median TSR of companies within the companies.

Restricted share plan LTI plan where participants are awarded shares for nil cost at the date of grant. Typically, no vesting conditions apply to the shares other than time.

Return measures Performance measures which include measures such as return on capital employed (ROCE) and return on equity (ROE).

Share option plan LTI plan that grants rights to acquire shares at a specified price (typically equivalent to market value of the shares at the date of grant) at the end a specified period of time. Share options are often granted subject to specified performance conditions that determine the extent to which the options can be exercised.

Share matching plan Plan that grants the participant (rights to) shares at the beginning of a performance period (typically at nil cost) at the end of the performance period, by multiplying an amount of shares the participant already purchased (‘purchased shares’). Typically these purchased shares are (mandatorily) acquired with a received STI, but they can also be acquired with private funds. The participant typically pays nothing for the matching shares. Often used as a vehicle to encourage the management to acquire shares in the company.

Short-term incentive (STI) plan An STI plan is any program based on the attainment of short-term performance objectives, within a one-year timeframe. At least some portion of the payment must be paid immediately or soon after achievement of those objectives.

STI deferral Deferral involves withholding payment of some or the entire STI award for a specified period of time. See Appendix 4 for an outline of the valuation methodology used to value STI deferred awards for the purposes of quantum analysis.

Total remuneration Fixed remuneration, plus actual STI paid and the cash value of any deferred portion, plus the value of LTI grants in the financial year.

Total shareholder return (TSR) The total return of a share to an investor (capital gain plus capital returns reinvested).

Vesting period Period between grant of an incentive award subject to conditions and the point at which all time and performance conditions are satisfied.


Notes


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