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Friday, 20 June 2014

ABN Amro and Rabobank react to the strict new bonus cap in The Netherlands… by increasing the fixed salary of their senior management. Obviously, a new leg in the bonus discussions has begun.

It has been about six years, since the credit crisis officially took off in The Netherlands. During that time period, there have been numerous discussions about the (structural) problems and the future of the banking industry in The Netherlands.

One of the most controversial topics for such discussions, has been the remuneration of bank executives and employees. And to be more precisely: the bonuses and other variable remunerations that bank executives and high profile bank employees received during the last decade. In various cases, the variable reward for bank employees far exceeded the fixed remuneration.

There is little doubt that – in a considerable number of cases – these large variable remunerations have triggered excesses, which strongly damaged the banking industry in the end. This was the inevitable consequence of the increasing focus on short term goals and growing moral hazard within the banks. 

Executives, who wanted to please the shareholders with quick wins and improved performance ratios, set targets that eventually proved to be counterproductive. These targets spurred their senior management and high level employees to achieve the wrong goals, in order to earn their bonuses, while forgetting the true raison d’etre for their profession.  All this put the financial health of their bank in jeopardy in the years before the crisis.

So there was definitely a problem at the banks, with respect to the remuneration, that had to be solved. 

The technocratic (and perhaps most successful) approach to solve these remuneration problems would have been, when an authorative commission consisting of ‘unsuspicious’ bankers, lawyers, economic scientists and independent insiders in the matter, would have thoroughly investigated the matter, under the leadership of a matured politician with sufficient public and political support.

Such a commission:
  • could have looked substantively and with a certain detachment at the advantages and drawbacks of the current kinds of renumeration within the banking industry;
  • could have developed an improved, mixed system of partly fixed and partly variable remuneration, that would do justice to the weight of the function and the desire to reward excellent employees, but would not bear the moral hazard risks of the old system of bonuses and other variable rewards;
  • could have deployed this new rewarding system among the whole Dutch banking industry and upon the Dutch branches of foreign banks;

And of course it would be even better – but also a whole lot harder, due to the reluctancy of especially the London City to comply with any attempts to restrain banker’s payments – when a new system of remuneration would have been deployed AND endorsed within the whole European Union.

Unfortunately, this did not happen.

On 16 April 2013, the European Parliament did aprove of the CRD 4 regulation, which imposed a bonus cap on remuneration for banks and credit institutions of maximum 100% of the fixed reward. 

Although this bonus cap was acceptable for the majority of the EU countries, the British government saw this CRD4 directive as a danger for the competitiveness of the London City as a global financial hub. For this reason, the British government lodged a legal challenge with the European Court of Justice in September 2013.

Then again, for The Netherlands, embodied by its gung ho Finance Minister and chairman of the Euro group, Jeroen Dijsselbloem, this 100% bonus cap from the European Capital Regulation Directive 4 did not go far enough at all.

To the contrary: many political and public discussions in The Netherlands about the bankers’ bonuses were saturated with anger, envy and resentment about 'those bankers who brought the whole Dutch banking industry to the edge of the abyss – from where it had to be rescued by the Dutch taxpayers – while never offering a real apology for their errors and general behaviour after the event’.

This was not only the opinion of Jan Modaal (Dutch Joe Sixpack), but it was also widely heard in the political bodies in The Netherlands. 

Dutch Finance Minister Jeroen Dijsselbloem, for instance, is convinced that employees in the banking industry (all employees as a matter of fact) are overpaid at the moment, in comparison with people working in other industries. He wants to make an end to this situation.

This is the reason that Dijsselbloem is going to deploy legislation concerning variable remuneration, which puts a cap on bonuses and variable rewards of maximally 20% of the fixed reward. With this new legislation in place, the Dutch laws with respect to bankers' remuneration will be among the most rigorous in the European Union. 

Of course, this new legislation will bring an awkward situation for the large Dutch banks, as the large bonuses and high variable remuneration for their senior managers and high profile bank employees have grown into a privilege, that will be hard to abolish. Especially, as in various cases this variable remuneration has become a nearly permanent status.

That is the reason that banks, like ABN Amro and Rabobank, decided to raise the fixed salary of their senior managers and high profile bankers, in order to mitigate the loss of the variable parts of their remuneration, as a consequence of the 20% bonus cap.

Yesterday, a new discussion about bonuses and variable rewards in the Dutch banking industry took off. 

The Dutch financial newspaper Het Financieel Dagblad came with a news message that the senior management of ABN Amro would receive a 20% raise on their fixed salary. Here are the pertinent snips:

ABN Amro increased the fixed salary of approximately hundred managers, directly below the Board of Directors, with 20%. This measure should compensate these managers for the bonus cap that Finance Minister Jeroen Dijsselbloem wants to impose on the banking industry.

According to CEO Gerrit Zalm of ABN Amro, this measure is in compliance with the new legislation. He argues that the salary raise, which has been deployed in the beginning of 2014, is necessary for the stateowned bank to keep its talents. ‘You have to reward competitively; otherwise you will weaken the foundation of the bank. It is inevitable’.

ABN Amro already deployed this cap on the variable remuneration to 20% from a maximum of 100%, for the management layers below the board of directors. At the same time, this group received a raise on their fixed salary of 20%. The board of directors of the bank did not get a variable reward in the first place, so they will not receive this compensation at all.

In a reaction, Rabobank stated that it compensated its executive staff – consisting of 240 bankers – as well, in exchange for totally abolishing the variable remuneration. However, the bank does not want to disclose with how much the fixed salaries have been raised, although – according to a spokesman – the increase is not in the same range as that of ABN Amro.

ING stated that it did not apply a generic compensation for their executive staff. ‘There has not been an increase by a single percentage’, according to a spokesman. ‘In some cases the fixed reward has been increased. However, the rule of thumb was that the total remuneration had to drop’.

At ABN Amro, CEO Gerrit Zalm wants to further deploy this compensation, to prevent his employees from being taken over by other banks. ‘For people the total compensation counts and not the size of the variable component’.

Finance Minister Dijsselbloem responded to this message, through his spokesman:

The remuneration policy for the senior management is the responsibility of the Board of Directors of ABN Amro. The discussion about the bonus cap and the fixed remuneration will undoubtedly be dealt with during the negotations upon the remunerations bill, which has been sent to the Second Chamber last week.

After this news appeared in the press, the fixed salary increase at ABN Amro was the talk of the town in The Netherlands: politicians, media representatives and pundits were outbidding each other in condemnation and ‘public disgust’ about these measures by the banks. Measures, which showed ‘once again their poor understanding for the feelings that the average Dutchman in the street had about banks and bankers’.

The ABN Amro, noticing the mounting public anger about this measure, came quickly with a press release in order to do some damage control:

On January 1 of 2014, ABN Amro has strongly reduced the income of the management group – the management layer directly below the Board of Directors.

The retrenchment consists of a reduction of the maximum variable reward to 20% of the fixed income, from 100%. 

In order to partly compensate this maximum 80% reduction, the management group received a raise of its fixed salary by 20%. In spite of this increase, the nominal loss of salary is between 5% and 10% on average. 

With this measure, ABN Amro is running ahead with respect to the new regulation.

Instead of extinguishing the ‘smouldering forest fire’, formed by the bonus discussions in The Netherlands, ABN Amro put it actually further ablaze with this press release. 

People responded: “Now you can see that these bonuses and variable payments were in reality almost a fixed source of income for these senior managers, instead of a incidental reward for excellent work” (see second red and bold text).

Some media pundits argued: “Why do labour unions hear during collective labour agreement negotiations, that a 3% wage increase for general personnel and facilitary service people is beyond discussion, while these senior managers at the ABN Amro banks receive a 20% wage increase without further negotiations”.

One economist even stated (see first red and bold text): “If these executive managers want to leave ABN Amro and move to London, when their fixed wages will not be increased, I will go to Schiphol Airport to personally wave them goodbye!

Personally, I have mixed feelings about the commotion that has emerged as a consequence of this new legislation by Jeroen Dijsselbloem and the response of ABN Amro to it.

In the first place, I want to state (from personal experience) that it never gives a person a good feeling when he loses a substantial part of his income, regardless of how high or low this income actually is.

Income is seen as a reward for the work delivered by people. When a large share of it is involuntarily taken away, it feels like being punished. I even dare to say that the negative feelings, coming from a loss of income, are stronger than the positive feelings that people get, while receiving a higher income.

Secondly, I regret it that Jeroen Dijsselbloem chose for an "Alleingang" (i.e. solo action) in Europe, when he implemented the Dutch bonus cap of 20%, where the rest of the European Union chose for a 100% bonus cap through the CRD4 legislation. By implementing this very strict Dutch regulation, Dijsselbloem and other politicians perhaps came under suspicion of 'wanting to get even with the banks for their part in the economic crisis'.

On the other hand: something had to be done about the perverse stimulants and the moral hazard effects, that excess variable remunerations had on bank executives and high profile bankers in Europe and beyond. There is almost no denying that the ubiquitous pursuit of profits and bonuses, as well as the diminishing risk-awareness in the years before the economic crisis, have done a great deal of damage to the global economies.

Besides that, the clear notion in the case of ABN Amro and Rabobank, that the variable rewards and bonuses for executive bankers were in fact a steady privilege and not an incidental reward for exemplary behaviour and/or excellent quality of work, proves that these means of rewarding lost their ‘raison d’etre’ in the first place.

The ‘best’ and most sought-after experts in certain specialist activities within the banks (traders, business, industry & risk analysts or interest & derivative wizards) won’t be halted from leaving the bank, with this raise of their fixed income by ABN Amro. 

The ones that can be lured with higher payments will work there, wherever their paycheck will be the highest: in London, Paris or Frankfurt and probably not in Amsterdam. The other – more loyal – workers will probably appreciate their current employers and stay where they are anyway.

This sheds an unfavorable light at the somewhat worn out argument that ‘ABN Amro must pay, to make its employees stay’.

Apart from the discussion about these particular wage increases at ABN Amro, Rabobank and – to a lesser degree – ING Bank, there is a general opinion in The Netherlands that employees of bank and credit institutions are overpaid in comparison with other industries and other kinds of work.

Rens van Tilburg, a publicist and researcher at non-profit organization SOMO (i.e. the Foundation for Research of Multinational Organizations) and the Sustainable Finance Lab, who is an avid follower of Twitter, argued that people in the banking industry are currently overpaid by about 15%.

The following recommendation (part of in total four recommendations) has been printed in a SOMO report from 2012 in which Van Tilburg has been involved:

Recommendation: Bring the remuneration in line with comparable jobs outside the banking industry. With the conservative estimate in mind that bank wages are about 15% too high, the three largest banks in The Netherlands spend roughly €2 billion of excess salary on their personnel.

Where the Dutch national bank DNB is justifiably criticizing dividend payments, it ought to be critical as well about personnel expenses, which are out of synch with comparable jobs in other industries. When the government keeps the annual wage increases of its civil servants at zero, why does it not do the same with the bankers of its state-owned bank [ABN Amro – EL]

Wouter van Aggelen, Manager of Public and Government Affairs of ING Group, learned that I was planning to write an article about this subject. 

When he heard that I had reached out to Rens van Tilburg, he responded with the following statements, which I print for the sake of showing both sides:

In the days when this report was presented (2012), ING have thoroughly looked at SOMO’s statement that banking personnel is overpaid by 15%. 

We then came to the following conclusions, which I send to you. 
  • SOMO ‘revised ‘ the wage increase (which, by the way, is calculated for the whole financial and business services industry and not for banks in particular) for structural effects;
  • However, these structural effects (age, level of education etc…) are extraordinary high in the financial industry;
  • When we take this into consideration, the revised wage increase has been 31.5% for the last decade - against 36.4% in education and 32% in healthcare and 26.5% for the economy as a whole – which is only 0.5% extra per year;
  • The statement that the wage expenses in Dutch financial industry have risen more dramatically than in the other countries, is unfounded:
    • The OECD table, to which is referred in the SOMO investigation, shows the development of the Unit Labour Costs (ULC) of the whole financial and business services industry; measured in total employment, the Dutch banks form less than 10% of this industry;
    • Besides that, in many other countries, the ULC rose more dramatically than in The Netherlands.
    • Further it is important to look at remuneration levels, as well as FTE’s (Full Time Equivalents);
  • In case of ING itself, the reduction of wage expenses since 2009/2010, through a series of measures, has not been processed in the CBS data yet: reduction of the variable remuneration of the Board of Directors and the senior management, the new Collective Labour Agreement (including transitional arrangements) and reorganizations (including the execution of social plans).

Unfortunately, I don’t have first hand insights in the wage levels of common employees in the banking industry. Salaries in Dutch companies are among the best kept secrets and they are never discussed in the open.

Nevertheless, I believe that normal banking personnel do indeed receive a more than adequate, but not per sé exceptionally high, salary for their jobs. 
As intelligent and eager people, with a high level of education, are sought after by every bank and insurance company, all banks must offer competitive salaries in order to get the best personnel. 

However, this is also true for many other commercial industries and even at the central and local government.

Still, the main reason that banks have very loyal personnel is that banks offer possibilities for personal and career development, which are second to none.

Good personnel receives numerous job and promotion opportunities, while even mediocre personnel is treated with more patience and compassion than often in other commercial industries.

Besides that, banks offer possibilities for further education, courses and trainings-on-the-job, that hardly any other company can offer. That is the reason that most common personnel stays at the banks for many years.

With respect to the remuneration of senior management and high profile bank employees with special skills, I believe that there is a certain market effect, which forces banks to pay higher salaries than in other industries. However, this effect should not be exaggerated by the executives of banks, in order to justify the payment of excessive salaries and bonus arrangements.

With that in mind, I believe that ABN Amro – and in its trail Rabobank - did not show the best judgment, when it increased the fixed remuneration of its senior management with 20% in January 2014; regardless of the fact that these senior managers lost a maximum of 80% of their (obviously not so) variable wages. However, that does not mean that I don't understand the motivation of ABN Amro to do so anyway.

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