Bonus caps: A view from the Netherlands
07 November 2014
The last two weeks have been exciting for bankers in the Netherlands. The bill cutting their bonuses to 20% of fixed pay was passed by the Dutch Lower House. Two days later, most fixed pay allowances, introduced by banks to mitigate the negative consequences of the CRDIV 100% bonus cap, were qualified by the European Banking Authority as variable pay, making them useless to bridge the pay gap that arose with the introduction of the CRDIV bonus cap. Banks and investment firms are directed back to the drawing board to find other alternatives than just increasing base salaries as a response to the introduction of the newest trend in remuneration: bonus caps.
Not all bonus caps are alike. ‘Identified Staff’ (in short, senior management and 'risk takers') of banks and investment firms have accustomed themselves to the pay constraints introduced by CRDIII in 2011 as well as the relatively new CRDIV bonus cap. The Dutch 20% bonus cap is the new kid on the block. Not only because it is significantly lower than the CRDIV bonus cap, 20% of fixed pay in stead of 100%, but also because its has a greater scope: it applies to all staff of ‘financial enterprises’. A financial enterprise is a legal term and comprises not only banks and investment firms, but also, amongst others, insurers and premium-pension institutions. For these ‘financial enterprises’ as a general rule a 20% bonus cap will be applicable.
However, due to a vast number of exceptions, different bonus caps will apply to different types of staff. Staff under a collective bargaining agreement (CBA) will fall under the general 20% bonus cap. But non-CBA staff may benefit from a higher cap - up to 100% - as long as the average bonus of non-CBA staff collectively is capped at 20%. The bonus cap also applies to staff working abroad. For those working in the EEA an individual bonus cap of 100% applies, which may be increased up to 200% for staff working outside the EEA. The 100% bonus cap is also applicable to staff of Dutch international holding companies, which have most of their staff working abroad. Finally, the bonus cap is not applicable to Alternative Investment Fund Managers and managers of UCITS.
Is the Dutch bonus cap limited to Dutch companies? No! Although branches of EEA-firms that fall under CRD IV are exempted from the 20% bonus cap, the Dutch bonus cap rules do apply to branches of non-EEA firms. Also, the bonus cap rules apply to Dutch subsidiaries of foreign firms that are financial enterprises. Finally foreign subsidiaries of Dutch firms also fall under the bonus cap rules.
The existence of two bonus caps (CRD IV bonus cap and the Dutch 20% bonus cap), each with their own scope and effective date doesn’t make life easier. As a general rule, firms can hold on to the following: for the 2014 performance bonuses - to be awarded in 2015 - the CRD IV 100% bonus cap applies to Identified Staff of banks and investment firms. Assuming the Dutch 20% bonus cap rules come into force as per 1 January 2015, 2014 bonuses will not yet be caught, if the 2014 bonus award arises from an obligation of the financial enterprise that existed prior to 1 January 2015. If this is not the case, the Dutch bonus cap rules will apply in full as per 1 January 2015, including the award of the 2014 performance bonus.
Is this the end? As far as the Dutch Finance Minister is concerned, no!
When debating the bonus cap rules and especially the exception for AIFMs and managers of UCITS, the Dutch Finance Minister mentioned that he will pin his hopes on getting EU consensus for a bonus cap for this group.
To be continued…… I am sure of it.