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Mar 12, 2012

Binding pay votes: what can the UK learn from the Dutch?

The UK plans to bring in a binding vote on pay. What can it learn from the Netherlands, which introduced one in 2004?

In January Vince Cable, the UK business secretary, confirmed that the government would put forward proposals for a binding vote on executive pay.

The changes would significantly increase the power of investors in the UK, where they currently have only an advisory say on pay.

The Netherlands has had a binding vote in place since 2004. But it wasn’t until 2008 that Dutch shareholders made the most of their voting privilege, when they vetoed Philips’ new long-term incentive plan, forcing the company to come back with a redrafted version the following year.

In that same year, property investor VastNed Retail also lost a binding vote when it tried to push through unpopular retention bonuses.

Few cases

Overall, there have been very few cases of companies actually losing binding votes, but many more companies have withdrawn remuneration proposals when a failed vote looked a likely outcome, according to Errol Keyner, deputy director of the Dutch shareholder association VEB.

The UK system has yet to be finalized – a consultation is taking place before the law is put before parliament – but Cable has said he wants a forward-looking binding vote that would require 75 percent shareholder approval. So how could such a vote affect engagement between shareholders and companies in the UK?

Keyner says discussions on pay in the Netherlands have become very tense due to the binding vote. ‘Until five or 10 years ago criticism behind the scenes was kept behind closed doors,’ he explains.

‘On the surface, everything was okay, but recently fallouts and disagreements have become increasingly evident. Much of this is due to the binding shareholder vote, which has given shareholders the platform to influence boardroom decisions much more than before. And the bonuses paid to underperforming executives has been seen as a disgrace by Dutch shareholders for a long time.’

Gerbrand Nijman, chair of the Dutch IR society NEVIR and head of IR at telecoms company VimpelCom, also believes that since the binding vote was brought in, there has been greater tension surrounding executive pay.

‘There has been more sensitivity to components of remuneration,’ he says. ‘Transparency is extremely important to shareholders, and now there is more pressure on companies to provide this transparency.

‘Executives are rewarded by how well they have performed their roles for their companies, and, if shareholders object to a pay proposal, they have the power to vote this down.’

Reputation on the line

Nijman admits the rejection of pay proposals at Philips and Royal Dutch Shell – which lost an advisory vote on pay in 2009 – were ‘not good for reputation’.

‘The biggest lesson learned from the shareholder conflicts in the Netherlands is that it is better to listen beforehand than to lose a vote after,’ he says. ‘If the binding vote is brought in to the UK, the best way to handle remuneration is to consult key investors before deciding any policy.’

If the situation isn’t avoided, and a binding vote goes against a company, it is forced to come back with a new policy the following year, explains Keyner.

In the meantime, any new executives joining the company have to operate under the old pay system. ‘And if the candidate doesn’t like it, he or she will not be hired,’ the deputy director adds.

Philips lost its vote in 2008 after 57 percent of shareholders voted against a long-term incentive plan that changed the way pay was measured against performance.

According to a study by RiskMetrics, the proposal was ‘heavily criticized by shareholders as the company would no longer comply with the recommendation of stringent performance criteria’.

VastNed, meanwhile, tripped up over its desire to award retention bonuses that had no performance criteria attached.

Shareholders made their objections known in advance, notes the RiskMetrics report, but the company proceeded with its original plans and ‘received an unpleasant surprise’ when they were rejected.

UK outlook

This display of shareholder strength is what Cable is seeking to emulate in the UK. In truth, the UK is likely to experience low levels of negative votes similar to the Netherlands.

Even with the relatively tame advisory vote, shareholders rejected pay reports at FTSE 100 firms just three times over the last 10 years; they will be even more reticent to act with a binding vote.

In a coup for the government, however, one major investor has come out in favor of the plans. Fidelity, one of the world’s largest asset managers, has put out a statement saying it supports the move to a binding vote with an approval threshold of 75 percent.

Not every company has been so supportive: a consultation report from 2011 on executive pay acknowledges that many shareholders and other stakeholders are against a binding vote.

The Confederation of British Industry (CBI), an influential lobby group, isn’t a fan, either, saying the change ‘does not make for good corporate governance’.

A spokesperson for the CBI says an advisory vote and director nominations are enough to keep a company in check, while a binding vote could make shareholders less likely to speak up due to the damage a ‘no’ vote could cause to the share price if it resulted in a boardroom walkout.

Planned timetable for the UK’s binding vote

-March 2012: Consultation launched
-Autumn 2012: Legislation brought before parliament
-AGM season 2014: New rules come into effect

Source: Department for Business, Innovation and Skills