Ownership structure and board composition have considerable impact on CEO remuneration at Dutch listed companies
Rotterdam, July 2010 --- In addition to economic aspects such as company size and growth expectations – ownership structure and the composition of the Management Board and Supervisory Board significantly influence the size of CEO pay packages. (Most large-sized public companies in the Netherlands have both a Management Board and a Supervisory Board, with the latter overseeing the first. This is demonstrated by joint research into the executive remuneration practice, carried out yearly by Rotterdam School of Management, Erasmus University and Hewitt Associates. This year, the research has focused on the impact of both the
ownership structure and the
composition of the Management Board and Supervisory Board on CEO pay. The study has covered 75 companies listed on the AEX, AMX and AScX between 2006 and 2008. De Nederlandse versie van dit persbericht vindt u
hier.
A company’s
ownership structure has the following influence:
- The larger proportion of a company’s shares are owned by bigger players (>5%), the smaller the pay packages taken home by CEOs. Evidently, major shareholders, who have a greater economic stake in the company, have an important monitoring function and thus reign in CEO remuneration.
- Substantial share packages – defined as being at least 1% of issued capital – held by other Management Board members or Supervisory Board members also have dampening effect on what a CEO is permitted to earn.
Contrary to our expectations, companies with anti-takeover defences in combination with the variable mentioned above pay their CEOs substantially less financial compensation. So these “well-protected” companies appear to be more critical of CEO pay, too
- Follow-up analyses of the companies examined makes clear that the proportion of shares held by major shareholders have a stronger restraining influence on CEO pay in larger companies than in smaller ones. Conversely, the share ownership among CEOs and other executives have a bigger dampening impact on CEO pay in smaller companies
In determining the
composition of the Management Board, the researchers have looked at the following characteristics:
- The size of the Management Board
- The size of the Supervisory Board
- The time that the CEO has been in charge
- The time that the Supervisory Board Chairman and other Supervisory Board members have served
- The extent to which Supervisory Board members operate independently, as defined by the Dutch Corporate Governance Code
The study has furthermore brought to the fore:
- The most important variable by far is the size of Supervisory Board. Those Supervisory Boards consisting of an above-average number of members turn out to pay substantially higher remuneration to their CEOs. These “overcrowded” Supervisory Boards prove to be less effective in supervising and curbing CEO pay.
- Non-independent Supervisory Board members – for example, those affiliated with parties having a business interest in the company such as banks and lawyers’ firms; as well as those connected to major share holders – turn out to have a restraining influence on the size of CEO pay packages.
- CEOs who have been at the helm over a longer period of time receive a higher basic salary, but no significant link was found with the variable part of CEO remuneration and thus overall CEO remuneration. The Supervisory Board members’ actual time in office has little or no impact.
Quotes:
Arthur Claassen of Hewitt says, “The picture that has emerged looks familiar to us. If you wish to examine the influence on changes to ownership structure on both the size and composition of the pay packages, then banks are perhaps the best example. Since government began playing a dominant role in the banking sector, their presence has had a direct moderating impact on the composition and size of CEO pay packages. In this equation, classic factors such as company size and growth expectations do not really figure that much. A few years ago, companies taken over by private equity firms were on the other end of the remuneration spectrum. Here pay levels skyrocketed, despite consolidated ownership. Clearly, we should not underestimate the different attitudes that the different dominant shareholders bring to the table. For us, it is very clear that those players who have a say in or direct influence on CEO pay packages can very much determine their eventual composition and size. So the labour market is definitely not the only determining factor.”
Nicolai Knop, external PhD student and researcher at RSM, says, “This research proves that major external shareholders have a significantly dampening influence on the size of CEO pay. Instead of widely spread-out share ownership, we may need to advocate have more concentrated share ownership or, alternatively, shareholders joining forces to form a counterweight to company management in pursuing issues that are highly relevant to wider society, such as executive remuneration. Recent examples underlining the (potential) impact of shareholders are Philips and Shell, a majority of whose shareholders voted against the proposed executive pay packages.”
Gerard Mertens, Professor of Financial Analysis at RSM, adds, “You need not only to take the ownership structure into account, but also the composition of the Management Board. Above-average large Management Boards lead to higher CEO pay. Moreover, to moderate remuneration, it is not necessarily undesirable that Supervisory Board members are non-independent players, as defined by the Dutch Corporate Governance Code. Given the findings of this research, one may welcome that the Eumedion investors’ platform and its members are now considering to become more closely involved in the selection of members of Supervisory Boards. They are now looking into the applicability of the Swedish model – in which a few major shareholders together with a number of Supervisory Board members sit on the selection and appointment committee for a particular company.”
The
research report will be published by EURICI. EURICI is short for the
Erasmus University Research Institute on Compensation and Incentives. EURICI carries out research into and acquires knowledge of the basic principles, design, characteristics and application of performance-oriented reward systems, as well as their impact on the organizations in question, their employees and wider society. EURICI was founded by Prof. dr. Frank Hartmann and Prof. dr. Gerard Mertens, both of whom conduct research in this field.
More information
For more information on this study, please contact:
Hewitt Associates is an international company active in HR consulting and outsourcing. With a 23,000-strong workforce in almost 40 countries, Hewitt Associates is one of the leading and largest companies in its field. The Dutch operation has offices in Amsterdam, Rotterdam and Eindhoven, where about 350 staff provide support and advice to clients regarding actuarial advice, pensions and the whole area of HR.
www.hewitt.nl
Rotterdam School of Management, Erasmus University is consistently ranked amongst the top 10 business schools in Europe. It is located in the international port city of Rotterdam where core Dutch values of openness, flexibility and acceptance of diversity have attracted businesses on a global scale. Our emphasis is on groundbreaking research and practices relevant to business; our primary focus is on developing business leaders who carry their innovative ideas into a sustainable future. Our portfolio includes a broad array of bachelor, master, doctoral, MBA and executive education programmes.
www.rsm.nl
For more information on RSM or on this release, please contact Marianne Schouten, Media & Public Relations Manager for RSM, on +31 10 408 2877 or by email at mschouten@rsm.nl.
