Remuneration report

 

This report outlines the remuneration arrangements for the Managing Board and the Supervisory Board of NIBC. It comprises three parts. The first part outlines the 2008 remuneration policy and practices, and provides details of the remuneration payable to the Managing Board with respect to the performance of 2008. The second part provides details of the remuneration arrangements for the Supervisory Board. The third part provides details of the process to develop the 2009 (and onwards) Remuneration Policy for the Managing Board.

 

This report was prepared by the Remuneration and Nominating Committee (Committee or RNC) on behalf of the Supervisory Board. The RNC operates on the basis of a charter, which is publicly available on NIBC’s website, and regularly reviews the remuneration and nomination policy and practices of NIBC. If and when appropriate, the Committee proposes changes to the charter, remuneration and nomination policy and practices to the Supervisory Board.

 

The year 2008 was an extraordinary year for the financial markets in general and NIBC in particular. In light of the 2007 financial performance of NIBC, the Chairman and CEO, Mr. Enthoven, and the Vice-Chairman and CRO, Mr. Stegmann, offered to step down from their respective responsibilities. NIBC was pleased to announce the appointment of Mr. Sijbrand as CRO on 22 February 2008 with immediate effect. This was followed by an announcement on 25 March of the appointment of Mr. Drost as Chairman and CEO with effect from 1 May 2008.

 

The extraordinary market circumstances and the changes in senior management have had some impact on the Managing Board remuneration policy and practices, in particular with regard to the composition of the labour market peer group, variable compensation opportunities and elements of NIBC’s pension arrangements. These will be discussed further on in this report.

 

In the course of the year, further developments in the financial markets prompted the Dutch government to take action and provide financial assistance to financial institutions. Under the Dutch State’s Credit Guarantee Scheme, NIBC successfully issued a bond towards the end of the year. Participation in that Credit Guarantee Scheme was contingent upon meeting a number of requirements in the area of remuneration and governance. NIBC believes that these requirements are, indeed, met.

 

 

2008 Remuneration Policy and practices for the Managing Board

On 20 March 2008, the Annual General Meeting of Shareholders adopted the proposed 2008 Remuneration Policy which included one variation compared to the 2007 policy. This related to the variable compensation potential for Mr. Sijbrand, the new CRO. Soon after, it quickly became apparent that the labour market peer group needed serious revision with several financial institutions having defaulted or operating under seriously changed ownership. The RNC did not feel immediate action was required as the 2008 Remuneration Policy had already been agreed and communicated.

 

In summary, the Remuneration Policy for the Managing Board for 2008 onwards was based on the following principles:

  • Total target remuneration levels should reflect market median remuneration levels of a labour market peer group consisting of relevant (European divisions of) financial institutions active in the Dutch, German and British financial markets. In the event of extraordinary performance of the Managing Board, total remuneration levels should be broadly in line with 75% (3rd Quartile) levels of the labour market peer group;
  • Base salary levels of the Managing Board should be broadly in line with market median levels of the labour market peer group;
  • Annual total remuneration levels of the Managing Board members are differentiated and reflective of their specific role, their relative experience and performance, the market levels of remuneration for that role, and the specific market circumstances under which the Managing Board operates;
  • The variable compensation opportunities for the Managing Board members are varied with both the Chairman and the Vice-Chairman qualifying for (i) a cash bonus of up to 75% for on-target performance and up to 100% for extraordinary performance and for (ii) deferred compensation of up to 100%. The CRO qualifies for (i) a cash bonus of up to 60% for on-target performance and up to 80% in case of extraordinary performance and for (ii) deferred compensation of up to 100%. Finally, the Chief Financial Officer (CFO) qualifies for (i) a cash bonus of up to 30% for on-target performance and up to 40% in case of extraordinary performance and (ii) deferred compensation of up to 40%. All percentages are percentages of the respective base salaries and any award is at the absolute discretion of the Supervisory Board;
  • Managing Board members will be employed for an indefinite period of time but are appointed as statutory director for a maximum term of 4 years;
  • Upon termination of employment at the request of NIBC without cause, Managing Board members are entitled to severance pay equal to their annual base salary; and
  • Managing Board members are eligible for membership of a NIBC-sponsored pension plan, which consists of a defined benefit (from 1 January 2008 for new participants capped at a pensionable salary of EUR 55,825) and a defined contribution (from 1 May 2008 capped at the level of their respective base salaries) component.

 

Labour market peer group

In order to be able to recruit the right calibre of executives for the Managing Board, and to secure long-term retention of current Managing Board members, NIBC has taken external reference data into account in determining compensation levels. For this purpose, a labour market peer group was defined consisting of relevant (European divisions of) financial institutions active in the Dutch, German and British markets, with which NIBC competes for talent and business. The companies were selected based on strategic considerations (e.g. comparable clients, geographical focus, service, and strategy) and tactical considerations (e.g. comparable activities such as Corporate Finance, Financial Markets, and Asset/Investment Management for third parties). The labour market peer group consists of the (relevant divisions of the) following financial institutions: ABN AMRO, Barclays, Bear Stearns (London), BNP Paribas, Deutsche Bank, Fortis, ING Bank, Kempen & Co, Dresdner Bank, Rabobank, and Royal Bank of Scotland.

 

However, given the turbulence in the financial markets, it became obvious in the course of 2008 that this labour market peer group is no longer appropriate and its composition needs to be revisited. This will happen in the context of developing the new 2009 Remuneration Policy.

 

Base salary

The RNC has recommended, and on 21 February 2008 the Supervisory Board approved, an increase of the base salary of Mr. Van Dijkhuizen to EUR 400,000 gross with effect from 1 January 2008, an increase of 14%, which brought him in line with the other members of the Managing Board. The base salary of Mr. Van Nieuwenhuizen remained unchanged whilst Mr. Sijbrand was recruited on the same base salary of EUR 400,000 gross. For Mr. Drost, a base salary of EUR 700,000 was agreed, the same as received by his predecessor.

 

Variable compensation

Each year, the variable compensation pool for the bank is determined on the basis of a combination of NIBC’s total compensation ratio (total personnel-related expenses as a percentage of total revenue) and the pay-out ratio (total variable compensation as a percentage of the operating result before tax and pay-out of variable compensation). NIBC has always managed this prudently and its compensation ratio has been consistently below that of comparable (international) peers, also in 2008.

 

The variable compensation pool for 2008 went down by about 45% compared to 2007. Whereas many financial institutions had record profits in 2007 in many of their businesses with subsequently flat or higher bonus pools, NIBC had already taken action in light of its financial performance and reduced its 2007 variable compensation pool by some 30%.

 

Variable compensation generally consists of a short-term cash element and a short-term deferred compensation element. In respect of the financial year 2008, the RNC recommended and the Supervisory Board adopted the proposal to deliver the deferred compensation element in the form of deferred cash. The vesting schedule, which was changed in 2008 from 5-year vesting to 3-year vesting to better align with industry deferral practices, remains unchanged with 1/3 vesting each year on the 1st of January of each year.

 

Short-term cash bonus

The short-term cash bonus for all Managing Board members is normally awarded on the basis of a consistent balanced scorecard methodology, whereby corporate financial (50%), corporate non-financial (25%) and individual (25%) performance criteria are weighted. For 2008, the agreed corporate financial criteria were: net profit, efficiency ratio, comprehensive return on net asset value, and non-interest income ratio. Corporate non-financial targets included such criteria as liquidity management, risk management and credit ratings. Specific details of the financial criteria are not disclosed as these are considered to be commercially sensitive. Targets are revised annually to ensure that they remain stretching but realistic.

 

Given the specific role and responsibilities assigned to the CFO and the CRO, their bonuses are not dependent on the overall financial performance of NIBC. Instead, their bonuses are determined on the basis of corporate non-financial criteria (50%) and individual performance criteria (50%) such as the quality and process (improvements) of the company’s external and internal financial reporting and internal controls and the management and mitigation of (operational) risk.

 

As mentioned before, 2008 was a challenging and extraordinary year for all involved. In the eyes of the RNC and the Supervisory Board, the Managing Board, under the new leadership of Mr. Drost, has taken swift and decisive action in critical areas as liquidity management, capital management, cost management and risk management. NIBC is now much better positioned than twelve months ago and this is, in large part, due to the leadership, efforts and capabilities of the Managing Board.

 

By requesting the Supervisory Board not to be considered for any variable compensation for 2008, the Managing Board demonstrated it is prepared to act responsibly towards NIBC’s various stakeholders.

 

The RNC welcomed the initiative of the Managing Board and consequently recommended to the Supervisory Board that no variable compensation be awarded for 2008 for any of the Managing Board members. The Supervisory Board accepted the recommendations made by the RNC and decided accordingly.

 

Short-term deferred compensation

In light of the aforementioned, the RNC recommended and the Supervisory Board also resolved to not award any short-term deferred compensation to any of the members of the Managing Board.

 

Total direct compensation

The RNC refers to the tables in note 55 of the Financial Statements for details.

 

Other incentive compensation

During the first half of 2008 Mr. Drost and Mr. Sijbrand joined NIBC. At that time the RNC was completing its discussions with the Managing Board about the need for and the extent of a retention pool for selected senior executives. In an attempt to guarantee longer term stability and continuity in the leadership of NIBC, the RNC recommended and the Supervisory Board resolved to approve that such a retention pool, indeed, be created. In total 44 selected senior executives were awarded a combination of Restricted Depositary Receipts (RDRs) and Options. Additionally, and in keeping with NIBC’s overall remuneration philosophy and practice, all other employees also received an allocation of options, the number of which varied dependent on their respective corporate title. Simultaneously, and related to their investment in NIBC Common Depositary Receipts (CDRs) with own funds, members of the Managing Board were offered long-term sign on and/or retention awards in a mix of RDRs and Options.

 

However, in the period after 31 December 2008 in view of the debate about executive compensation in financial institutions and in anticipation of a new 2009 Remuneration Policy, the Managing Board, Supervisory Board and Shareholders have jointly decided to fully rescind the aforementioned package at the original conditions, i.e. both the long-term sign on and retention awards for members of the Managing Board and the investments made by them.

 

The Supervisory Board highly appreciated the gesture made by the members of the Managing Board.

 

Severance arrangements

As a result of the employment relationship ending between Messrs. Enthoven and Stegmann on the one hand and NIBC on the other hand, a number of contractual arrangements were triggered. In line with their employment contracts, both Mr. Enthoven and Mr. Stegmann were entitled to a severance payment in line with the Dutch Corporate Governance Code (the Code). In effect it meant that they both received no more than 12 months of base salary or, in the case of Mr. Enthoven an amount of EUR 700,000 and, in the case of Mr. Stegmann an amount of EUR 400,000. In addition to that, they received a payment in lieu of their contractual notice period which they did not serve in full. No other payments were made.

 

The Supervisory Board felt it was inappropriate for Messrs. Enthoven and Stegmann, as former Managing Board members, to remain invested in NIBC. With that in mind, the Supervisory Board decided to exercise its rights under the relevant conditions of administration by exercising its call right and subsequently call all outstanding depositary receipts held by Messrs. Enthoven and Stegmann in an open period at the fair market value, calculated in accordance with the conditions of administration. Following the exercise of this call right and the forfeiture of all options granted to them as a result of the ending of the employment relationship, Messrs. Enthoven and Stegmann have no further remaining investments in NIBC.

 

Pensions

Mr. Drost became a member of the NIBC pension plan with effect from 1 May 2008 on the same conditions as those that apply to the other employees of NIBC. This means that he is covered by a defined benefit arrangement up to a pensionable salary of EUR 55,000 and a defined contribution arrangement for any pensionable salary in excess of that. The RNC recommended and the Supervisory Board resolved to determine that the maximum pensionable salary be increased from EUR 400,000 to EUR 700,000 so that Mr. Drost, like all other employees of NIBC, is in a position to build up pension based on his full base salary. As is the case for all other employees, NIBC contributes a flat rate of 20% of his pensionable salary plus the franchise towards his pension to the Pension Fund. Mr. Sijbrand had joined the NIBC pension plan earlier with effect from 22 February 2008 on the same basis. In 2008, Messrs. Drost and Sijbrand contributed 2.5% of their pensionable salary plus franchise towards the cost of pension. For 2009, this will increase to 4.0%.

 

In 2008, Mr. Van Nieuwenhuizen and Mr. Van Dijkhuizen were entitled to a defined benefit pension arrangement up to a pensionable salary of EUR 81,085 (annually adjusted for general wage increases in line with the Collective Labour Agreement for Banks in the Netherlands) under NIBC’s employee pension plan, and an additional defined contribution arrangement with a maximum pensionable salary of EUR 400,000. All premiums are paid for by NIBC at a flat rate of 20% of pensionable salary plus the franchise. The pensionable age for all Managing Board members is 65. As they were both participants in the pension plan prior to the most recent changes in the plan rules, neither Mr. Van Nieuwenhuizen or Mr. Van Dijkhuizen are required to make any personal contribution. Additionally, Messrs. Van Nieuwenhuizen and Van Dijkhuizen receive a contribution of 2.9% of their pensionable salary as compensation for a reduction in pension benefits resulting from changed legislation and this compensation is in line with what other employees, who were members of the pension plan at the time of the introduction of the changed legislation, receive. This compensation is already included in the 20% flat rate contribution paid by NIBC.

 

Loans

As a policy, NIBC does not provide loans to its executives. As per 31 December 2008, there are no loans outstanding.

 

Contracts of employment

The contracts of employment of all Managing Board members are compliant with the recommendations contained in the Code. They are all employed for an indefinite period of time until they reach normal retirement age but appointed for 4 years as statutory directors only and severance arrangements are limited to twelve months base salary.

 

Expense allowance

All Managing Board members are entitled to an expense allowance which covers specifically identified minor expenses.

 

Other emoluments

Like all employees, Managing Board members are entitled to a subsidy towards the cost of mortgage interest paid and they also receive the legally required contribution towards the cost of medical insurance. All members of the Managing Board are entitled to a company (lease) car or, at their choice, a cash car allowance. Mr. Drost is contractually entitled to the use of a chauffeur whilst the other members of the Managing Board can, from time-to-time, make use of a chauffeur for business reasons only. Additionally, they are all covered under the NIBC’s All Employee Accident Insurance Scheme as well as under the NIBC’s Long-Term Disability Insurance Scheme.

 

 

Remuneration of the Supervisory Board

The remuneration for the Supervisory Board has not changed in 2008 and, at present, consists of remuneration for the Chairman of the Supervisory Board of EUR 55,000, for the Vice-Chairman of EUR 45,000, and for the members of EUR 35,000, with expenses covered by a fixed expense allowance of EUR 5,000.

 

The Supervisory Board has four committees, each with a different fee structure for its members. The annual fee for the Audit and Compliance Committee amounts to EUR 15,000, for the Risk Policy Committee, including the Related Party Transaction Subcommittee to EUR 11,500, for the Remuneration and Nominating Committee to EUR 10,000, and for the Strategic Committee to EUR 11,500.

 

In accordance with the Code, NIBC does not award performance-related pay to members of its Supervisory Board. As a policy, NIBC does not provide stock options, shares or loans to members of the Supervisory Board. Consequently, there are no loans outstanding.

 

 

2009 Remuneration Policy of the Managing Board (and onwards)

Given the many changes and developments in the area of executive compensation such as in the updated Code and ongoing public and political debates on the subject, the RNC has recommended to the Supervisory Board to postpone decisions on the 2009 Remuneration Policy. The Board recognises that the existing policy needs to be amended. The new requirements embedded in the Code call for extensive analyses of scenarios and in order to have a robust process more time is required. However, it is the intention of the RNC to present its findings and recommendations on the 2009 Remuneration Policy to the Supervisory Board before the end of June 2009. The Supervisory Board has accepted this postponement.

 

 

The Hague, 8 April 2009

Supervisory Board

 

Mr. J. H. M. Lindenbergh, Chairman

Mr. C.H. van Dalen

Mr. W.M. van den Goorbergh

Mr. N.W. Hoek

Mr. A. de Jong

Mr. D. Rümker

Mr. R.S. Sinha

Mr. A.H.A. Veenhof