Taming Runaway Bonuses

Here in the Netherlands we also have a prominent financial sector, dominated by a handfull of internationally-operating banks (e.g. ABN Amro, ING, even Rabobank) for which the value of the assets of any single one alone exceeds the national GDP. It follows that developments here over the past six months or so have more-or-less echoed the more-prominent financial travails in, say, the US or Great Britain: overindulgence in promising new asset-classes – often involving American real estate – which then turn out to be “toxic,” concerns over solvency, government injections of capital through one means or another, and in general some rather poor performance on the part of financial executives when it comes to sober risk analysis and maintaining their institutions’ very financial viability.

What is also not missing from the Dutch experience is the phenomenon that has gotten much of the American and British public exercised in recent weeks, namely that of financial executives walking away with huge monetary bonuses in the face of what is commonly understood as the meaning of “bonus” (“paid over and above base salary to reward extraordinary performance”) and the glaring absence of any merit that would justify them.

As elsewhere, in the Netherlands it also falls to the Treasury Secretary/Minister of Finance to try to do something about this situation. Here that function is occupied by Wouter Bos, who is also head of one of the two main parties in the governing coalition (the PvdA, or Party of Labor) and so Deputy Head of Government. Still, as the Dutch free newspaper De Pers reports, he might find it tough going as he meets today with the heads of the main Dutch banks on this very topic. Even as he tries to fashion a “gentleman’s agreement” (herenakkoord) with these institutions that recent bonuses should be reclaimed and no new ones should be granted, that paper writes that there is little he can do legally – even with ING Bank, which has been particularly flagrant of late in handing out the bonuses to its top executives even as the Dutch state has had to step in to supply it with the most financial support so far.

Well, that’s if you don’t count one other Dutch bank that has received even more of a State helping hand lately, namely ABN Amro, where the Dutch authorities in fact bought part of it up. They also took care to assert their new ownership to that piece they bought (in contrast to many American and British institutions, where the respective state became majority-owner but still backed off to let old management continue to run things as they saw fit). Over there at ABN Amro Wouter Bos dismissed the old top management and put in his own, headed by Gerrit Zalm as bank CEO. While at first glance that choice may seem surprising, as Zalm was for a time head of the right-wing VVD, the Dutch political party that is just about as diametrically opposite to Bos’ PvdA as you can get without heading out onto the lunatic fringe, it really was an inspired one: Zalm is better known as the longest-serving Minister of Finance in Dutch history (1994-2002 and 2003 -2006), and therefore clearly a star-quality pinch-hitter to bring in to run even as large a bank (or part of one) as ABN Amro.

A bonus scandal is brewing over there also, but Zalm is on top of it, as today’s Het Financieele Dagblad reports:

ABN Amro CEO Gerrit Zalm is threatening to fire his top-managers if they cling to the guaranteed part of their bonuses. “We’ll make a moral appeal to let them go, but whoever wants to hold on to his anyway in my calculations has no more future at the bank.”

It’s mainly a group of fifty top executives with whom Zalm has this bonus problem, and this in most cases involves a “retention bonus” these were awarded in connection with the take-over of ABN Amro by three other international banks back in 2007, which are not relevant anymore now that all that has blown up in the financial crisis and ABN Amro is property of the Dutch state. Zalm further intends to adjust the bonus regime for 2009 according to the principles of “sobriety and the avoidance of bad incentives” – although it’s also true that he green-lighted the payment at the end of 2008 of around €125 million in bonuses to 1,500 other ABN Amro employees for truly doing excellent work, even in the midst of the financial crisis.

I guess that that latter – people still doing good work in bad times, even as the institution they work for crashes and burns – is still justifiable. In any event, I believe it all the more if it is asserted out of Gerrit Zalm’s mouth. But I rather like (as a Dutch taxpayer) this practice of removing a failing bank’s management and putting in one’s own expert with a mandate to clean house. The American and British governments should consider giving it a try.

Update: Success! That “gentleman’s agreement” that Finance Minister Bos was looking for with the big Dutch banks over their bonus-policies has come about, so reports today Het Financieele Dagblad. Why, Frans Weekers (a member of the lower chamber of the Dutch parliament – the Tweede Kamer – of the VVD, or free-market conservative, party – even hails it as heralding an end to “a frustrating bonus-culture at companies that nota bene have been rescued with tax monies.”

But is that true? From the article it’s hard to make out precisely the terms of that “gentleman’s agreement.” The banks (and their cousins the insurance companies) apparently committed themselves to “sustainable and moderate remuneration polic[ies],” and promised to avoid “irresponsible short-term risks of shareholder-value.” The Tweede Kamer as a whole does seem satisfied with this, the FD reports, although some factions are not, most especially delegates from the Socialist Party (SP). You’d expect these sorts of hard-leftists to be dissatisfied no matter what emerged from yesterday’s talks between Bos and the finance-chiefs – bar an arrangement to put them in the stocks in Amsterdam’s Dam Square, with boxes of ripened tomatoes available for passers-by – but their objections this time seem reasonable. As SP Tweede Kamer delegate Ewout Irrgang put it, “These are pretty words, but no hard agreements and furthermore they are valid only for 2009.” (Then again, maybe we should just discount anything Irrgang has to say – not because he is from the Socialist Party, but because his last name means “fool’s errand” in German.)

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