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Wednesday, 14 March 2018

Systematic remuneration issues at systemic banks

Recently, the ING Bank Supervisory Board proposed a 50% raise in the CEO remuneration. Yesterday, the Supervisory Board withdrew their proposal given the uproar in Dutch politics. Initially, ING Bank claimed that their client base had not been affected by the uproar. Yesterday, they had to retract that earlier assertion.

There is a typical Dutch saying that translates like "Just act normal that's already crazy enough". ING Bank may regard itself as an international bank but their roots are very, very Dutch. The Dutch uproar cannot be understood without knowing this typical Dutch phrase. In its essence, the Netherlands is a rather egalitarian society in which you don't show off your wealth too much.

ING Bank is a merger product of several smaller, non-systemic, banks. During the 2007-2008 global financial and banking crisis, ING was forced to accept government support as the bank was labelled a Systemically Important Financial Institution. ING Bank reluctantly agreed. The downside of a systemic bank label is political (public) interference in a private bank.

One could well argue that the CEO remuneration has nothing to do with the systemic bank label. This argument ignores the ongoing sentiment that international banks were responsible for the 2007-2008 global financial crisis and have not been penalized enough for their misconduct. Unfortunately, this argument seems to have an indefinite application despite its sympathetic feel.

The broad Dutch political uproar is partly related to the 21 March 2018 municipal elections and the small (1 vote) national majority in the House of Representatives. The Green Left political party aims to propose a draft law requiring a minimum-maximum remuneration bandwidth of "some 1:10" for systemic banks (NRCTwitter). The Dutch Finance Minister announced that the Dutch Cabinet may interfere in the ING Board remuneration (FDNRC).

I tried to find the recommendations from shareholder advisory service agencies, like ISS. I would not be surprised if such recommendations would be positive. On average, Dutch board remuneration is probably lower than of international peers. Partly, this is a Dutch cultural issue. Partly, such comparisons are creating a self-inflicted international remuneration inflation.

My only surprise in this uproar is the joint miscalculation by the Dutch Chairman of the ING Supervisory Board and the Dutch CEO. This miscalculation is clearly stated in the ING press release: "We realise we have underestimated the public response in the Netherlands on this clearly sensitive matter." Such a miscalculation should not happen at this senior level as the "ongoing public discussion [is] damaging ING and its employees", and its Supervisory Board.

The remuneration debate at ING is far from new. On 8 November 2007, a former ING CEO threatened to relocate ING HQ to the UK as he was annoyed by the Dutch remuneration debate. In 2014, another anonymous relocation threat was aired. In 2015, the current ING CEO aired milder criticism in the Financial Times. The ING criticism feels systematic and may explain the Dutch desire for curtailing systemic banks. Sources: Correspondent, FDFTTrouwWiki.