As the labour market undergoes unprecedented shifts, the need for forward-thinking executive compensation packages has become increasingly Important. In navigating this dynamic landscape, companies are tasked with not only attracting and keeping top-tier leadership but also aligning incentives with long-term organizational and sustainability goals, while looking to increase market and shareholder value. In the fierce competition for the best employees, we provide key guidance for developing robust executive remuneration packages that are effective and stand the current challenges of this era.

This article is written by Hendrik Bastiaans ([email protected]) and Brian James ([email protected]). Hendrik and Brian are part of RSM Netherlands International Tax Services with a focus on Global Mobility and ESG.

Components of an Executive Compensation Package

The current executive labour market demands a comprehensive approach to executive compensation. Boards must walk a fine line between offering competitive compensation that will either retain or attract an effective CEO while also building a package that their shareholders will approve. Getting it right can make the difference between having a compelling CEO at the head of the company or losing out on hard-hitting candidates that could drive the business forward. 

Executive compensation packages typically consist of several key components. First and foremost is the base salary, offering stability and forming the core of the package. Short-term incentives based on annual performance, like bonuses and commissions, reward short-term performance achievements. Long-term incentives based on a period of more than one year, such as stocks and performance-based rewards, align executive goals with the company's long(er)-term success. Executive benefits mirror those of other employees, including health insurance, retirement plans, and paid leave. Additionally, executives often receive exclusive perks that are generally not available to other employees, like the availability of business-class transportation, availability of private jets, hired drivers, special parking privileges, and security measures, albeit that some of these perks may not always pass the sustainability test. Lastly, severance packages provide a safety net in case of job transitions, ensuring a smooth exit for both the executive and the organization.

Green Incentives Packages

Incorporating environmental, social, and governance (ESG) considerations into executive compensation is increasingly crucial and a requirement under the Corporate Sustainability Reporting Directive (CSRD) disclosure standards to integrate sustainability-related performance in incentive schemes (ESRS/GOV-3). Companies are encouraged to integrate sustainability metrics into short- and long-term incentive plans, aligning executive performance with broader corporate sustainability goals. 

In drafting an effective board remuneration framework, Human resources (HR) plays a pivotal role, especially as companies navigate varying stages of ESG policy maturity. 
For companies that have already adopted and are executing ESG policies, clear targets are generally set, monitored, and evaluated. Companies must ensure the accuracy of their data, integrating ESG metrics into ERM systems to stimulate organizational change. Additionally, it entails linking executive incentive plans to key performance indicators that reflect essential aspects of the ESG strategy, considering appropriate timeframes for incentivizing the right decisions. Establishing a robust connection between the Remuneration Committee and other committees, such as Risk or ESG Committees, is crucial, assuring metric verification and outcomes. The aim is that the executives get rewarded for progress on sustainability company goals and not only for making efforts. 

For other companies just testing the waters with ESG, HR's involvement is crucial at the beginning. The process begins with establishing a clear ESG strategy, a task in which HR collaborates closely to ensure alignment with organizational goals and values. Subsequently, it will be necessary to make efforts to integrate ESG metrics into enterprise risk management systems, driving internal change and accountability. As the framework takes shape, HR works alongside the Remuneration Committee to link executive incentives directly to ESG performance indicators, considering appropriate timeframes to incentivize sustainable decision-making. Collaboration extends further as HR facilitates robust connections between the Remuneration Committee and other relevant bodies like Risk or ESG Committees, ensuring thorough metric verification and alignment with strategic goals. 

The next step then is to take a role in communicating the company's ESG vision, strategy, and achievements, integrating remuneration disclosures into the annual report to illustrate how executive rewards incentivize responsible decision-making and correlate with ESG successes. Last but not least, the ESG department needs to take ownership of ongoing development of ESG metrics, reviewing these regularly to ensure alignment with changes in company strategy and vision as well as regulatory changes.

Forward Thinking

Companies must also uphold their duty of care towards their employees by staying informed about upcoming regulatory changes that impact executive compensation. For instance, there are signals in the Dutch parliament that there will be a shift in the classification of growth shares remuneration for Private Equity Managers, moving from Box 2 to Box 1 (under the “Lucratief Belang Regeling”). Moreover, stringent penalties, such as a 75% tax, loom over excessive severance payments (under the “Pseudo-Eindheffing”), highlighting the need for prudence in this area. 

Also, it is important to recognize the tax implications of compensation structures at company level; while equity rewards are non-deductible for Dutch corporate tax purposes, cash payments remain deductible. Furthermore, integrating ESG considerations into remuneration frameworks not only aligns with broader sustainability goals but also incentivizes executives to prioritize non-financial objectives alongside traditional financial targets. This strategic approach ensures that executive compensation packages not only attract top talent but also drive sustainable value creation in line with evolving regulatory and societal expectations.

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