Remuneration report

In 2009, the RNC undertook a comprehensive review of NIBC’s remuneration policy. As a result, a new policy was adopted towards the end of 2009 and the process, principles and substance of this new policy are described below. The policy has resulted in a significantly more moderate and sustainable approach to compensation. The RNC wishes to operate responsibly and prudently in all matters of remuneration.

By all accounts, 2009 was again a very challenging year. The RNC and the Supervisory Board believe the Managing Board, under the leadership of Mr. Drost, has taken decisive action in such critical areas as funding diversification, liquidity management, risk management and business development. This helped to triple the production of new corporate loans in the second half of 2009 compared to the first half. All in all, the RNC and the Supervisory Board are very pleased with the Managing Board’s achievements, under continued difficult market circumstances.

In light of the special circumstances in the financial markets and for the second year running, the Managing Board requested not to be considered for any short-term variable compensation related to 2009 performance even though, based on an objective assessment of the Managing Board’s performance, variable compensation would have been warranted. The RNC very much welcomed this responsible initiative of the Managing Board. Consequently, the RNC recommended to the Supervisory Board that no short-term variable compensation be awarded for the performance year 2009 for any of the Managing Board members. The Supervisory Board accepted the recommendations made by the RNC and decided accordingly.

Review, relevant guidelines and compliance

NIBC needed to thoroughly review its remuneration policies and practices, both for the Managing Board, the Supervisory Board and other staff last year. This review was, indeed, undertaken and took the best part of the year given the complexity of the subject, the public and political sentiment and the various regulations that were published during the course of the year. These regulations included (i) the ‘Gentlemen’s Agreement’ between the Dutch Ministry of Finance and the Dutch Banking Association, (ii) the Rules of the Dutch State’s Credit Guarantee Scheme, (iii) the Report of the Maas Commission, (iv) the Dutch Corporate Governance Code, (v) the Dutch Banking Code, and (vi) the Principles for Controlled Remuneration Policies as issued by the Dutch Central Bank and the Dutch Authority for the Financial Markets (the DNB/AFM Principles). The RNC and the Supervisory Board have taken all these regulations into account in their review of NIBC’s remuneration policies.

Moderation of compensation

From the outset, it was agreed that the new remuneration policy had to be sustainable, balanced, aligned with and supportive of NIBC’s chosen strategy and risk appetite. It was also agreed that the governance surrounding the remuneration processes needed to be strengthened and brought into line with the various new regulations. In the course of 2008 and 2009, NIBC sharpened its business strategy, increased the focus on its core client franchise and significantly reduced its risk profile by exiting certain products and markets.

Following a robust process that included extensive research, scenario analysis and multiple constructive dialogues within the RNC and Supervisory Board and between the RNC and the Managing Board, the fully revised remuneration policy for 2009 and onwards was agreed in the Supervisory Board meeting of 17 December 2009.

Reduced variable compensation

As a result of the review, variable remuneration for the Managing Board was substantially reduced and is now much more moderate than before as a result of the introduction of caps on variable compensation. For example, maximum short-term incentive compensation for prior year performance has been reduced from 200% to 75% (50% for on-target performance) of base salary for the Chairman and the members of the Managing Board responsible for commercial divisions, from 180% to 55% (35% for on-target performance) of base salary for the Chief Risk Officer (CRO) and from 60% to 55% (35% for on-target performance) for the Chief Financial Officer (CFO). Moreover, the pay mix has changed by increasing the percentage of deferred compensation while a new, forward looking, long-term incentive has been introduced.

The principles

Remuneration principles

The new remuneration policy identifies the key principles that underpin the remuneration practices applying to all NIBC employees, including the Managing Board. These key principles require that remuneration is:

Aligned with business strategy and risk appetite;
Appropriately balanced between short-term and long-term;
Differentiated and discretionary;
Externally competitive and internally fair; and
Managed in an integrated total compensation way.

The policy further aims to achieve optimal alignment between the Managing Board on the one hand and senior management and other staff on the other hand.

Peer group composition

The Supervisory Board decided to establish a peer group consisting of all AEX and AMX (Euronext) listed companies. This peer group can easily be sustained over a longer period of time and is relevant both in terms of the relative size and complexity of NIBC’s business and the markets from which NIBC attracts or to which it stands to lose executive and other talent. More importantly, the composition of this peer group is objective and totally outside of NIBC’s control.

Market positioning

Through the cycle, total compensation for the Chairman and the members of the Managing Board is targeted just below the median of their peers in the aforementioned peer group.

Managing Board remuneration

Base salaries

Base salaries for the Chairman and the members of the Managing Board remain unchanged at EUR 700,000 and EUR 400,000 gross per annum respectively.

Short-term incentive compensation

A maximum of 75% (for CEO and members of the Managing Board responsible for commercial divisions) and 55% (for CRO and CFO) is available for the annual short-term incentive (STI). The STI consists equally of a cash bonus and a deferred cash bonus and is subject to the achievement of short-term (annual) performance targets. These targets contain an appropriate and balanced mix of financial and non-financial targets for the Chairman and the members of the Managing Board responsible for the commercial divisions such as (i) net profit to shareholders, (ii) efficiency ratio, (iii) revenue growth, and (iv) personal development. However, the targets for the CRO and the CFO are solely non-financial, such as (i) rating, (ii) funding and (iii) personal development. All performance targets are aligned with the approved 2010 budget and any pay-out is wholly discretionary.

Cash bonus

The cash bonus can never amount to more than 37.5% of base salary (25% for on-target performance) for the Chairman and the members of the Managing Board responsible for the commercial divisions and 27.5% (17.5% for on-target performance) for the CRO and CFO. The cash bonus is payable as soon as practical after the annual results of the bank are announced, but no later than immediately following the Annual General Meeting of Shareholders and subject to the individual not having resigned or his employment having been terminated ‘for cause’ prior to payment.

Deferred cash bonus

The deferred cash bonus part of the STI can also never amount to more than 37.5% of base salary (25% for on-target performance) for the Chairman and the members of the Managing Board responsible for the commercial divisions and 27.5% (17,5% for on-target performance) for the CRO and CFO. It is subject to three-year pro-rated vesting.

Long-term incentive compensation

The new regulations require executive compensation to consist of larger deferrals and more long-term components. In response to this, the policy introduces, with effect from 2009, a new long-term incentive (LTI). This LTI aims to stimulate long-term thinking and behaviour and rewards the Chairman and the members of the Managing Board for achieving bank-wide long-term performance conditions. The LTI is forward-looking and will be granted annually, irrespective of prior year business or individual performance. Its main aim is to provide an incentive to the Managing Board to achieve a balanced mix of pre-agreed long-term financial and non-financial performance conditions (e.g. employee engagement). The LTI will be subject to three-year cliff vesting and will be delivered in the form of Conditional Restricted Depositary Receipts (CRDRs) but, at the discretion of the Supervisory Board, may be determined in another form. The LTI will have a value equal to 25% of their respective base salary at grant and is also subject to an additional lock-up of two years following vesting.

Pension

In line with all other employees, the Chairman and members of the Managing Board are members of the NIBC pension plan (version 2007) consisting of (i) a defined benefit pension arrangement up to a pensionable salary of EUR 58,075 (for 2009) which is annually adjusted for general wage increases in line with the Collective Labour Agreement for Banks in the Netherlands, plus (ii) an additional contribution under a defined contribution arrangement up to a maximum pensionable salary equal to their respective base salaries.

The pensionable age for the Chairman and the members of the Managing Board is 65 at present. There are no contractual early retirement provisions. A standard flat rate contribution equal to 17.1% (from 2009) of pensionable salary for each member is paid by NIBC into the pension fund. The Chairman and other members of the Managing Board are required to make a personal contribution of 4% for 2009 (3.3% for 2010) of their pensionable salary towards their pension.

Certain transition measures apply to those members of the Managing Board who were members of the NIBC pension plan prior to 1 January 2007.

Other key benefits

The Chairman and the members of the Managing Board are entitled to a company (lease) car up to a certain limit or, if they choose, the equivalent value of the (lease) car limit as a cash allowance. The Chairman is entitled to the use of a permanent chauffeur from the chauffeurs pool, while the other members of the Managing Board are entitled to the use of a chauffeur from the pool for business purposes only, unless specifically otherwise agreed by the Supervisory Board. In line with other employees, the Chairman and the members of the Managing Board are entitled to a contribution towards their medical insurance, disability insurance, accident insurance and permanent travel insurance, a monthly expense allowance net of tax, a subsidy on mortgage interest paid on a maximum mortgage equal to four times their base salary and, finally, up to 30 holiday days per year.

Employment contracts

The Chairman and members of the Managing Board all have indefinite employment contracts, which are fully compliant with the Dutch Corporate Governance Code. Their appointment to the Managing Board is for a maximum term of four years. The term can be renewed. Any severance payment is limited to 12 months base salary.

Specific compensation issues for new managing board members

Mr. Ten Heggeler and Mr. Van Hessen, both appointed to the Managing Board in 2009, received employment contracts for an indefinite period of time but their appointment was restricted to four years, renewable. Their employment conditions were aligned with those of their colleagues on the Managing Board and in line with this remuneration policy. In addition to his annual regular compensation, Mr. Ten Heggeler received compensation of EUR 230,000 gross from NIBC. This enabled him to meet his contractual obligation to repay his previous employer the amount of relocation expenses that he was originally offered by them. He also received a payment of EUR 70,000 gross as partial compensation for deferred compensation from his previous employer lost as a result of his joining NIBC. Mr. Van Hessen, based in Germany until the end of 2009, continued to receive the normal expatriate benefits to which he was entitled until the end of 2009.

One-off co-investment

The Managing Board, Supervisory Board and shareholders agreed at the beginning of 2009 to rescind the long-term sign-on and retention awards made to the Managing Board in the first half of 2008. This included the personal investments in NIBC shares made by them. This rescission came on top of the Managing Board foregoing any entitlement to variable compensation based on 2008 performance. This joint decision was considered highly prudent and responsible.

However, the Supervisory Board indicated at the time that it would take this gesture into consideration as part of a wider review of the remuneration policy. It promised, in fact, to consider a modified, more moderate alternative arrangement. In its review of the remuneration policy, the Supervisory Board considered the various compensation regulations and NIBC’s special (private equity) ownership situation. The new remuneration policy had to be aligned with specific NIBC shareholder interests as well as the wider interests of other stakeholders.

Private equity-owned companies in general have historically required executives to make personal investments with their own money, in return for which they are entitled to some form of matching equity, be it shares or options. This is done in the belief that investors are best served when the executives’ interests are fully aligned with those of the shareholder. Consequently, these arrangements are totally back-ended in that any payout is deferred and contingent upon a liquidity event occurring in which the investors can sell their shareholdings or obtain partial or full liquidity. Until such time, these co-investments and the matching equity are typically totally at risk and subject to vesting. It is worth noting that these co-investment arrangements comply with the spirit of the new compensation regulations issued in the course of 2009 and that they avoid reward for failure.

The Supervisory Board was determined to ensure that any new one-off co-investment worth considering as a modified alternative to the prior rescinded arrangements in early 2009, complied with these characteristics.

Subsequently, and in close cooperation with the shareholder, the Supervisory Board decided to introduce a co-investment possibility. In light of the Dutch Banking Code, we will explain this co-investment possibility below. The Chairman and the members of the Managing Board were requested to invest up to one year’s base salary net in NIBC Common Depositary Receipts (CDRs). Taking into consideration prior personal investments made by some of the Managing Board members, the following (additional) net personal investments were made at the end of 2009: Mr. Drost (EUR 0.7 mln), Mr. Van Dijkhuizen (EUR 0.3 mln), Mr. Sijbrand (EUR 0.2 mln), Mr. Ten Heggeler (EUR 0.4 mln) and Mr. Van Hessen (EUR 0.1 mln). These personal investments were used to acquire CDRs at a price of EUR 9.25 per CDR, the value determined by the Supervisory Board and agreed with the Dutch Tax Authorities. In exchange for the personal investment made, the Supervisory Board, following consultation with the shareholder, decided to offer the members of the Managing Board a number of matching shares on a 1:1 basis. These matching shares are CRDRs with a net after tax value equal to the aggregate value of the CDRs acquired by them. These matching shares will be subject to four-year pro-rated vesting and a lock-up that expires on 1 January of the year following the fifth anniversary of the initial grant (i.e. 1 January 2014). However, these matching shares will be subject to immediate vesting and subsequent legal transfer upon a liquidity event and also subject to the condition subsequent to a liquidity event occurring, in which case they will become fully unconditional and can be legally transferred. The holders of the matching shares shall receive compensation, equivalent to the value of dividends paid (but not actually received by them) on NIBC shares during the vesting period. Subject to a liquidity event occurring in which the shareholders can sell their shares in NIBC and the Managing Board member still being employed, they are entitled to earn a number of additional performance shares in the form of CRDRs. These performance shares will be awarded only if the shareholders realise a pre-defined minimum return (starting from the date of grant) at the time they sell their shares. The number of performance shares increases from zero if the sales price settles above this minimum level and is proportionate to a number of matching shares that represents one year’s net base salary at the time of grant. In theory, the value of this one-off variable remuneration arrangement is uncapped, although the Supervisory Board has the discretion to adjust the ultimate value if, in its opinion, this would have unfair or unintended effects.

Other staff remuneration

Funding

Each year, based on a proposal made by the Managing Board, the Supervisory Board shall decide on the total amount of money available for variable compensation and the specific forms in which variable compensation may be awarded. The compensation ratio of NIBC has always been significantly lower than that of our main competitors and we were among the first to reduce our variable compensation pool back in 2007 by some 30%, at a time when most other banks were still maintaining or even slightly increasing the size of their pool. In 2008, we reduced our variable compensation pool by another 45%. Our 2009 compensation ratio decreased from 31% in 2008 to 27% in 2009 of operating income and the overall variable compensation pool for 2009 is still significantly below pre-crisis levels.

Variable compensation

All employees are eligible to receive STI compensation, but whether or not they actually receive it is wholly discretionary and depends on the overall performance of the bank and their respective business unit as well as on their own personal performance. Each employee will have a pre-agreed set of financial and non-financial performance targets. The performance assessment takes into account the realisation of pre-agreed targets as well as the way the employee has behaved according to the NIBC 7, the Business Principles of NIBC. The 100% cap introduced by the Dutch Banking Code for the Chairman and members of the Managing Board will serve as a guideline for other employees too, although a limited number of exceptions can be made annually, subject to specific prior approval by the RNC and the Supervisory Board. Any variable compensation in excess of 100% of base salary will be wholly deferred for three years with pro-rated vesting. STI compensation will be a combination of cash and deferred cash. The Managing Board shall determine the precise split between cash and deferred cash, if a threshold applies for the deferred bonus and, if so, how high that threshold is. The deferred cash bonus is subject to the same conditions as those that apply to the Managing Board.

In addition to STI compensation, senior management may qualify for LTI compensation in the same way and subject to the same conditions as those that apply to the Managing Board.

Special situations

Only in exceptional cases will the Managing Board offer sign-on or guaranteed minimum bonuses to new employees and retention bonuses to existing employees. In the unforeseen circumstance that these amount to more than 100% of the base salary of the individual employee concerned, prior approval will be obtained from the RNC and Supervisory Board. Any severance payment made in the case of termination of employment by NIBC without cause, is subject to the new business court formula (‘kantonrechterformule’) and, in the case of reorganisation, the bank’s Social Protocol. Special compensation plans for specific groups of employees such as carried interest arrangements are subject to prior approval by the Managing Board, which will annually inform the RNC and Supervisory Board about these arrangements.

Supervisory Board remuneration

Given the current climate, the Supervisory Board felt it inappropriate and unnecessary to consider any increase of its fees. The tax-free expense allowance of EUR 5,000 annually to which members were entitled was no longer deemed appropriate in light of prevailing tax rules. Consequently, this allowance was eliminated and the amount added to the gross fee. As of 1 January 2010, the Chairman and the members of the Supervisory Board are entitled to an annual gross basic fee which amounts to EUR 60,000 for the Chairman, EUR 50,000 for the Vice-Chairman and EUR 40,000 for a member. In addition to the annual basic fee, the Chairman and members of the Supervisory Board are entitled to further fees for membership of one or more committees amounting to EUR 15,000 for the Audit & Compliance Committee, EUR 11,500 for the Risk Policy Committee and EUR 10,000 for the Remuneration & Nominating Committee. The Chairman and the members of the Supervisory Board are further entitled to reimbursement of genuine business expenses made in the fulfilment of their duties.

Remuneration governance

In line with the various recommendations and guidelines issued by regulators, the governance surrounding the annual remuneration process has been strengthened and key roles have been agreed for the Human Resource function, the Risk Management function, the Compliance function, the Audit function and the Finance function. At least once a year, the Chairman of the Risk Policy Committee will attend the meeting of the RNC where remuneration decisions as mentioned above are prepared so as to assess whether or not the suggested compensation has led to or results from unnecessary risk-taking. The first steps towards this improved process have already been taken in the determination of 2009 variable compensation, but it will be further refined in the course of 2010. One of the first steps involves the Supervisory Board discussing employees with the highest proposed variable compensation for 2009 as well as any proposal to award variable compensation in excess of 100%, if any. A scenario analysis has been conducted to assess the possible outcomes of the variable remuneration components on an individual and collective basis.

Any unvested amounts of deferred cash, STI, LTI or one-off variable remuneration are subject to clawback by the Supervisory Board in the event they have been based on inaccurate financial or other data or fraud or when the employee in question is dismissed ‘for cause’. Moreover, in exceptional circumstances, the Supervisory Board has the discretion to adjust any or all variable remuneration if, in its opinion, this remuneration would have unfair or unintended effects. In assessing performance against pre-agreed performance criteria, financial performance shall be adjusted to allow for estimated risks and capital costs. Finally, the Supervisory Board shall annually discuss the employees with the highest variable compensation as well as give approval to any variable compensation in excess of 100% of base salary.

To avoid unnecessary duplication and in order to comply with the principles of the Dutch Corporate Governance Code, we refer to note 53 of the annual accounts for all relevant tables. These can be considered an integral part of this Remuneration Report.

Conclusion

The RNC and the Supervisory Board believe the new remuneration policy to be prudent and sustainable. Relevant regulations have been taken into consideration. The Supervisory Board believes in prudent management of remuneration but recognises that NIBC operates in a competitive marketplace where it needs to be able to attract, motivate and retain sufficient talent. Over time we will learn more about what happens in the marketplace and gain further experience in dealing with these issues.

The Hague, 8 March 2010

Supervisory Board

Mr. J. H. M. Lindenbergh, Chairman

Mr. W.M. van den Goorbergh, Vice-Chairman

Mr. C.H. van Dalen

Mr. N.W. Hoek

Mr. A. de Jong

Mrs. S.A. Rocker

Mr. D. Rümker

Mr. A.H.A. Veenhof