The Dutch “Gentleman’s Agreement” on Executive Compensation
I’ve only ever met one finance minister, the Netherlands’ Wouter Bos, but fortunately he seems to be doing a good job, cleverly striking a gentleman’s agreement with bailed-out Dutch banks to ensure the political sustainability of the Dutch government’s approach to the financial crisis. You can see the herenakoord here, but you almost certainly don’t read Dutch. Fortunately, Justin Fox translated some key points:
* During the credit crisis, salary increases at the top of a company can’t be any bigger than those for the rest of the personnel.
* At companies getting government support, the managing board [the top 5-10 executives, usually] won’t get any variable pay [a.k.a. bonuses] for 2009.
* At government-supported companies, there should also be the greatest possible reticence regarding variable pay for other senior managers in 2009 and until a new compensation policy has been determined.
* As part of a more durable and moderate compensation policy, golden parachutes will not exceed one year’s salary and long-term variable compensation will play a greater role relative to short-term variable pay.
Apparently Bos discussed this with Tim Geithner to some extent. But Geithner doesn’t quite seem to have been able to pull anything equivalent off. Instead, as Fox points out, we’re engaged in a tawdry cycle of congress getting into a populist dudgeon, but then loopholes are left everyplace and at least some elements of the executive branch are helping firms find ways to exploit the loopholes. In theory the upside of things like Larry Summers on such good terms with key financial firms would be the ability to do something like this. In practice, that doesn’t really seem to be the case thus far.
20 Responses to “The Dutch “Gentleman’s Agreement” on Executive Compensation”
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April 6th, 2009 at 1:14 pm
A gentleman’s agreement. Perhaps in the Dutch banking community Wouter Bos is dealing with gentlemen. Is there any evidence that Geithner and company are dealing with gentlemen?
April 6th, 2009 at 1:15 pm
“…but then loopholes are left everyplace and at least some elements of the executive branch are helping firms find ways to exploit the loopholes…”
And loopholes take many varieties:
FROM: http://finance.yahoo.com/tech-ticker/article/225897/Geithner’s-Stress-Test-%22A-Complete-Sham%22-Former-Federal-Bank-Regulator-Says;_ylt=Aj02xzTFVFzu_XFAk2_SEgG7YWsA?tickers=UBS,C,BAC,XLF,SKF,FAS?sec=topStories&pos=9&asset=TBD&ccode=TBD
Money quote:
“The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.”
April 6th, 2009 at 1:25 pm
So, the solution is to fire the heads of our banks and replace them with reasonable Dutch gentlemen?
I can buy that.
April 6th, 2009 at 1:31 pm
@1: seriously. Part of our problem is that we don’t have social mores anymore to qualify and modulate our greed. We’ve turned into a nation of unbridled Gordon fucking Gekkoes — and I don’t mean the commenter.
April 6th, 2009 at 1:35 pm
I’m generally wary of political correctness, but the term “gentleman’s agreement” is pretty obnoxious.
And by obnoxious I mean sexist. Can’t we retire it already?
April 6th, 2009 at 1:43 pm
The dutch aren’t any different than we are. The dutch bankers just don’t have this huge body of politically disengaged taxpayers like american bankers do. They have to answer to germans who are far more engaged about financial prudence, and the french aren’t that much less sensitive. Thus the political dynamics are far, far different. The dutch bankers *know* that there is a political cost to being an asshole that *will* translate to lost authority. That isn’t the case in the US.
April 6th, 2009 at 1:47 pm
You can see the herenakoord here, but you almost certainly don’t read Dutch.
But of course anyone with a working knowledge of German and English can pretty much work out Dutch by just saying it aloud – “heren” is just like “Herren,” German for gentlemen, and “akoord” is self-explanatory. Always fun.
April 6th, 2009 at 2:02 pm
mainstreet says:
I’m generally wary of political correctness, but
I’ll go on to complain about the accurate translation of a Dutch phrase used by that nation’s finance minister.
Shouldn’t the Stalinistas simply start airbrushing out of the record their non-PC bugbears?
April 6th, 2009 at 2:09 pm
I can, too, as long as they don’t replace the little jars of free candy at the tellers’ windows with jars of drop, which is the nastiest food I have ever tasted. Start giving these away, however, and we have a deal.
April 6th, 2009 at 2:27 pm
But of course anyone with a working knowledge of German and English can pretty much work out Dutch by just saying it aloud
Having been there/done that to a pretty large extent, I can attest that this works only very partially.
April 6th, 2009 at 2:46 pm
“The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.”
I’m so tired of this. You cannot simultaneously claim that banks are deeply insolvent and that a weak adverse scenario in the stress test will allow banks to appear solvent. If the stress test is a sham, you need to provide a better justification than this guy does.
April 6th, 2009 at 2:56 pm
but you almost certainly don’t read Dutch
I most certainly do, or should I say natuurlijk kan ik Nederlands goed lezen. Jesus, what kind of readership do you think you have? There are some Yalies reading your blog, you know, it’s not only illiterate Harvard types.
April 6th, 2009 at 3:22 pm
The Dutch have long had an ‘agreement’ between the workers and executives – it is known as the ‘Polder Model’ – see: http://en.wikipedia.org/wiki/Polder_Model .
In theory this means both worker and company benefit. As an expat from the USA, living here in Holland for 10 years, I can tell you what it means to me: A constant fight to try to get a decent salary for my work. As a degreed professional, I have found that being a freelance consultant suits me best, otherwise I would ‘feel’ underpaid.
Now, that said, the Dutch have a high standard of living and a good social safety net with affordable health care for all. It is likely my 35 years of living in the USA that gives me this perspective on my needs and wants – e.g. giving up that McMansion or that super-sized American auto or eating 4 times a week a 64 ounce steak with enough fries for 3 people. I am slowly overcoming them.
And again, all that said, there are regular stories in the Dutch press of price collusion among competitors – screwing the little guy.
Overall – Ik hou van holland!
April 6th, 2009 at 4:17 pm
But of course anyone with a working knowledge of German and English can pretty much work out Dutch by just saying it aloud
Let me just strongly second what live said. I had four years of German in high school, and I find reading Dutch very difficult—I actually have to “sound out” the words in my head and then translate them. The different spellings for the same sounds are incredibly disorienting to me.
April 6th, 2009 at 4:19 pm
Also, contra Pesto, salty licorice is absolutely delicious.
April 6th, 2009 at 5:06 pm
James, I’ll be happy to eat poffertjes, pannekoeken, uitsmijters, croquettes, stroopwaffels, matjes herring, eel, pea soup, frites (met sauce, of course), all the Dutch cheese you want, and to wash it down with genever, but hard liquorice covered in a chemical that wikipedia says is “common on burning coal dumps” is where I draw the line. That stuff literally makes me gag.
April 6th, 2009 at 5:26 pm
I’m so tired of this. You cannot simultaneously claim that banks are deeply insolvent and that a weak adverse scenario in the stress test will allow banks to appear solvent. If the stress test is a sham, you need to provide a better justification than this guy does.
I don’t understand why people believe it’s more of a solvency crisis than a illiquidity crisis. I don’t understand why they believe the stress tests are fraudulent. The just know? Maybe they are, maybe we’re turning Japanese, but it seems like an open question.
April 8th, 2009 at 9:37 pm
The topic is quite trendy in the net right now. What do you pay the most attention to while choosing what to write about?
April 9th, 2009 at 10:35 pm
FANTASTIC!
April 15th, 2009 at 6:23 am
I follow your posts for quite a long time and must tell you that your posts always prove to be of a high value and quality for readers.