Research report - Rotterdam School of Management

The Impact of Ownership and Board Structure
on CEO Compensation in the Netherlands
Nicolai Knop and Gerard Mertens 1,2
July 2010
Abstract
The primary objective of this study is to better understand the impact of ownership and board
structures on compensation of Chief Executive Officers (CEOs) in Dutch firms. For our sample of
the 75 largest Dutch firms for the period 2006-2008 we find that ownership and board structure
variables have significant additional explanatory power to commonly used economic determinants
like size, performance and growth opportunities. Outside blockholders, external shareholders who
own at least 5% of the shares, significantly lower the levels of total CEO compensation.
Ownership by management board members (excluding the CEO) and supervisory board
members are also negatively associated with levels of various forms of CEO compensation. The
effects of CEO ownership on compensation levels are, however, less conclusive. In contrast to
our predictions, anti-takeover measures also seem to have a monitoring role and have a
significant negative relation with CEO compensation. With regard to the board characteristics, the
key variable is the size of the supervisory board. Larger or “overcrowded” supervisory boards are
less effective which results in higher CEO compensation.
Keywords: CEO Compensation, Ownership Structure, Board Structure, Blockholders, Large
Shareholder, Corporate Governance
1
Contact details: Nicolai Knop (nknop@rsm.nl) and Gerard Mertens (gmertens@rsm.nl). Department of Accounting and
Control, Rotterdam School of Management, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR, Rotterdam, the
Netherlands.
2
We gratefully acknowledge the research assistance of Rien Strootman. We also like to thank Hewitt Associates in the
Netherlands for providing their compensation data.

1. Introduction
Previous studies on the impact of corporate governance on executive compensation are focused
on Anglo-Saxon countries, primarily the United States. There are relatively few studies covering
Continental Europe, like for example Elson and Goldberg (2003) and Haid and Yurtoglu (2006),
which both cover Germany. The relation between corporate governance and executive
remuneration in the Netherlands has not been examined yet 3 . The purpose of this study is to fill
this gap by examining the impact of ownership and board structures on compensation of Chief
Executive Officers (CEOs) in publicly-listed firms 4 .
The Netherlands, with its small open economy, are an interesting market to further investigate,
because its corporate governance features and pay practices lie in between the Anglo-Saxon
countries and Continental Europe. Furthermore, shareholders in the Netherlands have a binding
vote on executive pay, i.e. a majority of shareholders can reject a new remuneration policy, as
opposed to the (non-binding) advisory vote on pay in most Anglo-Saxon countries. Below we will
address some of these issues in more detail starting with the overall corporate governance
model, followed by ownership concentration, board structure, pay practices amongst Dutch firms
and the pay-setting process including the binding vote for shareholders.
The overall corporate governance model of the Netherlands is a mixture of the Anglo-Saxon
shareholder model and the stakeholder model (Rhineland model) which prevails in Germany and
other Continental Europe countries. According to the Dutch Corporate Governance Code the
management board and the supervisory board have overall responsibility for weighing up the
interests of stakeholders, generally with a view to ensure the continuity of the enterprise, while
the company endeavours to create long-term shareholder value 5 . This dual approach is still
subject to debate in the Netherlands; see for instance Maatman (2004), Boot, Mertens and
Wallage (2008) and Cools and Winter (2008).
The ownership structure of the Dutch firms is not as dispersed as Anglo-Saxon companies but
also less concentrated then their German counterparts. In Continental Europe ownership is much
more concentrated in contrast to large U.K. and U.S. firms with their dispersed ownership
structures (see Becht and Mayer (2000) and La Porta et al (1998, 1999)). Becht and Mayer
3 Research on executive compensation in the Netherlands has been primary focused on the pay-for-performance
relationship (i.e. Cornelisse et al, 2005; Mertens et al, 2007; Duffhues and Kabir, 2008; Van Ees et al, 2007; Otten et al,
2008; Kemna and Mertens, 2009). An exception is the recent study of the Netherlands Bureau for Economic Policy
Analysis (CPB) that analyses the causes of the growth of top wages of 600 Dutch companies, of which 10% was publicly
listed, for the years 1995-2005 (Straathof et al, 2010).
4 CEO compensation is most frequently studied in previous research on executive compensation.
5 The Dutch CG code defines stakeholders as follows: the groups and individuals who directly or indirectly influence (or
are influenced by) the achievement of the aims of the company. In other words employees, shareholders and other
providers of capital, suppliers and customers, but also government and civil society.

(2000), for instance, show that in many European countries single blockholders frequently control
more than 50% of the votes, while the majority of U.K. and U.S. listed companies have no
blockholder owning more than 10% respectively 6% of the shares. In addition, Becht and Mayer
show large differences between Continental European counties, ranging form a “private control
bias” in Germany to a modest management control bias of the Anglo-Saxon variety in the
Netherlands and Spain 6 .
In the Netherlands, like in Germany, a two-tier board structure is most commonly used as
opposed to the one-tier board structure in Anglo-Saxon countries. Within a two-tier board system,
the management board is responsible for the day-to-day business, the corporate strategy and
(financial) results. The management board, chaired by the CEO, is accountable for this to the
supervisory board and to the general meeting of shareholders. The role of the supervisory board,
e.g. the non-executive board members, is to supervise the policies of the management board and
the general affairs of the company, as well as to assist the management board by providing
advice. Because of this two-tier structure there is a natural distance between executive board
members and non-executive board members as opposed to the (Anglo-Saxon) one-tier model.
In a one-tier board all directors (both executive directors as well as non-executive directors) form
one board and take combined decisions. Furthermore, in a two-tier board structure there is a
clear split between the CEO and the chairman of the supervisory board, while in a one-tier board
the CEO can also be the chairman which has been common practice amongst many US
corporations 7 .
Executive compensation practices within Dutch firms tend to follow UK pay practices rather than
French or German pay practices 8 . Bryan et al (2006) compares the structure of executive
compensation of US firms with 256 firms of 36 non-U.S. countries for the period 1996-2004. They
show that the average ratio of equity-based compensation to total compensation of Dutch
companies (0.395) is closer to the ratios of the England (0.366) and the United States (.534), then
to France (0.176) and Germany (0.063). More recent studies of Van Ees et al (2007) and Hewitt
(2009) showed a strong convergence between the European countries, although variable pay
packages of German CEOs show a strong bias towards annual bonuses as opposed to long term
6 Becht and Mayer (2000) document that voting blocks of Austrian and German companies are typically clustered around
the 25%, 50% and 75% voting level which correspond to significant voting levels in both countries (blocking minority,
majority and super-majority voting). Haid and Yurtoglu (2006) also use these voting thresholds as dummy variables in
their regression models.
7 In the sample of Core et al (1999) about 75% of the firms had a CEO who was also the board chair. Agrawal and Nasser
(2009) showed that this percentage is about 64% for a more recent sample period (1998-2006). In addition Agrawal and
Nasser (2009) found that in about 30% of the firms the CEO also serves on the board’s nomination or corporate
governance committee.
8 Possible explanations are amongst others: a) the cross-listings of major firms like Reed Elsevier, Royal Dutch Shell and
Unilever, and b) that the U.K., in general, serves as a guide for the Netherlands on many corporate governance topics.
The British Combined Code that includes best practice provisions with regard to executive remuneration, for instance,
greatly influenced the first edition of Dutch Corporate Governance code, e.g. the Tabaksblat Code.

(equity based) incentives. Focusing on the most frequently used performance measures within
long-term incentive plans, Van Ees et al (2007) and Mertens and Knop (2008) found that the
majority of large Dutch and U.K. firms use relative total shareholder return as performance
measure within long-term incentive plans, while relative total shareholder return is less common
in France and Germany 9 . So not only the pay mix but also incentive design differs between
European countries 10 .
One of the most distinct corporate governance features - regarding executive compensation - of
the Netherlands constitutes shareholders’ right to vote on executive remuneration plans, i.e. the
so called “Say-on-Pay” 11 . As of 2004 Dutch companies should submit their new remuneration
policy for the next financial year and subsequent years (or major changes to the existing policy) to
the annual general meeting of shareholders for ex-ante approval, which is the final stage in the
pay-setting process (see exhibit 1). The shareholders of Dutch companies have a binding vote,
which implies that the new (or changed) policy cannot be implemented in case a majority of the
shareholders vote against. This is in contrast with the advisory vote in the UK. Since 2002,
shareholders of UK public companies have an advisory vote on the director’s remuneration report
which covers the pay policy for the next year(s) and prior year’s compensation for each director.
This advisory vote is however non-binding, so U.K. companies can disregard the opinion of
shareholders 12 . In the U.S the House of Representatives approved the “The Wall Street Reform
and Consumer Protection Act of 2009’’ in December 2009 which includes an advisory vote on pay
practices including executive compensation and golden parachutes. Germany had no “Say-on-
Pay” during the period 2006-2008. Shareholders could only vote on the pool of capital reserved
for share-based compensation plans, not the plans themselves. However, with the adoption of
new legislation, the “Gesetz zur Angemessenheit von Vorstandsvergütungen“ (VorstAG), on
August 2009, shareholders are now eligible to have an advisory vote on the remuneration report
of publicly listed firms in Germany. The setting in France is not much different from Germany
before the adoption of the VorstAG, with the exception that French shareholders enjoy a binding
vote over severance packages since 2007.
The “Say-on-Pay” regime in the Netherlands with its binding vote has resulted in several
landmark cases in the Netherlands. In 2008, Royal Philips Electronics, was the first Dutch
9
Total shareholder return (dividends reinvested) of a company compared to an industry peer group or a general market
index like for example the FTSE 100.
10
Ferrarini et al (2003) conclude: “European executive pay cannot, however, be regarded in a monolithic fashion given the
current sharp differences in corporate governance as well as diverging cultural attitudes towards wealth and pay
transparency”.
11
See the ISS/RiskMetrics reports of 2007 “What International Markets Say on Pay – An Investor Perspective” and 2008
“A Pan-European Perspective on Executive Remuneration”.
12
Royal Dutch Shell plc is a UK company, but headquartered in the Netherlands and a heavy weight in the Dutch large
cap index (the AEX), faced a majority of shareholders that voted against its remuneration report during the 2009 AGM.
However, because of its UK legal status this was only an advisory vote and Royal Dutch Shell maintained its incentive
plan and proposed bonus payments.

company ever where a majority of shareholders opposed the new long-term incentive plan (LTIP).
This veto was followed by VastNed Retail, a real estate investment company that faced a
takeover bid by IEF Capital, where shareholders opposed the award of retention bonuses to
executive board members. In addition, Corporate Express, facing strong shareholder opposition,
withdrew its remuneration proposal at the beginning of its 2008 annual meeting of shareholders.
Similar developments took place in 2009. Again VastNed Retail faced a majority vote against an
ad hoc bonus proposal. In addition, a number of major Dutch large caps, like Royal DSM,
Heineken and Randstad, also facing shareholder and public revolt, removed their remuneration
policy from the AGM agenda.
Although the number of cases, in which the majority of shareholders voted against the
remuneration policy of Dutch companies, is still limited, the threat of voting down remuneration
proposals may prove be to an uncomfortable burden for most public companies and their
directors.
Even though the Netherlands has some distinct corporate governance features including the
‘binding’ vote of shareholders on executive remuneration policies, the results of this study are
remarkably similar to previous U.S. and German studies. For our sample of the 75 largest Dutch
firms for the period 2006-2008 we find that ownership and board structure variables have
significant additional explanatory power to commonly used economic determinants like size,
performance and growth opportunities.
Outside blockholders, external shareholders who own at least 5% of the shares, significantly
lower the levels of total CEO compensation. Ownership by management board members
(excluding the CEO) and supervisory board members are also negatively associated with levels
of various forms of CEO compensation. The effects of CEO ownership on compensation levels
are, however, less conclusive. In contrast to our predictions, anti-takeover measures also seem to
have a monitoring role and have a significant negative relation with CEO compensation. With
regard to the board characteristics, the key variable is the size of the supervisory board. Larger or
“overcrowded” supervisory boards are less effective which results in higher CEO compensation.
The remainder of this study is organized as follows. Section 2 provides an overview of previous
studies on ownership and board structure in relation to executive pay. In this section we also
introduce our main hypotheses. Section 3 discusses the dataset and models used in this study. In
section 4 we present the main results of our empirical analysis. Section 5 summarizes and
provides the main conclusions of our study. Section 6 presents some further directions for future
research.

Exhibit 1: Pay-setting process in the Netherlands
Vote on new
remuneration.
policy or major
changes to
existing policy
during the AGM
Remuneration
Remuneration
policy
policy
Propose/set rem. policy
Pay level,
pay mix +
incentive
design
Shareholders
Shareholders
Supervisory
Supervisory
Board Board (SB)
(SB)
Remuneration
Remuneration
Committee
Committee
(sub (sub committee)
committee)
Management
Management
Board Board (MB)
(MB)
Other determinants
Economic factors: size, industry, growth opportunities, performance, risk
Institutional factors: law, fiscal regime, corporate governance codes
Public opinion: media, politics
External advisors: compensation consultants, proxy advisors
Appoint individual members in
AGM (max 3 terms of 4 years)
Select
members
Negotiate
Terms Terms of of emloyemloymentment
+target
+target
setting
setting
Negotiate
Performance
review
Annual
Annual
compensation
compensation
Performance

2. The relation between corporate governance and executive compensation
2.1. The balance of power within the pay-setting process
In the previous section we described the pay-setting process in the Netherlands and its specific
features. The outcomes of executive pay-setting process in general are however widely debated.
In the literature two competing theories exist that explain the determinants of executive
compensation. These are (1) the efficient or optimal contracting model and (2) the managerial
power model 13 .
The efficient contracting model, introduced by Jensen and Meckling (1976), assumes that pay is
set by an remuneration commission consisting of independent non-executive board members
(vis-à-vis managers) on behalf of the shareholders. This at arm’s length bargaining process
should result in a cost-effective compensation package that provides risk averse executives with
incentives to increase shareholder value. Since this model had been the dominant theory in
studies on executive pay, Bebchuk and Fried (2004) labeled it as the “official view”.
Various empirical studies provided evidence inconsistent with the efficient contracting theory.
Examples are amongst others Bertrand and Mullanaithan (2000), Core et al (1999), Hambrick
and Finkelstein (1995) and Yermack (1997).
These inconsistent results lead into a new model, the managerial power model, heavily
advocated by Bebchuk and Fried (2004) in their book Pay without performance: the unfulfilled
promises of executive compensation. The managerial power model argues that agents/managers
have the power to heavily influence the pay setting process resulting in rent extraction at the
expense of shareholders. So where the efficient contracting theory assumes that executive
compensation is used by shareholders to reduce agency costs, the managerial power theory
sees inefficient executive compensation arrangements as an agency problem on itself.
Bebchuk and Fried (2004) list several limitations to the at arm’s-length contracting view. We will
discuss some of these limitations. First, non-executive directors or supervisory board members
enjoy financial and non-financial benefits of holding board positions. Hence they have a desire to
be reelected on the board. To avoid internal friction and unpleasantness, directors avoid disputes
over CEO’s compensation. Second, CEOs have substantial power over the firm’s resources and
their positions sometimes give them significant influence outside the firm. CEOs can use this
power to benefit directors directly or indirectly ranging from directors’ compensation to donations
to charity foundations that employ or are headed by a non-executive director. Third, there are
13 See Otten (2007) for an extensive overview of existing theories on executive pay.

also various social and psychological factors like for instance friendship, loyalty and collegiality
that encourage non-executive directors which interfere with the at arm’s-length principle.
Even if directors operate with full integrity to serve shareholders’ interests, Jensen and Murphy
(2004) show that the result of the pay-setting process is almost inevitably tilted towards the
benefits of CEOs, because remuneration committees routinely lack time, information, expertise
and negotiation skills.
Besides the direct negotiations between the members of the remuneration committee and the
CEO, other market forces, like the managerial labor market, market for corporate control and
product markets, might influence the pay-setting process resulting into an arm’s length contract 14 .
According to Bebchuk and Fried (2004), however, these market forces might impose some
constraints, but are in general not sufficiently strong to dictate outcomes.
Shareholder’s power to intervene might be an effective control mechanism as well. As discussed
in the introduction, several Anglo-Saxon countries, like Australia and the U.K., have an advisory
vote on executive pay and the Netherlands have a binding vote. Although the number of cases in
which shareholders actually voted against compensation schemes is still fairly limited (ISS, 2007;
Risk Metrics, 2008), there is a growing tendency towards more scrutiny by shareholders as we
have seen in the Netherlands. In addition recent studies of Balachandran et al (2007) and Carter
and Zamora (2008) find evidence that shareholders in UK firms have influence on (the design of)
incentive schemes resulting in strengthened pay-for-performance link and less potential dilution of
equity-based incentives, particularly stock option grants.
Whether “say-on-pay” will be the panacea for keeping executive pay close to arm’s length
contracting arrangements remains to been seen. An important precondition is close collaboration
among shareholders in policy making, setting (new) guidelines and having an effective dialogue,
e.g. engagement, with (the boards) of companies in which they invest. Different types of investors
with their individual interests and preferences might result in a rather heterogeneous shareholder
base rather than a homogeneous pool speaking with one voice.
To sum, the executive pay process can be regarded as a continuum which is as a result of the
balance of power within a firm (Almazan et al, 2005; Sapp et al, 2007). The managerial power
hypothesis lies at one extreme with the managers having almost complete power to set pay. At
14 Two interesting examples of product market discipline are Dutch food-retailer Ahold and German car-parts supplier
Bosch. After the appointment of Mr. Moberg as CEO of Ahold in May 2003, consumers of Ahold, dissatisfied with the paypackage
of the new CEO, significantly decreased their spending in Ahold’s supermarkets. In an interview in the Financial
Times of 27 January 2010, the CEO of Bosch says that the company will not do business with banks that maximize
bonuses (Schäfer, 2010).

the other extreme lies the efficient contracting model in which the power to set pay is ultimately
held by the shareholders. This duality is well articulated by Finkelstein and Hambrick (1995): “In
management-controlled firms – were no single owner exists – results suggest an overreaching
pay philosophy: maximize CEO pay, subject to demonstration of face legitimacy of that pay. In
externally controlled firms – where a major (no manager) owner exists – results suggest a very
different philosophy: minimize CEO pay, subject to the ability to attract/retain a satisfactory CEO”.
The final balance depends on the ownership structure and the board characteristics. Exhibit 2
presents both dimensions with their underlying variables along with the main three actors, the
shareholders, the supervisory board and management.
The remainder of this section builds further on exhibit 2. The next paragraph (2.2.) provides an
overview of studies on ownership structure in relation to executive pay. We take a closer look at
the impact of outside blockholders on the level of executive compensation (2.2.1), followed by
supervisory board ownership in paragraph 2.2.2. and ownership by the CEO and other executives
in paragraph 2.2.3. Paragraph 2.3. describes the impact of the board characteristics like board
size, board independence, CEO tenure and tenure of supervisory board members. For each
variable a hypothesis is formulated as well which will be examined in section 4.

Exhibit 2: The balance of power within the pay-setting process
Ownership structure
Outside blockholders
�� Ownership concentration
�� Type of blockholders
�� Shareholder rights (antitakeover
measures)
Shareholdings of SB
�� Chairman
�� Other supervisory board
members
Shareholdings MB
�� Chairman
�� Other MB members
3 main actors
Shareholders
Shareholders
Remuneration Remuneration Committee
Committee
Management
Management
Board Board (MB)
(MB)
Appoint members
Approve rem. policy
Supervisory
Supervisory
Board Board (SB)
(SB)
Pay
negotiations
Board structure
Supervisory board
�� Board size
�� Independence of SB members
�� Tenure of SB members
Management Board
�� Tenure CEO

2.2. The impact of ownership structure on CEO compensation
2.2.1. Impact of blockholders on executive compensation
The separation of ownership and control, and the resulting conflict of interests between owners
(principals) and manager (agents), has been the heart of the agency theory (Jensen and
Meckling 1976). Shleifer and Vishny (1986) demonstrate that a large shareholder does have a
strong incentive to monitor managers and can play a beneficial role in remedying agency
problems and increase firm value. Cyert et al (2002) also present a theoretical agency model, but
the authors focus entirely on the pay-setting process and show that CEO’s equity compensation
is negatively related to the fraction of the firm held by the largest outside shareholder who poses
a takeover threat to managerial control.
The monitoring role of large outside shareholders, e.g. blockholder, as shown by Shleifer and
Vishny (1986) and Cyert et al (2002) is also supported by empirical evidence. Since most studies
covering the U.S. we start with these studies followed by an overview of non-U.S. studies. The
overview below will be in chronicle order.
U.S. studies
Studies by Lambert et al (1993) and Core et al (1999) find a negative relation between the
existence of an outside blockholder that owns at least 5 percent of the outstanding shares and
the level of executive compensation. Both studies cover data for the years 1982-1984. Dyl (1989)
also use data from 1982, but defines ownership as the natural logarithm of the percentage of the
firm held by the ‘top five’ shareholders instead of a single dummy variable like the previous
studies. He also finds a negative relation, which can be attributed to major shareholders that have
a meaningful economic incentive to engage in monitoring activities which reduce agency costs.
Cyert et al (2002), studying 1992-1993 data, find that the equity ownership of the largest external
shareholder is strongly negatively related to the size of CEO equity compensation and total
variable pay. In addition, they show that the largest shareholder does do not significantly lower
the level of base salary. Benz et al (2001) show that a higher concentration of shareholders 15
significantly lowers the value of granted options for S&P firms over the years 1992 to 1997.
Fahlenbrach (2004) uses shareholder rights instead of ownership concentration to express the
balance of power between management and shareholders. He finds over the period 1992-2001
that companies with weak shareholder rights pay their CEOs significantly more total
compensation 16 . Both cash compensation and equity-based compensation are higher. Becker et
15 Shareholder concentration is measured by the proportion of outstanding stock an average shareholder owns.
16 Fahlenbrach (2004) uses the governance index of Gompers et al (2003) to measure the balance of power between
shareholders and managers. Gompers et al (2003) have build a governance index based on 24 different corporate

al (2009) examine US firms in the period 1996-2001. They show that a non-managerial individual
blockholder (5%), excluding blocks held by mutual funds and other institutions, reduces total CEO
pay which is consistent with theories of large shareholders as monitors of management and
thereby mitigating agency costs.
Other U.S. studies focus only on a specific group of blockholders: the institutional investors 17 .
Hartzell and Starks (2003) find that concentration of institutional investor ownership is negatively
related to the compensation of top five executives over the period 1992-1997 18 . Almazan et al
(2005) investigate the same time period 1992-1997, but make a split in two types of institutional
investors: potentially active (investment advisers and investment companies) and potentially
passive investors (bank trust departments and insurance companies). Although they report a
difference between both groups with regard to their influence on the pay-for-performance
sensitivity, their main finding is that an increase in the concentration of ownership by both types of
institutional investors is associated with lower levels of salary and total compensation. Khan et al
(2005) studying US CEO compensation over the period 1992-1999, find that the largest
institutional shareholder - not necessarily owning a 5% stake - has a significant impact on CEO
pay, resulting in lower pay levels of compensation. Shin (2005) finds that concentration by large
institutions (top 5) is inversely correlated with the percentage of CEO compensation that is equitybased
for U.S. firms over the period 1998-2002.
Studies outside the U.S.
Elston and Goldberg (2003) is the first comprehensive study in Germany 19 . They analyze 91
companies over the 1970-1986 period and find similar results like previously mentioned U.S.
studies; concentrated ownership reduces the average and total level of compensation of the
entire management board. In addition they find evidence that bank influence has a negative
influence on pay levels 20 . Haid and Yurtoglu (2006) build further on the Elston and Goldberg
governance provisions and state takeover laws resulting in an index with a range of 0 to 24 (with 24 being the most hostile
environment for shareholders).
17 Further elaborating on Kahn et al (2005) there are a couple of reasons why large institutional investors are different
form large individual investors. In terms of expertise, large institutional owners have stakes in many organizations, as well
as experienced professionals to monitor their investments, and therefore might can more effective in influencing
compensation packages. In addition, large institutional owners have more power and expertise individually and collectively
through proxy voting agencies like Risk Metrics/ISS of Glass Lewis or corporate governance platforms like the Association
of British Insurers (ABI) and Eumedion in the Netherlands, compared to other large individual stockholders.
18 Their ownership variable, concentration of institutional investor ownership (top 5 institutional ownership scaled by total
institutional ownership instead of total shares outstanding), is heavily criticized by Smith and Swan (2007) as well as other
methodological issues like e.g. ineffective size control (not using the natural logarithm of firm’s market capitalization).
19 Earlier studies most similar to the study of Elston and Goldberg (2003), FitzRoy and Schwalbach (1990) and Schmid
(1997) also showed a negative effect of ownership concentration on the compensation of managers in Germany, but
faced data limitations (see Elston and Goldberg, 2003). FitzRoy and Schwalbach (1990) used annual data for 95 firms
form 1969-1985 but ownership data was only available for one year, 1982, and therefore the same ownership variable
was used for each company for the entire the sample period. Schmid’s (1997) sample covers only one year, 1991.
20 A firm is bank influenced if the bank owns more than 25% of the shares, if total votes of banks at shareholders’
meetings (including proxy votes) exceed 50% or if total votes ranges between 25% and 50% and the chairman of the
supervisory board is a banker.

study; their sample covers the period from 1987 to 2003. The authors find similar results: higher
ownership concentration lowers the average annual total pay (fixed plus variable) for the
members of the management board 21,22 . Like Elston and Goldberg (2003), Haid and Yurtoglu
(2006) also find that bank ownership substantially reduces the level of pay, but in addition they
find that family ownership has a significantly positive impact. Haid and Yurtoglu (2006) also
investigate the implications of deviations from the one-share-one-vote principle, e.g. cash flow
rights do not equal voting rights. Their results suggest that increases in the size of German
companies are associated with much higher pay levels when voting rights deviate from cash flow
rights.
Sapp (2007) find that Canadian firms with a controlling shareholder pay their CEOs less and the
gap between their CEO and the next four best compensated executives in the firm is less. Sapp
(2007) also finds that the level of variable compensation decreases for firms that are family
owned or when firms have a controlling shareholder 23 .
Based on the literature provided in this section we can formulate the first three hypotheses. The
first hypothesis is based on amongst others Lambert et al (1993), Core et al (1999), Cyert et al
(2002), Sapp (2007) and Becker (2009) which document a negative relation between large
external blockholders and the level of executive pay.
Hypothesis 1: outside blockholders, shareholders who own at least 5% of the shares, are
associated with lower executive pay.
Various studies like Hartzell and Starks (2003), Almazan et al (2005), Khan et al (2005) and Shin
(2005) make a distinction between types of blockholders and focus institutional investors because
of their strong monitoring capabilities. Like Almazan et al (2005) we make a split in two types of
institutional investors: potentially active (investment advisers and investment companies) and
potentially passive investors (bank trust departments and insurance companies).
Hypothesis 2: if the largest outside blockholder is a “potentially active institutional investor” it will
have a significant negative impact on the compensation levels.
21
Haid and Yurtoglu (2006) have no information on the compensation data of individual board members, because publicly
traded companies in Germany were not required to disclose executive compensation on an individual basis in the years
covering their sample period.
22
Elston and Goldberg (2003) and Haid and Yurtoglu (2006) measure ownership concentration from one to five, where
five defines the highest degree of concentration, with a single stockholder holding more than 75% of the firm’s shares. If
two or three stockholders hold more than 75% of the shares and the firm does not qualify for the higher concentration
level, then concentration is set at four. Concentration is set at three if a single stockholder holds more than 50% of the
shares, and two, if two or three stockholders own more than 50% of the shares. Concentration is set at one for all cases in
which the concentration level is lower than for category two.
23
A controlling shareholder is defined as the largest shareholder having either at least twice the voting rights of the next
largest shareholder or at least 10% equity ownership.

The monitoring role of large external shareholders can be mitigate as shareholders’ rights are
restricted. Weaker shareholder rights result in higher total compensation for CEOs and a higher
annual increase in compensation (Fahlenbrach, 2004; Haid and Yortoglu, 2006).
Hypothesis 3: weaker shareholder rights, e.g. deviations from the one-share-one-vote principle
or anti-takeover measures, will result in higher levels of executive pay.
2.2.2. Equity holding by supervisory board members
Lambert et al (1993) find a negative, but insignificant, association between the percentage of
outstanding equity owned by external board members and the level of executive pay. Core et al
(1999) also find a negative insignificant association between the percentage ownership per
outside director and CEO compensation. Similar results were found by Finkelstein and Hambrick
(1989).
More recent studies however find a significant negative relation between equity holdings by nonexecutive
board members and the level of executive pay. Cyert et al (2002) document a negative
relation between stock ownership by members of the remuneration committee and the level of
CEO compensation. In addition, Sapp (2007) shows that board members having larger equity
positions in the firm are related to lower compensation levels for the top five named executive
officers (NEOs) 24 . Agrawal and Nasser (2009) find that CEOs of firms with an independent
director who is also blockholder have (a) lower levels of cash and total compensation, and (b)
lower proportions of pay via stock and options 25 .
This leads us to the following hypothesis, whereby we apply the same 1% cut-off point as Nasser
and Aggrawal (2009):
Hypothesis 4: supervisory board members holding at least 1% of the shares have a negative
impact on CEO compensation levels.
2.2.3. Ownership by CEO and other executive board members
Finkelstein and Hambrick (1989) find a significant inverted U-shaped relationship between CEO
holdings and salary, whereby larger CEO ownership leads to higher salaries as long as CEO
ownership stays below 9%. After this point (of inflection) the reverse relation holds. Finkelstein
24
Sapp (2007) also document a negative coefficient for the CEO pay levels, but this relation is not significant at
conventional levels.
25
Agrawal and Nasser (2009) define blockholders as individuals who own or control 1% or more of a firm’s outstanding
equity (i.e., higher of cashflow rights or voting rights).

and Hambrick (1989) find no significant results for the bonus and total compensation (base plus
bonus). Lambert et al (1993) find a significant negative relation between the percentage of
outstanding equity owned by the CEO and the level of compensation. In addition they find a
negative, but insignificant, relation between the existence of a non-CEO internal board member
who owns at least 5 percent of the outstanding shares and the level of executive compensation.
Mehran (1995) finds that firms with higher managerial ownership have less equity-based
compensation. These findings hold for different managerial positions: the CEO, the top
executives as well as all officers and directors as a group 26 . Core et al (1999) also show that CEO
equity ownership or the presence of another executive board member who owns at least 5% of
the outstanding equity significantly reduces the level of CEO compensation for different
compensation definitions like base salary, total cash (base plus bonus) or total compensation
(total cash plus equity-based incentives). Bryan, Hwang and Lilien (2000) find that CEO
ownership is significantly negatively related to restricted stock grants. Cyert et al (2002) find,
unlike the other studies mentioned here, that larger CEO ownership results in higher pay levels,
either base salary, equity compensation or discretionary compensation 27 . Shin (2005) shows that
equity holding by the CEO are associated with a lower equity grant as percentage of total
compensation. Kahn et al (2005) find that higher levels of CEO ownership lead to a significant
reduction in the level of options compensation, as well as higher ratios of salary to total
compensation and lower ratios of options to total compensation. Sapp (2007) finds that the CEO’s
total compensation decreases as the shareholdings of the CEO increase.
Overall, we can conclude that most empirical studies find a negative relation between managerial
(non-CEO) ownership and the level of compensation (see Lambert et al, 1993; Mehran, 1995 and
Core et al, 1999).
Hypothesis 5: shareholdings of management board of at least 1% are negatively associated with
levels of CEO compensation.
The findings for CEO ownership are less conclusive. Finkelstein and Hambrick (1989) document
a significant inverted U-shared relation for base salary, but no find no significant results for bonus
and total compensation. Cyert et al (2002) document a positive (linear) relation between CEO
ownership and pay levels, while other studies (Lambert et al 1993; Core et al, 1999; Kahn, 2005;
26 Mehran (2005) also finds that the results for cash compensation are the opposite of those for equity-based
compensation, e.g. a positive relationship between the percentage of total compensation in cash (salary and bonus) and
the percentage of shares held by managers.
27 Their theoretical framework, however, shows that the effect of the CEO's ownership on his compensation is ambiguous.

Sapp, 2007) find a negative relation. Nevertheless, we also expect that higher CEO ownerships
results in lower CEO compensation 28 .
Hypothesis 6: there is a negative relation between a CEO owning at least 1% of the shares and
the level of CEO compensation.
2.3. Impact of the board structure on executive pay
Board structure also plays an important role in the pay-setting process. Below we discuss various
factors (see exhibit 2) that determine the strength and the independence of the Supervisory
Board: board size, independent directors, tenure of the CEO, tenure of the chairman of the
supervisory board and the average tenure of other supervisory board members.
2.3.1. Supervisory board size
Larger or “overcrowded” boards are considered to be less effective and therefore easier
influenced by the CEO. Bebchuk and Fried (2004) provide several reasons. We would like to
address two of them 29 . First, in larger boards individual directors may feel less responsible and
may focus less on firm’s affairs and executive pay accordingly. Second, due to their size these
board tend to be less cohesive and it is more difficult to gather a majority within the board to
challenge the CEO or other board members on compensation matters or otherwise. Results of
Core et al (1999) and Sapp (2007) support this conclusion; they find that larger boards are
positively related to the level of compensation. Findings of Cyert et al (2002), however, suggest
that the significance of board size is an indirect effect of the strong relation between executive
pay and firm size, and what matters in CEO pay is director’s ownership rather than the mere
number of directors.
Hypothesis 7: board size is positively associated with compensation levels.
28 Besides motives regarding the balance of power, economic motives of the CEO might as well play an important role in
explaining this negative relation between shareholdings of the CEO and the level of compensation. Lambert et al (1993)
suggests that the corporate CEO's compensation is a benchmark for lower-level managers' compensation. Therefore, if
CEO compensation is decreased, this will produce a large decrease in total organizational compensation and an increase
in the equity value of the firm. This will benefit the CEO with a high equity ownership as long as the lower level of
compensation is more than offset by an increase in the value of equity owned by the CEO. Another explanation is that
high managerial ownership results in higher concerns for dilution and therefore less equity-based pay. In addition, if riskaverse
managers hold a substantial equity stake in firm their interest are already aligned with the shareholders because
their wealth varies with firm performance (Core and Guay 2005).
29 The third argument of Bebchuk and Fried (2004) is that members of large boards are less likely to be constrained in
their decisions by the threat of public outrage; the larger the board, the harder it is for outside observers to direct their
outrage at any one member. We doubt if this argument still holds for the Netherlands (and the UK as well). After voting
against the remuneration report of Royal Dutch Shell during the 2009 AGM, shareholders forced Peter Jobs, chair of the
remuneration committee of Shell to step down. In addition during the 2009 AGM of Royal KPN almost a majority of the
shareholders voted against the discharge of Supervisory Board members from liability after shareholders were very
disappointed with changes in the executive remuneration packages which were not placed on the AGM agenda for voting.

2.3.2. Independent board members
Core et al (1999) find that CEO compensation is higher when the CEO is also the board chair and
when there is a greater percentage of the board that is not considered fully independent. External
board members that have been appointed by the CEO, who are ‘gray’ (a director is gray if he or
his employer received payments from the company in excess of his board pay), or who are
interlocked (a director is interlocked if an inside officer of the firm serves on the board of that
outside director’s company), are considered to be less independent. Benz, Kucher and Stutzer
(2001) find that when managers are also member of the board of directors the value of stock
options grant increases. Sapp (2007) finds that the percentage of independent directors is
significantly related to a decrease in the compensation levels of the top five named executive
officers. Sapp (2007) also finds a positive but statistically insignificant relation with CEO
compensation 30 . Overall evidence suggests that an independent supervisory board members
lower executive compensation.
Hypothesis 8: Independent boards are negatively associated with pay levels.
2.3.3. Tenure of CEO and other management board members
A longer managerial tenure might be associated with more managerial power as the (historical)
relation with the board of directors becomes stronger. Finkelstein and Hambrick (1995) document
an inverted U-shaped relationship between total pay and CEO tenure with inflation-adjusted pay
starting to decline at about 18 years of tenure. Cyert et al (2002) find a positive relation between
CEO tenure and base salary, but this relation is significantly negative for equity-based
compensation and discretionary compensation (e.g. annual bonuses). Fahlenbrach (2004) finds a
positive effect of CEO tenure on the level of CEO compensation. For instance, CEOs with a
longer tenure have substantially higher equity incentives. Despite the fact that the previous
empirical evidence is somewhat mixed, we hypothesize that CEO tenure is positively related to
compensation levels:
Hypothesis 9: CEO tenure is positively associated with pay levels.
2.3.4. Tenure of supervisory board members
Sapp (2007) finds a positive relation between the tenure of directors and the level of CEO
compensation. Remarkably, he does not find such strong relationship for the compensation of the
top five named executive officers.
Hypothesis 10: tenure of supervisory board members is positively associated with CEO pay.
30
In addition, Sapp (2007) finds that the presence of representatives of the controlling shareholder on the board is related
to lower executive compensation.

3. The Empirical Model and Data Description
3.1. Models
The hypotheses developed in chapter 2 will be tested using ordinary least-squares (OLS)
regression analysis. To be able to compare the results of this analysis with prior studies, in
particular the German studies of Elston and Goldberg (2003) and Haid and Yurtoglu (2006), we
will use the following general empirical specification of CEO compensation:
Ln (COMP)i,t = ß0 + ß1 ln(OWN)i,t + ß2ln(BOARD)i,t + ß3ln(Control)i,t, + ei,t (1)
Where COMP represents the amount of compensation (measured as fixed, variable pay and total
pay), OWN for ownership structure (ownership by external blockholders, type of blockholder, antitakeover
measures and ownership by board members), BOARD for board structure (supervisory
board size, supervisory board independence and tenure of board members) and CONTROL for
the control variables (size, growth, performance and risk). Finally, i and t denote the firm and the
time subscripts. The exact model and detailed definitions of the variables are presented in Exhibit
3.
Following Cyert et al (2002), all variables are expressed in natural logs with the exception of 0-1
dummy variables, because existing literature (see paragraph 3.3.4.) as well as our own
preliminary analysis indicates that firm size is the most influential determinant of the level of CEO
compensation, and that this relation is best described as log linear.
3.2. Sample and data sources
We collected data for the three main stock market indices in the Netherlands, the AEX-index
(large caps), the AMX-index (mid caps) and the AScX-index (small caps). Each index consists of
25 companies and usually is adjusted annually. This study uses the index-composition of 31
December 2008 (see appendix A for a list of companies per index).
For each company that is included in at least one of the three indices we collect data for three
years (2006-2008). Since two companies are not listed on the Amsterdam Stock Exchange in
2006, our initial sample covers 223 firm-year observations. Three companies do not have a CEO
in place in one the sample years. To reduce the effect of extreme observations, we exclude
outliers for both dependent and independent variables, which are defined as observations more
than three standard deviations from the median. The resulting sample has 200 firm-year
observations.

The data is collected from various sources. Compensation data are primarily obtained from Hewitt
Associates. Missing compensation data is added using information taken from the annual
reports 31 .
Corporate governance data, including shareholdings by members of the management board and
supervisory board, are also obtained from the annual reports. Data on substantial shareholdings
are collected from the public database of the Netherlands Authority Financial Markets (AFM). As
soon as the holding equals or exceeds 5% of the issued capital, the shareholder must report this.
Subsequently, he must notify the AFM again when the holding reaches, exceeds or falls below a
threshold 32 . With the revised law for substantial holdings (Wet Melding Zeggenschap) of 1
October 2006, hereafter WMZ 2006, the transparency on substantial shareholdings has improved
and a new database became available starting will all notifications as per 1 November 2006 33 .
Previous public databases of the AFM (WMZ 1991 and WMZ 1996) were not accurate (see also
De Jong et al, 2000). Finally, the control variables size and performance are obtained from
Thomson One Banker.
3.3. Measurement of variables
3.3.1. Compensation variables
We use three forms of compensation: base salary, variable pay and the sum of both, total
compensation 34 . All data are expressed in 2008 euros to correct for inflation.
Variable pay consists of short-term pay (the annual bonus) and the long-term pay (i.e. stock
options, performance shares, stock appreciation rights, and other long-term cash bonuses). The
annual bonus of year t is the bonus that belongs to the performance of year t. We correct for any
time lag differences (e.g. the bonus of 2007, which is regularly being paid in 2008, is part of the
variable pay for 2007). The grant value of long-term incentives is obtained from Hewitt Associates
31
From the 200 firm-year observations in our final sample, 13 firm-year observations were added form the annual reports
as they were not part of the Hewitt database.
32
This can be caused by the acquisition or disposal of shares by the shareholder or because the issued capital of the
issuing institution is increased or decreased. Thresholds are: 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and
95% (more details: www.afm.nl/registers/).
33
With the revised law for substantial holdings (Wet Melding Zeggenschap) of 1 October 2006, hereafter WMZ 2006, the
transparency of substantial shareholdings has increased. As a consequence, a new public database was created for
which all shareholders had to notify their substantial stakes as of 1 November 2006.
34
We do not use short-term pay and long-term pay separately because out of the original sample of 223 observations, 23
companies do not pay an annual bonus and about a third of the companies (75 observations) does not grant a long-term
incentive in one of the sample years. By combining both variable pay components, merely 10 out of 223 companies are
left with no variable pay in any of the observed years. These companies are not part of the final sample as we label them
as extreme observations (more than 3 standard deviations from the median). Besides methodological issues there is also
economic reason why to exclude this group; because it mainly consists of companies that are not operating on a going
concern basis. Two companies (5 observations) report net losses in each sample year. Spyker Cars, Van der Moolen (the
latter went bankrupt in 2009), and three financials (AEGON, ING Group and SNS Reaal) have received additional core
capital from the Dutch government to increase their capital base in the midst of the credit crisis. With the additional core
capital support these financials are no longer entitled to any performance-related pay in 2008. Furthermore, delegated
government representatives on the Supervisory Board of these firms have special veto rights with regard to compensation
and M&A transactions.

in the Netherlands. Where compensation data was not available in the Hewitt database, we
collected the data from annual reports and used the fair value of the equity-based instruments as
stated in the annual accounts.
Since compensation variables are highly skewed, we use the natural logarithm of one plus
compensation as the dependent variable (see also Agrawal and Nasser, 2009).
3.3.2. Ownership structure variables
Outside blockholders
A blockholder is defined as an outside investor, no member of either management or supervisory
board nor an anti-takeover entity, who owns at least 5% of the cash flow rights or 5% of the voting
power. We also exclude friendly organizations that are directly tied to the company and its
management, like the Vereniging AEGON and Stichting Beheer SNS Reaal. These bodies still
hold a large number (or even the majority) of common shares after the company became publicly
listed and are considered as a de facto anti-takeover defense mechanism.
As mentioned before, this 5% threshold triggers mandatory public filing in the Netherlands. The
same threshold applies under SEC regulation. Hence, other studies like Cyert et al (2002),
Mehran (1995) and Tosi and Gomez-Mejija (1989) also use this 5% cut-off. Following Dlugosz et
al (2005) we use voting power as opposed to investment power for our database when a
distinction can be made between the two. This is also in line with La Porta et al (1999), who also
rely on voting rights rather than cash flow rights. Recall from exhibit 2 that our primary interest is
the balance of power, e.g. who has effective control over the firm.
In our regression models we incorporate the combined voting power of all outside blockholders
(e.g. substantial shareholders) at year-end 35 . We therefore treat the sum of all blockholdings as a
continuous variable in contrast with previous studies which have expressed the presence of a
blockholder owning at least 5% of the outstanding shares by means of a dummy variable (e.g.
Core et al, 1999; Bertrand and Mullainathan, 2000).
In prior research considerable attention is being paid to one particular group of blockholders, i.e.
the institutional investors (see also paragraph 2.2.1.). In line with Almazan et al (2005) we
distinguish two types of institutional investors. The first group “passive financial institutions”
contains banks and insurance companies, like AEGON and ING Group, who might have
35 Some studies use a time lag with regard to ownership variables. They incorporate the ownership structure of t-1. Given
that equity ownership characteristics in a country are relatively stable over a certain period of time (see also La Porta et
al., 2002), we do not expect that measuring them on year-end t would yield a significant bias in our results.

potentially conflicting direct commercial interests with their investments 36 . The second group
“potentially active financials institutions” consists of large global asset managers (like Fidelity and
Schroders), pension funds (like APG and PGGM), and more active specialized local asset
managers (like Darlin and Todlin). The dummy variable TYPE equals one if the largest outside
blockholder is classified as a “potentially active financials institutions” and zero otherwise.
Anti-takeover measures
Potential influence by outside blockholders can be mitigated by anti-takeover measures. Dutch
companies use a number of anti-takeover measures (see Becht and Mayer, 2002; Eumedion
,2009). The most common anti-takeover measures are preference shares, priority shares and
certificates of shares.
In the Netherlands, more than 50% of the AEX, AMX and AScX companies (Eumedion, 2009)
have granted a legal entity (usually a foundation) an option to acquire preference shares in the
capital of the company. This legal entity, the “Foundation”, can exercise this option in situations
where, in the opinion of the Directors of the Foundation, the interest of the company, the business
or the interests of stakeholders are at stake. Exercise of the option to acquire the preference
shares could effectively dilute the voting power of the then outstanding ordinary shares.
Priority shares are shares with special control rights on for example the nomination of directors,
purchase and issue of shares or decisions on co-operation and mergers of business operations.
The third anti-takeover protection measure is certificates of shares. Common shares are issued to
an administrative office, which in turn issues depository certificates to other investors after
detaching voting rights. Due to changes in legislation, certificate holders are nowadays able to
vote. Nevertheless, administration offices remain influential because they are entitled to vote for
the certificate holders that do not use their voting powers.
If a company has one of these anti-takeover measures or has a large friendly blockholder (as
described above in the definition of an outside blockholder), like AEGON and SNS Reaal, than
the dummy indicator ANTI-TAKE equals one; otherwise zero.
Ownership by management board members
36 Almazan, Hartzell and Starks (2005) also make a distinction between 1) active institutional investors, 2) passive
institutional investors, and 3) other investors, (i.e., individuals). The first group (potentially active investors) includes the
types of institutions we expect have more skilled employees, are more likely to collect information, face less regulatory
and legal restrictions on their investments, and have less natural potential for business relations with the corporations:
investment advisers and investment companies. The second group (potentially passive investors) consists of the bank
trust departments and insurance companies.

Two dummy variables are included to capture for ownership by management board members.
The first dummy CEO OWN equals one if the CEO owns at least 1% of the shares outstanding.
The second dummy MB OWN equals one if the other members of the Management Board (the
CEO excluded) together own 1% or more of the shares outstanding on year-end of each sample
year 37 .
Ownership by Supervisory Board members
If the supervisory board members, including the Chairman, collectively own 1% or more of the
year-end shares outstanding, than the dummy SB OWN equals one, otherwise zero.
3.3.3. Board structure
Supervisory Board size
Larger or “overcrowded” supervisory boards are considered to be less effective and therefore
easier influenced by the CEO (see Bebchuk and Fried, 2004; Core et al, 1999, Sapp, 2007). If a
supervisory board size is larger than median, the dummy variable SB SIZE equals one, otherwise
zero.
Independence of the Supervisory Board members
If one of the members of the supervisory board members does not qualify as independent in
accordance with best practice provisions III.2.2 of the Dutch Corporate Governance Code, than
the dummy SB INDEP equals one 38 .
37 Agrawal and Nasser (2009) also use a 1% threshold for board members.
38 Best practice provisions III.2.2.: “A supervisory board member shall be deemed to be independent if the following
criteria of dependence do not apply to him. These criteria are that the supervisory board member concerned or his wife,
registered partner or other life companion, foster child or relative by blood or marriage up to the second degree as defined
under Dutch law:
a) has been an employee or member of the management board of the company (including associated companies as
referred to in Section 5:48 of the Financial Supervision Act (Wet op het financieel toezicht / Wft) in the five years prior to
the appointment;
b) receives personal financial compensation from the company, or a company associated with it, other than the
compensation received for the work performed as a supervisory board member and in so far as this is not in keeping with
the normal course of business;
c) has had an important business relationship with the company, or a company associated with it, in the year prior to the
appointment. This includes the case where the supervisory board member, or the firm of which he is a shareholder,
partner, associate or adviser, has acted as adviser to the company (consultant, external auditor, civil notary and lawyer)
and the case where the supervisory board member is a management board member or an employee of any bank with
which the company has a lasting and significant relationship;
d) is a member of the management board of a company in which a member of the management board of the company
which he supervises is a supervisory board member;
e) holds at least ten percent of the shares in the company (including the shares held by natural persons or legal entities
which cooperate with him under an express or tacit, oral or written agreement);
f) is a member of the management board or supervisory board - or is a representative in some other way - of a legal entity
which holds at least ten percent of the shares in the company, unless such entity is a member of the same
group as the company;
g) has temporarily managed the company during the previous twelve months where management board members have
been absent or unable to discharge their duties”.

Board tenure
Another best provision of the Dutch Corporate Governance Code (III.3.5.) stipulates that
supervisory board members are appointed for a maximum term of 12 years (3 terms of 4 years).
We make a split in the tenure of a supervisory board member. A tenure of more than 6 years is
considered as long. If the Chairman sits on the Supervisory board longer than 6 years, the
dummy CHAIR TEN equals one. If the other Supervisory Board members have an average
tenure of more than 6 years, the dummy SB TEN equals one. Likewise, the dummy CEO TEN
equals one if the CEO’s tenure is longer than six years.
3.3.4. Control variables
As control variables we use economic determinants that have been commonly used in previous
studies: firm size, growth opportunities, performance and risk 39 .
Size
Firm size is one of the best documented determinants of executive pay (i.e. Finkelstein and
Hambrick, 1989 and Tosi et al, 2000). Larger firms tend to pay their executives more. This sizepay
relation is also very strong for Dutch firms (e.g. Mertens et al, 2007 and Straathof, 2010). We
use the natural logarithm of annual sales as proxy for firm size.
Growth opportunities
In firms with more growth options it is more difficult to observe managers' actions, because the
results of these actions are more likely to materialize in future years. As a result, these firms may
have more severe agency problems. Studies like Smith and Watts (1992), Mehran (1995), Core
et al (1999), Bryan et al (2006) document that firms with more growth opportunities have make
more use of equity based incentives which might result into higher total pay levels.
Like Core et al (1999) and Bryan et al (2006) we use the market-to-book ratio as a proxy for its
growth opportunities. This ratio is set equal to the year-end market capitalization divided by the
book value of equity.
Performance
Next to size, the most studied variable is performance. Standard agency models suggest that the
level of pay is an increasing function of firm performance. We therefore expect that firm
performance is positively related to variable pay levels and therefore total compensation as well.
The relation with base salary is, however, less straightforward. Firm performance is measured by
39 Another control variable that is used frequently is “leverage”, see for example Yermack (1995), Bryan et al (2000),
Florackis and Ozkan (2004) and Bryan et al. (2006). Since our sample includes financials, like banks and insurance
companies, leverage is not included in this study.

an accounting measure, return on equity, and a market-based measure, the annual stock market
return on the common stock (e.g. Core et al, 1999 and Mertens, Knop and Strootman, 2007).
Risk
Firm risk is also a potentially important determinant of the level of CEO compensation. However,
literature has been unable to document a robust relation between firm risk and CEO
compensation. Consistent with other empirical research on compensation (e.g. Core et al, 1999;
Cyert et al, 2002 and Becker, 2009), we include share price volatility as a measure of firm risk.
The share price volatility is calculated as standard deviation of the share price on a weekly basis
in each year and annualized afterwards 40 . Similar to Core et al (1999) we expect an ambiguous
relation between firm’s risk and CEO compensation.
40 Standard deviation is annualized by multiplying the weekly standard deviation of the (natural) log weekly return by √52.

Exhibit 3: Model and variable definition
Ln (COMP)i,t = ß0 + ß1 ln(SALES)i,t + ß2ln(MTB)i,t + ß3ln(ROE)i,t, + ß4ln(STK RTN)i,t,+ ß5ln(PRICE
VOL)i,t + ß6ln(OUT BLK)i,t, + ß7 (TYPE)i,t ß8 (ANTI-TAKE)i,t + ß9 (CEO OWN)i,t + ß10 (MB OWN)i,t +
ß11 (SB OWN)i,t + ß12 (SB SIZE)i,t + ß13 (SB INDEP)i,t ß14 (CEO TEN)i,t + ß15 (CHAIR TEN)i,t + ß16
(SB TEN)i,t + ei,t
Variable Definition (ln denotes natural logarithm)
Compensation
COMP (Compensation) Year t CEO compensation, specified as either (i) base salary, (ii)
variable pay, (iii) total compensation, all expressed in 2008 euros.
Economic determinants (control variables)
SALES (sales) LN of the sales year-end t, expressed in 2008 euros (millions).
MTB (Market-to-book ratio) LN of the end of year t ratio of the market to book value of equity.
ACC RET (accounting return) 1 + year t accounting stock return, adjusted for inflation. Accounting
return is measured as the return on equity.
STK RTN (stock return) 1 + year t common stock return, adjusted for inflation.
PRICE VOL (share price volatility) LN of the annual standard deviation in year t based on weekly stock
returns.
Ownership structure
OUT BLK (Outside blockholders) LN (1 + fraction), whereby the fraction equals the total percentage of
voting power of all external blockholders for firm i on year-end t.
TYPE (Type of largest blockholder) The dummy variable TYPE equals one if the largest outside
blockholder is classified as “potential active institutional investor”,
otherwise zero.
ANTI-TAKE (anti-takeover measure) Dummy indicator ANTI-TAKE equals one if the company has an antitakeover
device, otherwise zero.
CEO OWN (CEO ownership) 1 if the CEO own more than 1% of total shares outstanding year-end
t, 0 otherwise.
MB OWN (Management Board ownership) 1 if the sum of all common shares owned by members of the
management board (CEO excluded) is at least equal to 1%, 0
otherwise.
SB OWN (Supervisory Board ownership) 1 if the sum of all common shares owned by members of the
Supervisory Board (Chairman included) is at least equal to 1%, 0
otherwise.
Board characteristics
SB SIZE (Supervisory Board Size) It the number of supervisory board members in year t exceeds 5 (the
median of the sample) than the dummy equals 1, zero otherwise.
SB INDEP (Supervisory Board independence) Dummy indicator equals 1 if one of the SB members is not qualified
as independent in accordance to the Dutch Governance Code.
CEO TEN (CEO tenure) If the CEO’s tenure exceeds 6 years, than the dummy indicator
equals 1, otherwise zero.
CHAIR TEN (Chairman tenure) If the tenure of the Chairman of the SB exceeds 6 years, than the
SB TEN (Tenure of other supervisory board
members)
dummy indicator equals 1, otherwise zero.
If the average of the other SB members (excl. the Chairman) exceeds
6 years, than the dummy indicator equals 1, otherwise zero.

3.4. Sample characteristics
Table 1 presents the summary statistics (after pooling the observations of the three survey years)
for the three compensation components and the independent variables. Compensation sales
have been transformed into 2008 euros using the harmonized price index of the Netherlands
(HCIP) 41,42 .
Compensation
The CEO’s median base salary is EUR 497,578, while the average base salary equals EUR
583,466. The median variable compensation equals EUR 455,604. Mean variable pay is however
substantially larger, EUR 973,480, which indicates the great variance of variable pay in our
sample. Median total compensation of the CEO is equal to EUR 919,190 (mean: EUR 1,556,945).
Economic determinants
Panel B of table 1 shows that median sales are EUR 1.6 billion. The average sales amounts to
EUR 10.4 billion euros, mainly caused by large cap companies as Royal Dutch Shell and ING
Group that are part of the AEX index.
Median stock returns are negative following the strong global declines in the stock markets as a
result of the credit crisis. This also causes a strong increase in share price volatility from about
25% in 2006 to over 50% in 2008 (not reported). Average share price volatility is 35.2%. The
return on equity, however, remains positive in our sample period. Finally, the median market-tobook
ratio equals 2.0.
Ownership structure
Outside blockholders hold on average 31.2% of the shares outstanding (median 28.0%), which
illustrates that the Netherlands lies between a fully dispersed ownership structure of Anglo-Saxon
countries and strong ownership concentration like in Germany with dominant single blockholders.
More than half of the companies (57.5%) use one or more anti-takeover measure and 28.5%
have a “potentially active institutional investor” as largest blockholder.
Almost twelve percent of the CEOs in our sample own at least 1% of the shares. This figure is
2.5% for other members of the management board (excluding the CEO). For eight percent of the
companies in our sample, the combined supervisory board (all members including the Chairman)
owns at least 1% of the shares outstanding at year-end.
41 http://statline.cbs.nl/StatWeb/publication/default.aspx?DM=SLNL&PA=71099ned&D1=a&D2=a%2c!0-
134%2c!142&HDR=T&STB=G1&VW=D.
42 We also used this HCIP index to convert return on equity and stock return from nominal returns to real returns.

Board characteristics
Forty-five percent of the companies have a supervisory board consisting of more than 5
members, the latter representing the median for the sample.
An interesting finding is also that thirty-eight percent of the companies have at least one
supervisory board member that does not qualify as independent accordancing to the Dutch
Corporate Governance Code. Note, however, that the Dutch CG Code allows one supervisory
board members to be qualified as non-independent, so the 38 percent should not be interpreted
as the percentage of companies that is not compliant with the Dutch Corporate Governance
Code.
About 26 percent of the CEOs have tenure of more than 6 years. This percentage is 42 percent
for Chairman of the supervisory board and 12 percent with regard to the average tenure of the
other supervisory board members (excluding the Chairman).

Table 1: Descriptive statistics pooled sample (2006-2008)
Panel A: CEO Compensation (euros)
Mean Median Std Dev.
Base salary 583,466 497,578 330,797
Variable compensation 973,480 455,604 1,231,755
Total compensation 1,556,945 919,190 1,511,676
Panel B: Economic determinants
Sales (millions of euros) 10,423 1,605 32,348
Market-to-Book (x) 2.520x 1.996x 1.821x
Stock return (%) -2.270% -2.305% 39.939%
Return on equity (%) 15.320% 16.891% 18.173%
Stock price volatility (%) 35.232% 31.257% 15.241%
Panel C: Ownership structure
% of shares held by outside blockholders 31.183% 27.960% 21.558%
Anti-takeover i 0.575 1.000 0.496
Potentially active institutional investor as largest blockholder i
0.285 0.000 0.453
CEO ownership (≥1%) i
0.115 0.000 0.320
MB members' ownership (≥1%) i
0.025 0.000 0.157
SB members' ownership (≥1%) i
0.080 0.000 0.272
Panel D: Board characteristics
Management Board size >5 i
Non-independent Supervisory Board members i
CEO tenure >6 years i
SB's Chairman tenure >6 years i
Average tenure of other members of the SB >6 years i
i: indicator variable equallling 0 or 1.
0.450 0.000 0.499
0.380 0.000 0.487
0.260 0.000 0.440
0.420 0.000 0.495
0.120 0.000 0.326
The sample consists of 200 annual observations of 75 firms betw een 2006 and 2008. Compensation amounts and sales are expressed
in 2008 euro's. Total compensation is the sum of base salary and variable pay.

4. Empirical results
4.1. Correlations
Table 2 presents the correlations between the variables in our model. We will discuss the main
independent variables below.
Economic determinants
Like previous studies, firm size, in this study proxied by sales, has the strongest correlation with
all compensation components, total compensation (TOT. COMP.), base salary (BASE SAL.) and
variable pay (VAR.PAY). The firm’s growth opportunities, measured by the market-to-book ratio
is, as expected, positively and significantly (at a 1% level) related to total compensation and
variable pay, but not to base salary. We find similar results for the performance measure return
on equity. Stock return has a significant positive correlation with variable pay, but not with total
compensation although the coefficient is positive. Share price volatility is negatively, and
significantly, related to all forms of compensation.
Ownership structure
The total holdings of all outside blockholders have an inverse relation (significant at the 1% level)
with all compensation components as predicted by hypothesis 1. In this hypothesis we predict
that outside blockholders are negatively associated with executive pay levels. Large shareholders
do have an important monitoring role and appear to restrain the levels of CEO pay. The variable
“TYPE” - representing passive or active institutional investors - does not show a statistically
significant relation with compensation. As a result, we find no evidence for our second
hypothesis. Remarkably, the variable “TYPE” does have a significantly negative relation with the
market-to-book ratio (MTB) and the sum of outside blockholdings, which would imply that
potentially active institutional investors are less common in firms with higher growth opportunities
or in firms with higher ownership concentrations. In line with our third hypothesis, anti-takeover
measures do have a positive relation with all three compensation components, however only the
correlation with variable pay is significant (at the 10% level). All three insider ownership variables
are inversely related to CEO compensation as predicted by our hypotheses 4, 5 and 6.
Noteworthy however, is that shareholdings by management board members have the strongest
inverse relation with CEO compensation; total pay, base pay and variable pay have a negative
correlation with management board ownership (excluding the CEO) and are significant at the 1%
level. CEO ownership is also inversely related to all forms of CEO compensation, which is in line
with hypothesis 6, but only the base salary coefficient is significant at the 5% level. Shareholdings
by supervisory board members show similar results. Again, only the base salary coefficient is
significant at the 5% level.

Table 2: Correlations
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
1 TOT. COMP 1.00
2 BASE SAL. ,868*** 1.00
3 VAR. PAY ,936*** ,698*** 1.00
4 SALES ,816*** ,793*** ,734*** 1.00
5 MTB ,236*** 0.07 ,348*** 0.14* 1.00
6 ACC RET ,192*** 0.08 ,238*** ,178** ,395*** 1.00
7 STK RET 0.09 0.01 ,151** 0.02 ,602*** ,335*** 1.00
8 PRICE VOL -0.14* -,140** -0.12* -0.13* -,350*** -,227*** -,670*** 1.00
9 BLK TOT -,435*** -,439*** -,312*** -,390*** 0.11 -0.01 0.04 0.10 1.00
10 ANTI-TAKE 0.10 0.09 0.13* ,238*** 0.04 0.11 0.04 -0.09 -0.01 1.00
11 TYPE -0.02 0.08 -0.09 -0.12 -,177** -0.02 0.04 -0.02 -,192*** -0.11 1.00
12 CEO OWN -0.08 -,161** -0.01 -,142** 0.01 -0.03 0.10 0.06 -0.07 0.02 -0.12* 1.00
13 MB OWN -,237*** -,283*** -,215*** -,252*** -0.05 -0.07 0.01 0.10 -0.05 -,186*** -0.10 ,243** 1.00
14 SB OWN -0.10 -,184*** -0.04 -0.10 0.09 -0.09 0.01 0.10 -0.05 -0.12 -0.10 0.01 0.07 1.00
15 SB SIZE ,678*** ,602*** ,626*** ,616*** ,151** 0.09 0.09 -,141** -,224*** ,229*** -0.08 -,169** -,145** -0.01 1.00
16 SB INDEP -0.06 -0.09 -0.02 0.01 0.14* 0.00 -0.01 0.03 ,246*** -0.01 -,198*** -,185*** -0.13 ,301*** 0.10 1.00
17 CEO TEN -0.04 0.00 -0.03 -0.07 -0.08 0.01 -0.09 0.11 -0.11 0.00 -0.02 ,394*** -0.02 -0.01 -,192*** -,300*** 1.00
18 CHAIR TEN -0.03 -0.03 -0.03 0.03 -0.12 0.02 -0.10 0.03 0.08 ,219*** -,156** 0.04 -0.14 ,197*** -0.04 ,231*** 0.10 1.00
19 SB TENURE -0.12* -0.09 -0.12 -0.10 0.02 -0.04 -0.02 0.05 ,224*** 0.01 -,165** -0.04 -0.06 0.00 -0.09 0.12 0.06 ,216*** 1.00
*. Correlation is significant at the 0.10 level (2-tailed)
**. Correlation is significant at the 0.05 level (2-tailed)
***. Correlation is significant at the 0.01 level (2-tailed)

Board characteristics
The size of the supervisory board has a strongly positive relation (significant at the 1% level) with
total compensation, base salary or variable pay. This corresponds with earlier research of Core et
al (1999), Sapp (2007), and is in line with Bebchuk and Fried’s (2004) claim that “overcrowded”
board are less effective resulting in higher CEO compensation. Supervisory board independence
is not found to be significantly related to CEO pay. Remarkable, however, is that the coefficient of
supervisory board independence is negative, contrary to the expected positive relation between
supervisory board independence and compensation levels following hypotheses 7. Tenure of the
CEO and supervisory board members are in most cases, and also in contrast with our
predictions, negatively related to the various forms of CEO compensation. With the exception of
the correlation coefficient of the tenure of supervisory board members and total pay, which is
significant at the 10% level, tenure of the CEO, chairman or other supervisory board members do
not appear to be important determinants for the level of CEO pay in Dutch firms.
4.2. Regression results
The regression of CEO compensation on its economic determinants, ownership structure, board
characteristics and year controls are presented in table 3. The first column contains the results for
total compensation, whereas base salary and variable pay are reported in second and third
column. The coefficients for the year indicators are not reported in the tables because they are
not of direct interest to this study and also because our sample only covers three years.
Total compensation
In line with earlier studies we find that the size of a company is the most important determinant for
the level of compensation 43 . The sales indicator has a coefficient of 0.24 which implies that for
every 10% increase in firm size, the average compensation paid to CEO increases by about
2.4%. As predicted, we also find a strong positive relation between CEO pay and the firm’s
growth opportunities (measured by the market-to-book ratio). The other economic variables,
performance and risk, do not have a significant relation.
Outside blockholders are negatively related to the level of compensation at a 1% level of
significance. The coefficient of -0.81 implies that every 10% increase in the total percentage of
shares owned by outside blockholders lowers total CEO pay with 8.1%. Remarkably, antitakeover
measures also lower CEO compensation in contrast to what we earlier predicted. It
seems that anti-takeover mechanisms like administration offices or friendly blockholders - in
combination with the other explanatory variables - also play a monitoring role. The type of
43 The standardized beta is twice as large as that of second strongest independent variable.

investors, where we particularly focus on the “potential active institutional investor”, is not
significantly related to total compensation.
Management board ownership has a strong negative impact on the level of compensation in
accordance with earlier predictions, the coefficient of -0.40 is significant at the 5% level.
Shareholdings of supervisory board ownership are also inversely related to CEO pay but not
significant on conventional levels. CEO ownership has, in contrast to our predictions, a positive,
though insignificant coefficient.
Looking at the board characteristics, the key variable is the size of the supervisory board. Larger
(or “overcrowded”) supervisory boards appear to be less effective, which result in higher CEO
compensation. The coefficient 0.49 implies that supervisory boards with more than 5 members
pay their CEO 49% more. The other board structure variable that is significantly related to CEO
pay is the independence of supervisory board members. Independent supervisory board
members are negatively associated with the levels of pay (at the 10% level). Like anti-takeover
measures, non-independent supervisory board members seem to have a monitoring role as well.
Tenure of the CEO or supervisory board members are not statistically significant associated with
total compensation.
Base salary
Again size is the most important determinant for the level of pay. As predicted growth
opportunities are not significantly associated with base salary. Of the other economic indicators,
only return on equity has a significant (and negative) relation with base pay.
Outside blockholders and anti-takeover mechanisms are inversely related to base salary, which is
in line with the results for total compensation. There are, however, some remarkable differences
to total compensation as presented in column 1. Potentially active institutional investors have a
positive impact on the level of base salary. A potential explanation might be that these investors
are primarily focused on incentive based pay and pay-for-performance while being less
concerned with the overall level of base salary given the fact that variable pay makes up for the
lion’s share of executive pay in the Netherlands 44 . Another difference is that next to management
board ownership, shareholdings of supervisory board members have a negative coefficient
(significant at the 1% level) as well. Both variables reduce base salary with 28.8% and 22.5%.
The size of the supervisory board is again the key variable with regard to board characteristics.
Non-independence of supervisory board members is not significantly related to the base salary.
44 In our sample, see table 1, mean base pay equals EUR 0.58 million, which is about 37.5% of total pay EUR 1.56 million.

However, in contrast to total compensation, CEO tenure is positively associated with base salary.
The coefficient for the CEO tenure is 0.089, which means that CEOs with a longer tenure (more
than 6 year in position) are paid 8.9% more than their counterparts with a shorter tenure. This is
in line with our earlier predictions. Tenure of supervisory members is not significant at
conventional levels.
Variable pay
Size and growth opportunities are the major determinants for variable pay. Return on equity and
stock return are positively related, as predicted, but they do not have significant coefficients.
Stock price volatility also has a positive, but insignificant, regression coefficient.
In contrast to base salary and total compensation, outside blockholders do not have a significant
impact on the level of variable pay (note that the coefficient remains negative). The type of largest
outside blockholder is also not significant. From this we infer that insiders largely determine actual
variable pay levels, within the boundaries set by the overall remuneration policy as (ex ante)
approved by shareholders. In other words, the final decision for granting annual bonuses and
long-term incentives is made by the supervisory board in consultation with the management
board/CEO and related parties, e.g. anti-takeover entities like administration offices and friendly
blockholders. The outcome of this internal decision process depends on various factors. On the
one hand, CEO ownership and larger supervisory board are associated with higher variable pay,
while management board ownership and anti-takeover measure have a mitigating effect on the
other hand.
We finally note that the incremental adjusted R-squared is significant for every compensation
variable (total pay, base pay and variable pay) indicating that ownership and board structure have
additional explanatory power next to the economic control variables.

Table 3: Regression results full sample
Predicted
sign Total Base
Variable
pay
Constant 12.427 *** 12.295 *** 9.940 ***
26.240 37.324 10.464
Sales + 0.242 *** 0.168 *** 0.359 ***
11.043 10.976 8.161
Market-to-Book + 0.230 *** 0.045 0.547 ***
4.156 1.163 4.918
Return on equity + -0.010 -0.200 * 0.126
-0.064 -1.840 0.402
Stock return + 0.113 0.036 0.246
0.956 0.432 1.035
Stock volatility ? -0.046 -0.078 0.091
-0.411 -0.993 0.405
Sum of all blockholders - -0.810 *** -0.439 *** -0.610
-3.795 -2.954 -1.423
Anti-takeover measure + -0.221 *** -0.140 *** -0.243 **
-3.635 -3.315 -1.994
Potential active inst. investor - 0.077 0.132 *** 0.020
1.100 2.716 0.144
CEO ownership ≥1%) - 0.150 -0.061 0.452 **
1.468 -0.858 2.203
MB ownership ≥1%) - -0.404 ** -0.288 ** -0.677 *
-2.025 -2.076 -1.691
SB ownership ≥1%) - -0.138 -0.225 *** -0.037
-1.198 -2.795 -0.159
Size supervisory board + 0.494 *** 0.232 *** 0.766 ***
6.723 4.531 5.191
Non-independence of SB members + -0.119 * -0.046 -0.172
-1.752 -0.968 -1.258
CEO ternure + -0.013 0.089 * 0.006
-0.172 1.719 0.040
Tenure chairman SB + 0.084 0.046 0.106
1.301 1.036 0.823
Tenure other SB members + -0.005 0.038 -0.126
-0.051 0.612 -0.698
Adjusted R 2
0.771 *** 0.720 *** 0.657 ***
F 38.274 29.426 22.190
Incremental Adjusted R 2 form
ownership and board structure
variables
0.087 *** 0.087 *** 0.052 ***
F 6.320 5.169 2.522
*. significant at the 0.10 level
**. significant at the 0.05 level
***. significant at the 0.01 level
CEO compensation variable (n=200)

4.3. Robustness checks 45
Consistent with previous studies, firm size has the greatest explanatory power for variations in all
three types of CEO compensation. Given our small sample size we are not able to split our data
into “small” versus “large” firms (e.g. Cyert et al, 2002). Alternatively, we run separate regressions
in which we exclude either the top 20% of the largest firms (first quintile) or the bottom 20% of the
smallest firms (fifth quintile). Results for total compensation and variable pay are reported in table
4.
We start with total compensation presented in the first two columns. The first column reports the
total compensation regression results for the sample without the 20% largest companies. The
second column reports the results for the sample without the 20% smallest firms. In line with
previous results presented in table 3, size, growth opportunities, outside blockholders, antitakeover
measures and the size of the supervisory board are significant determinants in both
regressions.
There are also a number of differences. First, the regression model has a higher explanatory
power if the 20% smallest firms are removed (similar results for the variable pay regression).
Second, the constant in the second column is higher. As expected removal of the 20% smallest
firms result in higher compensation levels. Third, management board ownership plays a
significant role if the top 20% of the firms is removed. Because none of the larger firms have
management boards owning at least 1% of the shares (management ownership of at least 1% is
only apparent in smaller firms), this variable is not apparent in the second column. Fourth, nonindependence
of supervisory board members has a significant negative impact for the subsample
for the larger firms (column 2) while this coefficient is also negative, but insignificant, for the
smallest firms reported in column 1.
Variable pay is presented in the third and fourth column. Again size, growth opportunities and
size of the supervisory board are the significant variables in both sub samples.
There are also a few remarkable differences between columns 3 and 4. Only for the sub-sample
without the top 20% largest companies, presented in column 3, CEO ownership is significantly
positively associated with variable pay. In addition, blockholders do have a significant inverse
relation with total variable pay for larger firms (column 4), while this relation is also negative, but
not significant for the smaller firms (column 3). Only in larger firms, non-independent supervisory
board members have a significant negative relation with variable pay (at the 5% level).
45 Although not reported we have also performed the same regressions for a sub sample on only Dutch legal entities.
Because non-Dutch (e.g. Royal Dutch Shell Plc. and Antonov Plc.) firms only account for a small fraction (5.5%) of our
total sample of 200 firm-year observations, results do not change.

Overall, we find a number of resemblances between the two sub-samples. Size and growth
opportunities remain the important economic determinants. Blockholders and anti-takeover
measures lower CEO pay, while large supervisory boards are associated with higher pay levels.
Notable differences are the impact of managerial ownership and non-independence of
supervisory board members. Management board ownership and CEO ownership are more
important in smaller companies, while the monitoring function of non-independent is more of
significance in larger companies.

Table 4: Regression results without largest 20% firms and without bottom 20% firms
Predicted
sign
Total compensation Variable compensation
Without
top 20%
Without
bottom
20%
Without
top 20%
Without
bottom
20%
Constant 12.191 *** 12.601 *** 9.509 *** 11.696 ***
22.234 20.237 8.458 9.824
Sales + 0.237 *** 0.256 *** 0.366 *** 0.313 ***
7.520 8.250 5.659 5.288
Market-to-Book + 0.208 *** 0.256 *** 0.566 *** 0.423 ***
2.966 4.192 3.939 3.623
Return on equity + -0.001 0.062 0.218 0.215
-0.006 0.345 0.624 0.622
Stock return + 0.160 0.030 0.254 0.232
1.129 0.229 0.872 0.932
Stock volatility ? 0.034 -0.115 0.182 -0.155
0.256 -0.892 0.666 -0.628
Sum of all blockholders - -0.744 *** -0.712 *** -0.434 -0.826 *
-2.962 -2.951 -0.843 -1.790
Anti-takeover measure + -0.242 *** -0.263 *** -0.254 * -0.415 ***
-3.269 -3.983 -1.679 -3.285
Potential active inst. investor - 0.061 -0.039 0.040 -0.161
0.712 -0.497 0.226 -1.081
CEO ownership ≥1%) - 0.173 -0.126 0.541 ** -0.124
1.469 -1.020 2.237 -0.528
MB ownership ≥1%) - -0.454 ** na -0.715 na
-2.092 na -1.609 na
SB ownership ≥1%) - -0.191 0.086 -0.081 0.315
-1.456 0.607 -0.300 1.166
Size supervisory board + 0.530 *** 0.460 *** 0.804 *** 0.714 ***
6.539 6.015 4.837 4.886
Non-independence of SB members + -0.108 -0.188 ** -0.132 -0.353 **
-1.316 -2.604 -0.786 -2.558
CEO ternure + 0.014 -0.007 0.058 0.001
0.165 -0.088 0.335 0.007
Tenure chairman SB + 0.060 0.036 0.010 0.008
0.777 0.520 0.065 0.058
Tenure other SB members + 0.001 -0.004 -0.103 -0.250
0.009 -0.044 -0.496 -1.338
Adjusted R 2
0.621 *** 0.751 *** 0.513 *** 0.617 ***
F 15.480 29.426 10.311 16.063
Incremental Adjusted R 2 form
ownership and board structure
variables 0.148 *** 0.093 *** 0.069 * 0.090 ***
F 5.077 4.855 1.842 3.055
*. significant at the 0.10 level
**. significant at the 0.05 level
***. significant at the 0.01 level
CEO compensation variable (n=160)

5. Conclusions and summary
The primary objective of this study is to better understand the impact of ownership characteristics
and board structures on compensation of Chief Executive Officers (CEOs) of publicly listed firms
in the Netherlands. In our study we focus on the level of total compensation, base salary and total
variable pay 46 of the largest 75 companies over the three year period 2006-2008.
In line with previous research we find that ownership and board structure variables have
significant additional explanatory power over commonly used economic determinants like size,
performance and growth opportunities.
Outside blockholders significantly lower the levels of total CEO compensation. This finding may
have important public policy implications. Long-term shareholders and active share ownership are
currently subject to debate in the Netherlands, both firms and institutional investors are
considering ways to improve long term relationships. Examples of this are the loyalty dividend as
proposed by Royal DSM in 2007 to attract and reward long-term investors and Kemna and Van
de Loo (2009), who suggest offering pension funds preferential prudential treatment by lowering
the risk for a portfolio consisting of 5% interests in the Financial Assessment Framework of the
Dutch Central Bank (DNB). Regardless of the question whether these specific initiatives will prove
to be successful, the underlying trend for promoting active long-term ownership by large
shareholders might provide the right course because large shareholders are an effective monitor
to curb executive pay levels which have been debated in Netherlands since the late nineties.
In contrast to our predictions, anti-takeover measures also seem to play monitoring role and have
a significant negative association with CEO compensation. This outcome is, however, the result
of the interaction with other corporate governance variables. Additional research on the
interaction between various governance variables is required.
Ownership by other management board members (excluding the CEO) and supervisory board
members are also negatively associated with levels of various forms of CEO compensation. The
effects of CEO ownership on compensation levels are less conclusive at first glance. Additional
robustness checks show that CEO ownership is positively associated with compensation levels in
smaller firms, while it has a negative (but not significant) relation with pay in larger firms. Overall
results suggest that managerial ownership is more prominent in smaller companies.
46 The sum of short-term incentives (annual bonuses) and long-term incentives (i.e. options and performance shares).

With regard to the board characteristics, the pivotal factor appears to be the size of the
supervisory board. Larger or “overcrowded” supervisory boards are less effective, which results in
higher CEO compensation.
The other board structure variable which is inversely related to CEO pay is the independence of
supervisory board members. This result especially holds for larger firms. Like anti-takeover
measures, non-independent supervisory board members, amongst others former employees,
members with large equity stakes or supervisory board members that are tied to a large investor
or a bank, may have a monitoring role as well. Previous research shows that representatives of
the controlling shareholder on the board of directors are effective monitors and lower CEO
compensation levels (Sapp, 2007; Agrawal and Nasser, 2009). Interesting to note is that
Eumedion, the Dutch corporate governance platform for institutional investors, is currently
investigating whether large shareholders should be more involved in nomination process of
supervisory board members 47 .
CEOs with tenure of more than six years receive higher base salaries, but no significant relation
is found for variable pay or total compensation. We also find no evidence that the tenure of
supervisory board members is significantly related to CEO pay.
47 See Eumedion newsletter of January 2010,
http://www.eumedion.nl/doccontrol/index.php?action=download&href=%2FNieuwsbrieven%2FNIEUWSBRIEF+2010-
01.pdf

6. Future research directions
Further research on the impact of ownership and board structure on executive compensation in
the Netherlands should be primary aimed at collecting a larger sample size. This can done by
either adding the number of companies, approximately 130 firms are listed on the Amsterdam
Stock Exchange year-end 2008 while our sample only covers the largest 75 firms, or by
extending the sample period 48 . The registers for substantial blockholders of the Dutch Authority
for the Financial Markets before 2006 are not fully consistent, as discussed in Section 3, but with
cross-examination of other sources like annual reports at least four years (2002-2005) can be
added next to an up-date with 2009 figures.
In addition to the variables included in this study, other compensation variables could be
examined. Rather than the level of compensation, the pay mix (variable pay to total
compensation) or incentive intensity (Bryan, Hwang and Lilien, 2000) could be added to the
analysis.
Additional insights might be gained by using different ownership and board structure variables.
Ownership concentration could, for example, be measured with the Herfindahl index (FitzRoy and
Schwalbach, 1990; Hartzell and Starks, 2003). Finally, the interaction between different corporate
governance variables is a promising field for further research like for instance the relationship
between different types of blockholders or owner-board interlocks (e.g. shareholders with board
representatives).
48 See Euronext Amsterdam Fact Book 2008

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Appendix A: Sample composition
Index composition per 12-31-2008
Large Cap Mid Cap Small Cap
AEX AMX AScX
1 Aegon Aalberts Accell Group
2 Ahold AMG Antonov
3 Akzo Arcadis Ballast Nedam
4 Arcelor Mittal ASM International Beter Bed
5 ASM Litho BinckBank Brunel
6 BAM Group Boskalis Eriks
7 Corio Crucell Exact Holding
8 DSM CSM Fornix
9 Fortis Draka Gamma
10 Fugro Eurocomm. Prop. Grontmij
11 Heineken Heijmans InnoConcepts
12 ING Imtech Kardan
13 KPN Logica Kas Bank
14 Philips Nutreco Macintosh
15 Randstad Océ Nieuwe Steen Inv.
16 RD Shell-A Mediq (OPG Group) Qurius
17 Reed Elsevier Ordina Sligro
18 SBM Offshore Pharming Spyker Cars
19 TNT Smit Super de Boer
20 TomTom SNS Reaal Telegraaf
21 Unibail-Rodamco KTC TKH Group
22 Unilever Vastned Retail Unit 4
23 USG people Vopak Van Lanschot
24 Wereldhave Wavin Van der Moolen
25 Wolters Kluwer Wessanen Vastned Offices/Ind.