CMS Expert Guide to ESG Compensation in Belgium

The Companies and Associations Code, through the law of 28 April 2020, transposing Directive (EU) No. 2017/828 of the European Parliament and of the Council of 17 May 2017, contains a number of new provisions (Articles 3:6 and 7:89/1 to 7:92) on remuneration policy and reporting for directors and top management (including supervisory bodies and daily managers).

This law sets forth that listed companies in all sectors should remunerate directors and top management in accordance with a policy approved in the general assembly meeting. The remuneration policy must be submitted to the general assembly meeting for approval whenever there is a significant change and in any case at least every four years (Article 7:89/1).

In line with the regulations, this remuneration policy must take into account and explain how it contributes to the company’s strategy, its long-term interests, and its sustainability. Moreover, the policy should contain:

1. a description of the different components of fixed and variable remuneration;
2. a description of how the pay and employment conditions of the company's employees were taken into account when establishing the remuneration policy;
3. if the company grants variable remuneration, clear, comprehensive, and varied criteria for granting the variable remuneration (including criteria relating to CSR, how it contributes to long-term value, how to defer or reclaim variable remuneration, etc.);
4. If the company grants share-based remuneration, details of vesting and, where applicable, retention periods applicable after vesting and an explanation of how it contributes to the company's business strategy, interests, and long-term sustainability;
5. indication of the duration of the contracts and applicable notice periods, the main characteristics of any supplementary pension or early retirement schemes, and the terms of termination and payments associated with termination;
6. the decision-making process used in determining the remuneration policy, review, and implementation;
7. in the event of an amendment in the remuneration policy, an explanation of all significant changes and how shareholder votes and views on the policy and reports since the last vote on the remuneration policy by the general assembly meeting of shareholders were taken into account.

After the vote on the remuneration policy at the general assembly, the remuneration policy, as well as the date and result of the vote, should be published on the company's website without undue delay and remain available to the public (free of charge) at least during the period of validity of the remuneration policy.

Only in very specific circumstances can the company deviate from the remuneration policy.

In addition, listed companies should prepare a remuneration report (Article 3:6 §3) as part of the corporate governance declaration. This report must be approved by the general shareholders' meeting and published in the annual accounts of listed companies, covering several points. With respect to the directors and top managers, the remuneration report must contain the following:

1. the total amount of remuneration paid by the group, broken down by components (fixed, variable, pension, insurance, etc.), how the total remuneration is consistent with the adopted remuneration policy and contributes to the long-term performance of the company, and information on how the performance criteria were applied;
2. the number of shares and stock options granted or offered and their conditions;
3. information on severance pay;
4. information on the use of the option to reclaim variable remuneration; and
5. information on any deviations from the procedure for implementing the remuneration policy.

The Belgian Code on Corporate Governance applicable for Belgian listed companies regulates in its Principle 7 the remuneration of executive and non-executive board members.  

Principle 7 states that the board should adopt a remuneration policy designed to:

• promote sustainable value creation (E);
• attract, reward, and retain the necessary talent (S),
• promote the achievement of strategic objectives in accordance with the company’s risk appetite and behavioural norms (G).

In this regard, the Code specifies that for non-executive board members, the remuneration policy should:

• take into account their role as board members, and specific roles such as chair of the board, or chair or member of board committees, as well as their resulting responsibilities and commitment in time.
• not be performance-related, meaning directly related to the results of the company.
• be partially made up of shares in the company. These shares should be held until at least one year after the non-executive board member leaves the board and at least three years after the moment of award.
• not be granted in the form of stock options.

For executives, the remuneration policy should describe the different components of and set an appropriate balance between fixed and variable remuneration, and cash and deferred remuneration.

In this regard:

• The variable part of the executive remuneration package should be structured in a way that links reward to the overall performance of the company and the individual, and aligns the interests of the executives with the sustainable value creation objectives of the company.
• The board should set a minimum threshold of shares to be held by the executives.
• The short-term variable remuneration should be subject to a cap.
• Stock options should not vest and be exercisable within less than three years. The company should not facilitate the entering into derivative contracts related to such stock options or to hedge the risks attached.
• The board should approve the main terms and conditions of the contracts of the CEO and other executives further to the advice of the remuneration committee. The board should include provisions that would enable the company to recover variable remuneration paid, or withhold the payment of variable remuneration, and specify the circumstances in which it would be appropriate to do so, insofar as enforceable by law. The contracts should contain specific provisions relating to early termination.

The Sustainable Finance Disclosure Regulation (SFDR) 2019/2088 requires some financial institutions to ensure that their remuneration policy promotes effective management of sustainability risks.

Other existing guidance companies use in this area is of a non-binding nature, such as the Code Buysse, which gives recommendations to non-listed companies.

The remuneration policy and report mentioned above concerns all companies listed on the Belgian stock exchange.

SFDR concerns the financial industry, for instance AIFMs, companies managing qualifying venture capital funds or qualifying social entrepreneurship funds, etc.

In the above-mentioned regulations, there are no specific criteria, neither E, S, or G. There is only a broad reference to sustainability and non-financial aspects, as detailed and listed above. There is a general reference to the need to explain how the criteria for the forms of variable remuneration contribute to the sustainability of the company. In relation to the Belgian Code of Corporate Governance, the focus is on G.

See above. Here is a summary:

• Reporting obligations
• Designing remuneration policies which consider ESG components
• Taking ESG considerations into account when determining and authorising remuneration

The provisions mentioned in the Companies and Associations Code concern directors, other managers (defined as members of any committee where the general management of the company is discussed – Article 3:6), and managers in charge of the daily management’s remuneration.

Regarding the SFDR, no specific distinction is made.

In terms of liability, directors can be held liable for failing to get the company to comply (in the sense of failing to comply with the broader directors’ duties), whereas top management employees (who are not directors) cannot be held liable.

There are, to our knowledge, no regulations in Belgium governing ESG obligations for employees’ remuneration who are not directors and top management.

There are currently no legal requirements specifically aimed at addressing the pay gap between executive and workforce remuneration. Nevertheless, sectorial regulations define minimum remuneration per sector.

Gender pay gap is covered by the Law of 22 April 2012. In concrete terms, from a sectorial point of view, function classification should be reviewed to ensure gender neutrality. In addition, companies that employ more than 50 workers should draft and submit to the works council an analysis report on the structure of workers' remuneration. 

N/A – In Belgium, there are no prescribed remuneration schemes in relation to ESG.

No. There are currently no legal rules regarding specific ESG KPIs, which vary significantly from company to company.

Not consistent across all sectors, but see other answers to this questionnaire.

There are currently 163 listed companies across different sectors that are under legal obligation to follow the rules outlined above.

The Belgian company fabric is made up of a significant number of small and medium-sized enterprises (SMEs), so the question is highly dependent on supply chain practices and stakeholder pressure (i.e. employees, NGOs).

Yes – see question 1 : Belgian Code on Corporate Governance for listed companies and the Code Buysse for non-listed companies.

In practice, more and more companies believe that remuneration policies should be linked to incentivising behaviours which are consistent with the company’s purpose and values. This should include performance on environmental and social issues and should demonstrate some recognition of wider societal expectations, the general economic environment and returns to long-term shareholders.

On a general scale, only listed companies are bound by the above regulations.

For the financial industry, the Disclosure Regulation stated in answer 1 applies.

Unlike traditional financial performance metrics (which are typically numerical and easy to measure), ESG KPIs generally require both quantitative and qualitative data to help Boards and Remuneration Committees assess the Company’s actions and intentions.

Of the listed companies, a common way to do it is to link variable remuneration to performance or inclusion in ESG indexes (SSI, S&P) for the relevant company.

Other metrics include, for example:

Environment

• Reduction of CO2 emissions
• Progress towards green financing commitments
• Use of renewable/green energy
• Improvement of energy efficiency
• Use of sustainable materials in production
• Food waste reduction

Social

• Results of employee satisfaction surveys
• Client satisfaction surveys
• Diversity and inclusion
• Workplace safety and health
• Worker’s turnover
• Training and further education
• Data protection

Governance

• Ethics and compliance indexes
• Prevention of corruption and bribery
• Risk management
• Reporting and communication

Nevertheless, a recent study “Executive remuneration” led by Vlerick School in 2021 shows that, on average, the proportion of the company's environmental performance does not exceed 6% of the CEO's salary package.

Vlerick School emphasis that only 6% of the remuneration of the CEOs of listed companies is linked to environmental performance. According to this study, non-financial factors (such as sustainability, quality and innovation) have an average weighting of 32% in the bonus and 16% in the long-term remuneration, but only 5% of companies include environmental performance to determine the bonus, and 26% do so for long-term remuneration.

As seen above, there is no clear "trend" here. According to a 2021 study by Vlerick School, 32% of the companies included in the study above addressed ESG criteria (except environmental performance) in their short-term remuneration, and 16 in their long-term remuneration.

According to the above survey, the weighting of the ESG component ranges from 5% to 32% of the variable remuneration.

Companies and Associations Code:

• Article 3:6 - for listed companies to publish the remuneration report on their websites.
• Article 7:89 - for listed companies to publish the remuneration policy on their websites.

EU "Disclosure" Regulation 2019/2088: Article 5: Financial market participants and financial advisors must refer to the promotion of effective management of sustainability risks in their remuneration policy and publish this information on their websites.

Do they overrule employment/civil law agreements when entering in force? How is this conflict solved in your jurisdiction?

Adopting a new legal framework and obligation will have an impact that could ultimately lead to a change in the circumstances of an existing agreement. Article 7:89 §3, however, states that any existing agreement or practice should remain in effect until a new policy is approved by the general assembly.

If the director or top manager has an existing employment contract with the company, changing the remuneration without his consent is considered a unilateral and substantial change of an essential element of the employment contract. As a consequence, it is considered a tacit (or implicit) dismissal. Such a change entitles the employee to severance pay. 

With respect to entities subject to the supervision of the Belgian Financial Services and Markets Authority (the “FSMA”), the FSMA monitors compliance with financial ESG rules. For all other entities, there is no specific regulatory body specifically overseeing ESG matters.

Ultimately, the Company Court (Tribunal de l’Entreprise/Ondernemingsrechtbank) oversees compliance with the Companies and Associations Code.

The adoption of the European Corporate Sustainability Reporting Directive and the proposal of the Corporate Sustainability Due Diligence and amending Directive indicate that stricter ESG rules will be introduced in the future.