CMS Expert Guide to ESG Compensation in Czech Republic

Legislation in the area of executive remuneration is not uniform and the rules vary depending on the sector. Generally, the main criteria are (i) transparency, (ii) equal treatment and (iii) effective risk management.

• Financial institutions – Under Regulation (Sustainable Finance Disclosure Regulation, the “SFDR”), financial market participants and financial advisors must include in their remuneration policies information on how these (note: remuneration) policies are consistent with the integration of sustainability risks and publish this information on their websites.

In addition to the requirements under the SFDR, there are standards and rules set by local laws for certain regulated entities, in particular:

• Act No. 240/2013 Coll., on Management Companies and Investment Funds – The Act imposes higher standards on transparency of remuneration policy in management companies and investment funds.
• Act No. 277/2009 Coll., Insurance Act – Insurance companies must establish, maintain, and apply an effective management and control system which includes, among others, a written remuneration policy. The policy must contain information about its consistency with the integration of sustainability risks in line with the SFDR. This information must be published on the company’s website.
• Act No. 21/1992 Coll., on Banks – Banks must adopt a remuneration policy that (i) is based on equal remuneration for men and women and the same remuneration for the same work, (ii) contributes to adequate and effective risk management, and (iii) includes additional rules for determining and granting remuneration to persons with risk influence (incl. members of the statutory body, administrative body or supervisory body). The amount of the variable remuneration component of the persons with risk influence may not generally exceed the amount of the fixed remuneration component, unless the general meeting of the bank decides otherwise (maximum rate is 2:1). Banks which are considered significant (based on a decree of the Czech National Bank) must appoint a remuneration committee.
• Act No. 256/2004 Coll., on Capital Market Business - Securities traders must adopt remuneration policies complying with similar requirements as banks’ remuneration policies. The remuneration policies must clearly distinguish between the criteria for determining fixed and variable remuneration (fixed remuneration corresponds to the expertise and the individual’s organisational responsibility; variable remuneration reflects the individual’s sustainable results, adjusted for risks and results exceeding the scope of the individual’s work).

Companies listed on a European regulated market must adopt a remuneration policy which must be approved at the first general meeting held 90 days after commencement of operations on the European regulated market and approving the company’s financial statements. The remuneration policy must be comprehensible, support the company's business strategy, long-term interests and sustainability, and explain how it does so. The policy must be reviewed and reapproved at least every 4 years. The company must disclose the valid policy on its website. The executive remuneration must be in line with the policy. Listed companies must also prepare a remuneration report (containing information on all components of executive remuneration provided in any form) at the end of each accounting period. This report must be reviewed by an independent auditor, approved by the general meeting, and published on the company’s website for 10 years.

• Act No. 563/1991 Coll., on Accounting – Large accounting entities and consolidating accounting entities (for a large group of accounting entities) that are considered to be subject to public interest (e.g. banks, insurance companies, pension funds or health insurance companies) and that employ over 500 employees must report non-financial information (i.e. the ESG-related information). It is mandatory to include social and employment matters in the reporting (remuneration would typically fall under this category).

These regulations mainly cover (i) the financial sector; (ii) large accounting entities that are subject to public interest and (iii) listed companies, irrespective of their industry. However, listed companies usually operate in regulated sectors where competition is limited, for instance in the energy or telecommunications sector.

Although they do not refer to the pillars explicitly, these regulations mainly cover the second (Social) and the third (Governance) pillar. The regulations emphasise risk management and sustainability in particular.

Special local laws primarily require companies to adopt and follow remuneration policies that comply with statutory requirements and to disclose relevant information.

The directors’ obligation to perform their duties with due care also covers ESG matters, and directors should conduct the company’s business in line with ESG requirements. Failure to do so could render them liable.

Employees, unlike directors, do not have a duty of care. The liability for damages (caused by negligence) of top managers who are employees is generally limited to 4.5 times the manager’s average monthly salary. In contrast, the liability of directors is unlimited.

ESG remuneration requirements apply mainly to directors, but in some cases extend to top management as well.

Generally, in financial institutions (e.g. banks, securities traders), the rules for non-executive employees' remuneration are set out in remuneration policies.

In other sectors, there are no special regulations in the Czech Republic governing ESG obligations for non-executive employees' remuneration. General rules under Act No. 262/2006 Coll., the Labour Code, and Act No. 198/2009 Coll., Antidiscrimination Act, apply (i.e. prohibition of discrimination in the field of remuneration, equal pay for equal work, etc.).

Generally, financial institutions (e.g. banks, securities traders) must report the gender pay gap to the Czech National Bank.

We are not aware of any legal requirements specifically aimed at addressing the pay gap between executive and workforce remuneration.

There are no prescribed features applicable to all remuneration schemes.

However, local laws may set specifics for remuneration schemes in some categories of financial institutions.

For instance, in banks, the amount of the variable remuneration component of persons with risk influence (incl. members of the statutory body, administrative body or supervisory body) may generally not exceed the amount of the fixed remuneration component, unless the general meeting of the bank decides otherwise (maximum ratio of 2:1).

No. There are no legal rules regarding specific ESG KPIs. However, in the case of the securities trader, for example, the law explicitly states that both financial and non-financial criteria must be taken into account when assessing an employee’s performance for eligibility for variable remuneration.

At this stage, it is difficult to comment on market practice, as only a few companies provide the relevant non-financial reporting that adequately describes the impact of ESG rules on their remuneration policies. 

At this stage, it is difficult to comment on market practice, as only a few companies provide the relevant non-financial reporting that adequately describes the impact of ESG rules on their remuneration policies.

At this stage, it is difficult to comment on market practice, as only a few companies provide the relevant non-financial reporting that adequately describes the impact of ESG rules on their remuneration policies.

ESG KPIs cover mainly the first pillar of ESG – Environment, for instance:

• reducing CO2 emissions
• achieving carbon neutrality
• developing sustainable products and services

At this stage, there is no clear trend/there are not enough data to assess. Each company can set ESG KPIs differently.

There are no legal rules regarding the share of ESG-related variable remuneration. However, we see a trend amongst large energy companies (one of the first sectors to report on ESG) – approx. 5–15%.

Under the SFDR, financial market participants and financial advisors must include in their remuneration policies information on how those policies are consistent with the integration of sustainability risks and publish this information on their websites.

In addition to the requirements under the SFDR, further obligations are imposed on certain regulated entities by local laws, in particular:

• Management companies and investment funds – standard funds must disclose the remuneration policy on their websites. Special funds and the standard funds must disclose information on the remuneration in the annual report.
• Banks – Banks must disclose the remuneration policies to the Czech National Bank and must report the gender pay gap to the Czech National Bank.
• Insurance companies – Insurance companies must disclose the remuneration policies to the Czech National Bank. Every employee of an insurance company must be familiar with the remuneration policy.
• Securities traders – Securities traders must adopt the remuneration policy and disclose it to the Czech National Bank. Securities traders also report the gender pay gap to the Czech National Bank.
• Listed companies – Listed companies must adopt a remuneration policy and disclose it on the company’s website. At the end of each accounting period, they must prepare a remuneration report and publish it on the company’s website for at least 10 years.
• Accounting entities obliged under the Accounting Act – They must disclose non-financial information at the end of the accounting period in the Commercial Register. This information must be included in the annual report of the respective company (and published in the Collection of Deeds of the Commercial Register) or in a separate report. The separate report may be published in the Collection of Deeds or on the company’s website, provided that its annual report contains a corresponding link.

The provisions described do not overrule or automatically change existing agreements.

The remuneration policy of listed companies overrules the performance agreements, other acts and internal policies governing remuneration of members of the board of directors, administrative board, or supervisory board. On the date when the remuneration policy comes into effect, the performance agreements, other relevant acts and internal policies relating to executive remuneration will lose their effect to the extent that they conflict with the remuneration policy.

There is no special regulatory body in charge of general supervision of the ESG matters.

ESG supervision (in respect of hard legal requirements) is conducted by different regulatory bodies in different sectors, e.g.:

• Financial institutions (banks, management companies and investment funds, securities traders, listed companies, insurance companies) – the Czech National Bank.
  • If the Czech National Bank identifies a violation of obligations by the regulated institutions, it can generally impose corrective measures appropriate to the nature and severity of the violation (e.g. order an audit, order disclosure of additional information, limit the amount of the variable component of executive remuneration). Some violations also constitute an administrative offence (e.g. failure to adopt a remuneration policy in line with the legal requirements) for which the Czech National Bank may impose a monetary penalty (the amount depends on the obligation that the regulated institution violated).
• Entities subject to accounting obligations under the Accounting Act – the Tax Office – Failure to disclose non-financial information constitutes an administrative offence for which the Tax Office may impose a penalty of up to the amount of 3% of the total value of the company’s assets / the total value of consolidated assets.

Currently, we can see several informal discussions (on several platforms) on the transposition of the EU Corporate Sustainability Reporting Directive (the “CSRD”) as well as the expected Corporate Sustainability Due Diligence Directive.

Also more companies are starting to look into their upcoming reporting obligations under the CSRD. Currently, there are only around 50 companies in the Czech Republic that are required to report under the NFRD. Under the CSRD, it is expected that approx. 1500 companies will be required to provide their ESG reports.

The introduction of additional obligations is expected with the adoption of the Corporate Sustainability Due Diligence Directive.