CMS Expert Guide to ESG Compensation in Germany

Executive Board Compensation Disclosure Act (2005) - Implemented through various changes in the German Commercial Code, in particular in § 285 sentence 1 no. 9 a) and § 314 (1) no. 6 a)(see in detail), listed stock corporations were obliged to disclose not only the total remuneration, but also the individual remuneration of their management board members; in addition, an obligation to publish the basic elements of the remuneration system, which may also include sustainability factors, was introduced.

§ 289b HGB (German Commercial Code) is based on EU Directive 2014/957 (Non-Financial Reporting Directive) and establishes an obligation to publish a non-financial statement incl. ESG topics. The reporting obligation includes ESG topics, but not specifically in relation to remuneration.

§ 120a AktG (German Stock Corporation Act) is based on EU Directive 2017/82811 and establishes an obligation to publish the remuneration system and an obligation for the general meeting to resolve on the approval of the remuneration system for members of the management board of listed stock corporations presented by the supervisory board. This also relates to ESG topics, insofar as they are included in the remuneration system.

The EU "Disclosure" Regulation 2019/2088 - stipulates that certain companies of the financial industry must disclose their remuneration policy, including the extent to which it addresses sustainability risks.

§ 87 (1) 2 AktG - stipulates that the remuneration structure of the management board of listed companies must be geared towards the sustainable and long-term development of the company.

• § 289b HGB covers capital market-oriented companies, credit institutions and insurance companies with over 500 employees and additionally a balance sheet total of at least EUR 20 million or net sales of at least EUR 40 million.
• § 120a AktG covers all listed stock corporations.
• EU "Disclosure" Regulation 2019/2088 concerns the financial industry, for instance AIFMs, companies managing qualified venture capital funds or qualified social entrepreneurship funds etc.
• § 87 (1) 2 AktG concerns the remuneration of management board members of listed stock corporations.

• § 120a AktG: European Commission guidelines in the context of this provision state that "[C]ompanies should present for each director a description of the financial and non-financial (including, where appropriate, corporate social responsibility) performance criteria". Thus, CSR/ESG performance criteria only have to be presented in the report if they are included in the remuneration system. In this respect, the guidelines do not differentiate between "E", "S" and "G" criteria.
• The EU "Disclosure" Regulation 2019/2088 states in its Article 5 that financial market participants and financial advisors are required to indicate, in the context of their remuneration policy, to what extent it is consistent with the inclusion of sustainability risks and publish this information on their websites. It does not explicitly distinguish between "E", "S" and "G".
• § 87 (1) 2 AktG states that the remuneration structure of management board members of listed companies must be geared towards the sustainable and long-term development of the company. According to the legal committee of German parliament (Rechtsausschuss des Bundestages), "sustainable" in this context means that the supervisory board has to take "social and ecological aspects" (i.e. "E" and "S") into consideration when deciding on remuneration and remuneration incentives.

Here is a summary:

• Reporting obligations
• Managing ESG risks in remuneration policies
• Designing remuneration policies including ESG components

In general, directors can be held liable if they fail to cover ESG-related risks for the company (as part of their general director's duty). Liability of top management employees (who are still regarded as normal employees) is very limited. Most of the provisions on sustainable remuneration relate to directors.

Most of the regulations above relate to the remuneration of directors. However, the obligation under Art. 5 of the EU "Disclosure" Regulation 2019/2088 generally refers to remuneration policies, which are not limited to the remuneration of directors. Furthermore, the compensation structure must not be discriminatory with regard to gender, age, disability, faith, sexual orientation or ethnic origin.

There are no specif ESG-relevant requirements in terms of addressing the gap between executive and workforce remuneration. With regards to gender pay gap, Remuneration Transparency Act (Entgelttransparenzgesetz) provides for an individual right to information, according to which employers must, under certain conditions, disclose to employees, upon their request, the criteria according to which they are paid. Private employers with more than 500 employees are required to regularly review their pay structures and their compliance with equal pay. Employers with more than 500 employees who are obliged to prepare a management report according to the German Commercial Code must prepare a report on equality and equal pay. In this report they shall list their measures to promote equality between women and men and their effects as well as their measures to achieve equal pay for women and men.

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

No. There are currently no legal rules regarding specific ESG KPIs.

A relatively recent study regarding the integration of ESG goals into the variable remuneration of board members of the management board of listed stock companies revealed that of all DAX companies, 100% included ESG goals in their remuneration, with 52% including ESG goals in both their LTIs and STIs. Of all MDAX companies, 93% included ESG goals in their remuneration, with 30% including ESG goals in both their LTIs and STIs.

There are best practice recommendations for management board member remuneration from the "Working Group Guidelines for Sustainable Management Board Remuneration". The whitepaper recommends (among other things) that ESG goals regarding management board remuneration should be company-specific and relevant, significantly weighted with a recommendation of at least 20% (the Sustainability Council of the German Government recommends at least 30%), primarily long-term oriented (but depending on the goal, it can also be considered in an STI), measurable, demanding and transparently disclosed, derived from the company's business model and clearly related to corporate governance responsibilities.

• "S" and "G" similarly relevant in all sectors
• "E" depending on specific risks related to the different sectors

Environment

• Reduction of CO2 emissions
• Reduction of the CO2 intensity of the company's portfolio
• Use of renewable/green energy
• Improvement of energy efficiency
• Increase in the share of sustainable products
• Use of sustainable materials in production

Social

• Employee satisfaction
• Customer satisfaction
• Diversity and inclusion
• Workplace safety and health
• Employee turnover
• Training and further education

Governance

• Compliance
• Prevention of corruption and bribery
• Risk management
• Reporting and communication

As seen above, there is no clear "trend" here. 30% - 50% of the companies who were included in the study above addressed ESG aspects in both LTI and STI, the rest of them in only one part of the variable remuneration

ESG goals are mostly determined for all members of the management board collectively. If they are included by using a multiplier, the typical bandwidth of the multiplier would be 0.8 – 1.2. If ESG goals are implemented as a goal category of their own, their typical weighting would be 20% - 30%.

• § 289b HGB: Duty to publish a non-financial statement including ESG matters. The reporting obligation includes ESG matters, but not specifically in relation to remuneration.
• § 120a AktG: All listed stock corporations have to publish their remuneration system for members of the management board. CSR/ESG performance criteria have to be included in the report if they are included in the remuneration system.
• EU "Disclosure" Regulation 2019/2088: Art. 5: states that financial market participants and financial advisors must indicate, as part of their remuneration policy, to what extent it is consistent with the inclusion of sustainability risks and publish this information on their websites.

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

• § 120a AktG: No direct supervision by authorities; however, claims against supervisory board possible.
• EU "Disclosure" Regulation 2019/2088: According to § 10 (3) WpHG (German Securities Trading Act), the German Agency BaFin (Federal Financial Supervisory Authority) monitors compliance with the Regulation. BaFin can take necessary measures to enforce compliance by investment service companies offering investment advice or financial portfolio management.
• § 87 (1) 2 AktG: No direct supervision by authorities; however, compensation claims against supervisory board possible.

The new drafts of the European Corporate Sustainability Reporting Directive (COM/2021/189) as well as the Corporate Sustainability Due Diligence Directive (COM/2022/71) indicate that stricter ESG rules will be introduced in the future.