CMS Expert Guide to ESG Compensation in Portugal

Law 50/2020, of 25 August 2020, transposing Directive (EU) no. 2017/828 of the European Parliament and the Council of 17 May 2017 – amends the Portuguese Securities Code, notably by introducing a series of new provisions (Articles 26-A to 26-F) on remuneration policy for members of management and supervisory bodies.

This law sets forth that listed companies in all sectors should remunerate the members of the board and supervisory bodies in accordance with a policy approved by the general meeting.

According to 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 include the following information:

1. Details of how the remuneration conditions of the company's employees were taken into consideration when the policy was established;
2. Description of the different components of remuneration, i.e. fixed and variable;
3. Description of the bonus and other benefits that may be attributed to the management and supervisory bodies, including their proportion;
4. Outline of the duration of mandates or contracts with the members of management and supervisory bodies, applicable notice periods, termination clauses and associated payments; and
5. Reference to the main lines of pension or early retirement schemes, if any.

For the variable remuneration component, the regulations refer to the following attributes that should be addressed in the remuneration policy:

1. Criteria for attribution of variable remuneration, including financial and non-financial (emphasis added) and, if applicable, criteria linked with companies’ corporate social responsibility, and a clear and comprehensive explanation of how these criteria contribute to the company’s corporate strategy, its long-term interests, and its sustainability;
2. The methods to apply in order to determine the measure of the performance criteria were complied with;
3. The periods of deferral and the possibility of the company having a clawback mechanism for variable remuneration already paid.

If a variable component of the remuneration is paid in shares/stocks, the policy should identify:

1. The time limits for the acquisition of rights;
2. If applicable, the time limits for any limitation on sale period after vesting/exercise; and
3. The way in which the remuneration through shares/stocks contributes to the company’s strategy, its long-terms interests and its sustainability. 

An additional note to mention that, in accordance with Article 64 of the Portuguese Companies Law, managers or directors of the company are bound to observe, together with a duty of care, a loyalty or fiduciary duty, in the company's interest, taking into account the long-term interests of the shareholders and weighing the interests of other relevant parties for the sustainability of the company, such as its employees, clients and creditors.

There is also national regulation on gender pay gap, applicable to companies with 50 or more employees. Law no. 60/2018, of 21 August 2018 came into force on 21 February 2019, and during the first two years was only applicable to companies with 250 or more employees.

This statute creates an obligation for companies in Portugal to adopt transparent remuneration policies with the aim to eliminate wage differences between men and women rendering work with the same value. Alternatively, if applicable, companies may present objective justifications for such differences. Otherwise, it will be necessary to regularise these differences and for such purpose a plan must be implemented.

Other existing guidance to which companies refer in this area is of a non-binding nature, such as the Portuguese Corporate Governance Institute, which dedicates part of its corporate governance guide.

Any sector provided the company is a listed company on the Portuguese stock exchange.

Currently, with respect to gender pay gap regulation, all companies with more than 50 employees are covered, regardless of sector or industry.

In the regulations, there is no specific setting of criteria, neither E, S, or G. There is only a general reference to sustainability and non-financial considerations, 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 company's sustainability.

Although gender pay gap regulation does not make any specific reference, it is acceptable to frame it within the ‘S’ and as a way to achieve gender equality and empower all women and girls, foreseen in Goal 5 of the UN Sustainable Development Goals (SDG).

Here is a summary:

• To design remuneration policies which consider ESG components, namely, in which respects gender pay gap regulation, implement a transparent remuneration policy in organisations, implementing a job evaluation based on objective criteria common to both men and women, namely, merit, productivity, attendance and seniority;
• To take ESG considerations into account when determining and authorising remuneration, namely through deferral of payment or clawback clauses 

Directors could 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.

Moreover, only directors or members of supervisory bodies are subject to the above identified legal requirements.

As for gender pay gap regulation, it is only applicable to employees stricto sensu, regardless of one’s position within the Company.

Other than the regulation on gender pay gap as referred above, there are no other regulations in Portugal 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. Gender pay gap issues have been addressed in the Portuguese labour Code – foreseeing the right to equal access to employment and work, prohibition of discrimination, equal working conditions -, as well as under Law no. 60/2018, of 21 August 2018, and within the Portuguese Constitution under the equality principle.

In summary, the main feature resulting from the statutory requirements is the deferred payment of variable remuneration. Other features are left to the considerable discretion of each company.

As for employees and to prevent gender pay gap, companies must implement a transparent remuneration policy, based on a job evaluation based on objective criteria common to both men and women, namely, merit, productivity, attendance and seniority.

No. The KPIs may vary significantly from company to company.

Not consistent across all sectors.

There are currently 15 listed companies across different sectors that are under legal obligation to follow the rules outlined above.

The Portuguese 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 – The Portuguese Corporate Governance Institute also dedicates part of its corporate governance guide to directors’ remuneration best practices, including guidance on deferred payments.

Please refer to the above answers.

For the banking sector, other European instructions on best practices have been included in the banking sector recommendation as per the Portuguese Central Bank instructions on the matter.

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 carbon emissions
• Sustainability plans/strategy execution levels
• Renewable energy capacity installed (for energy companies)
• Carbon Intensity Index rating
• Energy efficiency company policies' compliance rates

Social

• Results of employee satisfaction surveys
• Client satisfaction surveys
• % of women in leadership positions
• Professional training
• Investment in health and safety at work
• Gender pay gap elimination

Governance

• Ethics and compliance indexes
• Supply chain ethical DD integration policies
• HSE rates

Both, with a slight prevalence for long-term remuneration.

ESG component weighting between 5% and 15% of variable remuneration.

Law 50/2020 of 15 August 2020, cited above, added Article 245-C to the Securities Code, which requires the management body of the listed company to prepare a clear and comprehensive report on the remuneration paid to the members of the management or supervisory bodies in the previous financial year, including in particular the enforcement of the remuneration policy.

The remuneration policy with non-financial or ESG components must be publicly available on the listed company’s website.

The annual report must include an explanation of the KPIs used and how they were applied, and information on the average remuneration of full-time employees in the last 5 years, among other things. The remuneration report should be approved by the annual general meeting and should be made publicly available on the listed company’s website. This remuneration report may be a chapter of the annual corporate governance report. Finally, the company's auditor must confirm that the information required under the above outlined provisions has been provided in the report submitted to the general meeting.

Furthermore, companies presenting a gender pay gap may be notified by the Portuguese Labour Inspection Authority (‘ACT’) in order to present a plan for the evaluation of remuneration differences and justify or regularise the gap. Companies may also be notified due to an employee or employee’s representative complaint.

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 26-F, however, states that any existing agreement or practice should remain in effect until a new policy is approved by the General Meeting.

A case-by-case analysis is in any case warranted.

Yes. Ultimately the CMVM (Comissão do Mercado de Valores Mobiliários or Securities Market Committee) monitors compliance with the Securities Code. Failure to adopt a remuneration policy and publicly report on the same in line with the new provisions of the Securities Code, enacted by Law 50/2020 of 25 August 2020, may result in a fine for a minor offense.

Both ACT and the Commission for Equality at Work and Employment (‘CITE’) carry out an important role in monitoring and supervising gender pay gap regulation and in case of breach by companies an administrative fee may be applicable. Furthermore, ACT may notify companies to regularize the gap, when applicable, despite the possibility of being arguable in Court such understating.

The Securities Commission has a sustainability agenda that also keeps a close eye on the European regulatory agenda.

Regarding gender pay gap the recent European directive on salary transparency should be referred to.