CMS Expert Guide to ESG Compensation in Turkiye

Generally, there is not a specific piece of legislation governing ESG matters in Turkey (except for certain legislation applicable to public companies (i.e. Communiqué on Corporate Governance) as further explained in our responses below and therefore, ESG criteria/obligations should fall under the scope of the general pieces of law, namely; the Turkish Labour Law, Turkish Commercial Code, and the Turkish Civil Code, to the extent applicable.

As such, the related remuneration issues should also fall under the said pieces of legislation.

There is not a distinction under the said legislation regarding the application of ESG matters and therefore the said legislation should apply to all sectors/industries. However, as mentioned in our responses to question 1 above, the Communiqué on Corporate Governance applies to public companies.

There is not a specific distinction in the said legislation in this respect and therefore it seems that the said legislation should apply to all pillars of ESG.

While there is not a specific piece of legislation governing ESG matters in Turkey, various ESG obligations should still fall under the general provisions of the Turkish Labour Law and the Turkish Commercial Code, as mentioned in our responses to question 1 above.

First, companies, in their capacity as employers face various obligations under the Turkish Labour Law, namely, among others, (i) to protect their employees and (ii) treat their employees in equal manner.

Protecting the employees encompasses an obligation to protect the employees from any adverse behaviour (e.g., mobbing) as well as protect them from material hazards, such as health and safety perils. In this respect, this obligation posed on the employer relates to the social and governance pillars of ESG and would find indirect application based on the Turkish Labour Law, as per the provision mentioned above.

As for the treatment of employees in equal manner, this encompasses an obligation to treat employees with similar duties and seniority in an equal manner and to avoid discrimination in this regard. This relates principally, but without limitation, to eliminating pay gaps between employees and should also fall under the social and governance pillars of ESG.

As for directors and managers, any ESG obligations posed on them will depend on their actual qualifications.

To elaborate, under Turkish law, directors and top management might qualify (i) solely as employees, (ii) solely as employer’s representatives (işveren temsilcisi), whereby they would no longer be considered as employees or (iii) hold both roles.

Where these individuals are regarded solely as employees (i.e., they do not hold positions such as general manager, vice-general manager or are not members of the board of directors), there will be very limited obligations on employees with respect to ESG matters. Rather, these individuals will be the beneficiaries of the ESG related obligations imposed on the employer (i.e., protection of employees and equal treatment) and can ask that the company fulfils the said obligations.

Whereas when these individuals are considered solely as employer’s representatives (e.g., when they are appointed as a member of the board of directors and hold no other positions within the company), they will no longer be considered as employees of the employer.

Rather, as employer’s representatives, they will be responsible for overseeing the overall management and representation of the company, which would include an obligation to implement the processes for the company to fulfil its obligations mentioned above (i.e., protection of employees and equal treatment). This means that the principal obligations with respect to ESG matters lie with such individuals who qualify as employer’s representatives (as opposed to those who are solely employees).

Similarly, employer’s representatives will also have the primary obligation to implement/oversee the implementation of any other ESG related policies within their organization (e.g., implementation of company policies, determination of any ESG KPIs).

Last, when such individuals hold both these positions separately (e.g., when they act as a member of the board of directors as well as the CFO), they will likely have significant involvement in the overall management and representation of the company and have responsibility in overseeing that the company fulfils the obligations imposed on it under Turkish Labour Law (i.e., protection of employees and equal treatment). This means that these individuals will have responsibility in the implementation of ESG policies within their organization as well.

One significant difference between employer’s representatives and individuals who hold both positions is that the latter will also be able to partially benefit from the rights granted to them under the Turkish Labour Law.

Pursuant to the Turkish Commercial Code, the members of the board of directors may be paid attendance fees, salaries, bonuses, premiums, and shares from the annual profit, provided that the amount is determined by the articles of association or by a resolution of the general assembly. This general provision applies to all joint stock companies.

The Communiqué on Corporate Governance sets out a general framework for public companies regarding corporate governance principles. Public companies are required to form committees such as audit committee, early detection of risk committee, corporate governance committee, nomination committee, and compensation committee in order to fulfil its duties and responsibilities in a reliable way.

The renumeration committee to be established by the board, shall be in charge of designations of the principles, criteria and implementations to be used in the remuneration of the members of the board of directors and the executives, considering the long term targets of the corporation and supervision thereof, and submit its advices with respect to the remuneration of the board of directors and the executive managers, considering the achievement level to the criteria used in remuneration. Remunerations provided for members of the board of directors and executives and all other benefits provided shall be disclosed via the annual report to the public.

The board of directors shall be responsible for the corporation’s achievement of its targets on operational and financial performance designated and disclosed to the public. Evaluation as to whether the corporation has achieved its targets on operational and financial performance disclosed to public or not, and if not achieved, reasoning thereof shall be included in the annual report.

Please see our responses to question 4 above.

Having said this, it can also be the case that there will be in place ESG related company policies that are binding on all directors/top management and in this case, while the terms of the Turkish Labour Law might not apply to these individuals, they will continue to be bound by the terms of such ESG policies as per the terms of the Turkish Civil Code and the Turkish Commercial Code (i.e., based on the specific representation agreement between them and the company which is different than an employment agreement).

Under Turkish Law, currently there are no specific pieces of law governing ESG obligations regarding the remuneration of non-executive employees. However, the obligations imposed on employees/employers’ representatives (as explained above) would continue to be applicable in this case as well.

As indicated in our responses to question 4 above, Turkish law imposes an obligation on employers to treat all employees in equal manner. This obligation, however, does not apply in absolute manner, rather it appears in the form of an obligation to treat employees in equal manner where the employees have the same / similar duties and seniority.

As such, this statutory obligation does not directly address a possible gap between the remuneration of executives and workforce as executives and workforce would likely not be considered as having the same or similar duties and could only address such a gap in cases of discrimination among employees with similar duties and seniority.

Having said that, a different set of rules partially apply for public companies in Turkey.

To elaborate, the principles set forth under the “Sustainability Principles Compliance Framework” (“Framework”) published by the Capital Markets Board (“Board”) could be applied to said matters based on the Corporate Governance Communiqué (“Communiqué”) as the Framework foresees that the public companies should ensure opportunity equality within their value chain and disclose the measures taken in this regard as well as ensuring that they respect human and worker rights entirely.

The Framework does not define any specific remuneration schemes.

There are no direct rules on ESG performance measures and targets (KPIs) that determine directors/top management remuneration.

However, the Framework requires the public companies to specify in their annual activity report whether they comply with the ESG principles listed therein, including the principles mentioned under our answer to Question 7, and if not then, provide the detailed reason of this and the social and environmental risks which arise due to this non-compliance.

As ESG is a relatively new concept in Turkey, the practices regarding ESG criteria for executive remuneration continue to evolve. It also makes sense to indicate that in majority of cases, executive remuneration continues to not be tied to the achievement of ESG initiatives set by a company.

Having said this, numerous companies in Turkey are now developing various ESG policies relating to among others, talent retention, implementation of pay equity and observation of employee wellbeing.

Similarly, many companies engage in charitable action as part of their ESG strategies as well as setting environmental targets and implementing sustainable corporate management strategies and engaging in sustainable investing policies.

As indicated above, theoretically, executive remuneration could be tied to achieving success with respect to the endeavours above as a matter of company policy. However, it seems that this has not become a general practice yet in Turkey.

Generally, the obligations brought under the terms of the legislation referred to in our responses to question 1 do not directly address ESG matters.

On the other hand, it is becoming more common for companies to consider ESG matters in their daily businesses and implement such policies as seen suitable by their shareholders, board of directors or specific committees established within the organization to address ESG matters.

Last, some companies also follow global guidance such as the the U.N. Sustainable Development goals in this respect.

Yes and no.

For instance, there may be some differences in this respect which arise from the nature of the activity conducted by the companies in question.

For example, energy companies seem to place more importance on environment and clean and sustainable energy matters whereas telecom companies may place more importance on recycling of waste electronic materials.

On the other hand, many large-scale companies, regardless of the sector they operate, are all attempting to reduce their carbon emissions and implement policies to follow ethical business policies and implement risk management systems.

In this respect, it is safe to say that some practices overlap regardless of sector whereas others might differ.

In addition, as also indicated in our responses to question 7 above, there is specific guidance on ESG matters available to public companies.

In this respect, this guidance would apply to all public companies, regardless of which sector or industry they operate in.

Moreover, in terms of the committees to be established by the board of directors in public companies, the committees to be established may differ from each other. For instance, banks are not required to establish audit and compensation committee.

Meeting certain environmental goals (e.g., offsetting carbon footprint or reduction of waste materials), diversifying workforce and eliminating gender discrimination (e.g., reaching a certain quote for employment of female employees) and management of supply chains (e.g., elimination of all restricted labour practices down the entire supply chain) seems to be the most common ESG-KPIs in Turkey.

Both. However, please also see our responses to question 15 below.

ESG is a relatively new concept in Turkish legal practice. As such, the share of ESG-related variable in the variable remuneration should be quite minor and other financial criteria (e.g., share value, profit etc.) continue to be more dominant in determining the remuneration of the executives.

As mentioned under our answer to question 9 above, as per the amendment to the Communiqué made by the Board, public companies are now obliged to specify in their annual activity report as to whether they apply the sustainability principles, and if not then provide detailed reasoning for such non-compliance and the social and environmental risks which arise due to this non-compliance.

Various companies have also adopted further disclosure requirements as part of their wider ESG strategies.

In case of public companies, the compliance with the Framework mentioned above is not legally mandatory but is sought on a voluntary basis (i.e., the companies simply explain why they have not complied with the related principles). As such, this would not alone overrule employment/civil law agreements in place between a company and its employees/executives.

However, to the extent that a company implements various ESG requirements as part of its company policies, then these will become part of the employment agreements/civil law agreements between the employees/executives and the company. In this case, the employees/executives will be obligated to comply with such requirements in parallel with the employment agreements/civil law agreements.

The Board has amended the Communiqué in order to subjugate the public companies to the Framework and therefore the Board could partially be regarded as a regulatory body overseeing ESG matters.

In this respect, with respect to public companies, the Board is already authorized to take decisions to ensure fulfilment of the obligation to comply with the sustainability principles, and to take related actions ex officio, although we would expect such action to occur when the ESG matters finally become binding on the relevant companies.

As for non-public companies, a regulatory body overseeing ESG matters does not exist.

Yes. The ESG related requirements are expected to become more widely applicable in Turkey, especially in line with the adaptation to EU regulations. In this respect, it is expected for the requirements mentioned above which are applicable on a voluntary basis to become mandatory and expand on a sector-specific basis.