- Resolutions on executive pay increase by 64% in 2020, and are expected to be at the centre of shareholder attention in 2021
- Environmental performance indicators are already in 3rd position in the top 5 most frequently used non-financial indicators for executive remuneration
- The importance of non-financial vs. financial indicators remains low, and long term incentives are still heavily influenced by financial performance indicators
Thursday 26 November 2020 - To shed light on some of the current trends in executive remuneration, PwC and corporate governance data analytics firm CGLytics took a closer look at the 2020 proxy season (the period during which many companies hold their annual shareholder meetings) for 49 listed companies in Belgium and Luxembourg. PwC’s 2020 Corporate Governance and Executive Pay report shows that in these companies, executive pay is increasingly scrutinised by shareholders, long term incentives are the dominant share of remuneration, and environmental indicators continue to gain in importance .
Say on pay
The number of resolutions at AGMs related to remuneration continues to grow, driven by the introduction of the revised European Shareholders’ Rights Directive (so-called “SRD II”) which reinforces transparency and disclosure requirements regarding directors’ and executives’ remuneration in listed companies and introduces the right of shareholders to express their views on directors’ pay (the “say on pay” principle). Provisions of SRD II with respect to the remuneration report and the remuneration policy relate to the first financial year starting from 30 June 2019, which for many companies is calendar year 2020. In other words, the current trend is expected to become more pronounced in the AGMs in 2021, which will be the first shareholder vote on the remuneration policies applied in the first year of the COVID-19 crisis. We predict that the principles of SRD II on remuneration and transparency will gain importance, particularly as Belgian listed companies will be required to disclose compensation of all directors on an individual basis, and provide a comparison of the evolution in directors’ pay versus the evolution of employees’ remuneration over the past five financial years - a sort of “fair pay assessment”.
This year already saw an enormous surge in the number of pay-related resolutions at general shareholder meetings,” comments Christiaan Moeskops, Partner at PwC Belgium and expert in reward and remuneration. “We expect the 2021 AGMs will bring even greater focus on remuneration policy, as shareholders express their views, the so-called ‘say on pay’. The rules of the game have changed: shareholders will not only be able to vote on the company’s remuneration report after the fact at the annual general meeting, but will also be able to have a say beforehand and influence the decisions taken. Without approval of the remuneration policy no changes to the remuneration package can be validly implemented.”
Steering executive performance from the short term towards the long term
In recent years there has been greater focus on designing executive compensation so as to encourage sustainable value creation over the long term. This is achieved by increasing the proportion of long term incentives (LTI) versus short term incentives (STI) and base pay. After a slight downwards trend in 2015 - 2018, the relative importance of long term incentives increased by 12 percentage points in 2019 (+33%). For companies listed in Belgium, there were already more limits on variable pay than those imposed by SRD II, and the increase of LTI in 2019 reflects an existing tendency, further reinforced by the 2020 Belgian Code on Corporate Governance which provides for a cap on STI granted to executive management. It’s worth noting that due to regulatory requirements in the banking and insurance sector which put caps on variable pay (to mitigate excessive risk taking), the base salary represents 67% of executive remuneration, with 12% being LTI.
Towards more non-financial and environmental indicators
In terms of evaluating company performance, financial performance indicators are still dominant, with a ratio of 73% financial KPIs (for STI) and 84% (for LTI) as compared to 27% (STI) and 16% (LTI) for non-financial KPIs. Non-financial KPIs are more frequently used for STI than LTI in executive remuneration despite the fact that non-financial KPIs should ideally be used to steer long term performance, especially if the goal is to truly shift executive focus to real long term sustainability.
Although KPIs related to the environment have a solid position in both short and long term non-financial KPIs, it is worth noting that “environment” is often not related to climate. In addition, although “environment” appears very frequently as a non-financial KPI, in general the importance (the weighting) accorded to non-financial KPIs remains much less than that granted to financial indicators. There is also still a tendency to have long term incentives primarily influenced by the same criteria as short term incentives, rewarding the same or similar results via different channels (STIs and LITs). Guidelines on non-financial indicators issued by the European Commission in 2019 recommend reporting on key indicators such as greenhouse gas emissions, energy, physical climate risks, green finance, environmental aspects (e.g. water, soil productivity or biodiversity, forest degradation or deforestation), and human capital and social issues (e.g. training and recruitment of employees). A company’s climate-related policies should describe whether and how the company’s remuneration policy takes climate-related performance into account, and should evaluate performance against targets set.
When comparing different non-financial KPIs regarding corporate social responsibility (CSR) and environment, social & governance (ESG) aspects, health and safety indicators represent almost one-third of the most commonly used non-financial indicators. The use of KPIs related to the environment and climate (e.g. greenhouse gas emissions reduction) has significantly increased in 2020; taken together they also represent almost one-third of the most commonly used CSR/ESG indicators while the sustainable people aspect (social) seems to be underrepresented.
“We can definitely expect further developments in this area,” states Bart Van den Bussche, specialised in executive remuneration and Director at PwC Belgium. “In a study on directors’ duties published in July 2020, the European Commission stated it is working on sustainable corporate governance with the aim of enabling companies to overcome short term pressures and making them accountable for the sustainability of their business conduct. The study highlights the fact that current board remuneration structures and board expertise pose challenges for sustainability. This regulatory agenda, combined with greater shareholder scrutiny of ESG aspects and increasing transparency, will continue to drive change in executive remuneration and performance indicators.”
PwC’s 2020 Corporate Governance and Executive Pay report
This report analyses the results of the 2020 proxy season (the period during which many companies hold their annual shareholder meetings) for 49 companies in Belgium and Luxembourg. The sample (“Selected Index”) comprises listed companies of the Bel20, Bel Mid and/or LuxX indices based on the composition of these indices as per August 2020. The Selected Index also comprises some companies of other indices and companies that are no longer listed (or have changed indices) but which still publicly disclose the information as for listed companies. The focus was on remuneration items on the agenda at AGMs, developments in (non) executive pay in reaction to the COVID-19 crisis and the composition of the board of directors.
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