Navigating uncertainty: linking CEO pay in listed companies to ESG goals as a compass for success

• There is an increasing trend to link ESG indicators to the pay of senior leaders, although it remains a challenge to achieve a balance with financial performance indicators
• Most companies surveyed include ESG KPIs into both short and long term incentive plans for executives. However executive performance is still measured largely against financial indicators
• The average age of board members of the sample (hereafter ‘Selected Index’) is approaching 60 in every sector, confirming the need for succession planning at board level
• The most represented nationality in the boards of the Selected Index is Belgian. The observed lack of diversity in terms of nationality indicates that the Selected Index may not have achieved racial and ethnic diversity
• Only 50% of the companies in the Selected Index have shareholder acceptance of 90% or more on their remuneration policy and/or remuneration report

17 November 2022 - There is an increasing trend to link ESG indicators to the pay of senior leaders, although it remains a challenge to achieve a balance with financial performance indicators, according to the 2022 Corporate Governance and Executive Pay Report. PwC Belgium examined data provided by Diligent, a leading provider of software, intelligence and services across governance, risk, compliance, audit and ESG, about the 2022 proxy season (the time during which many firms have their annual shareholder meetings) of 55 listed companies in Belgium and Luxembourg to shed light on some of the current trends in executive compensation and board composition. The report also uncovered that the current uncharted times of very different geopolitical and economic challenges make a strong case for a diverse board of directors.

ESG KPIs gain ground in executive pay

A growing number of shareholder proposals are asking companies to integrate ESG goals into their executive compensation package. Social indicators are the most frequently used (such as KPIs related to employees’ health and safety), but their weighting is less than environmental and governance criteria. Overall, executive performance is still measured largely against financial criteria.

External stakeholders including investors, consumers, suppliers etc. are increasingly scrutinising non-financial factors when identifying material risks and growth opportunities, or when seeking to make sustainable consumption choices that will be in line with their values. In response, EU legislators have created the EU Corporate Sustainability Reporting Directive (CSRD), which will extend the requirement to disclose non-financial and diversity information to all large companies and all companies listed on regulated markets (and all their subsidiaries). It will impose the examination of sustainability data by a third-party auditor, provide more detail about the information to be disclosed and ensure that all information is published in digital format as part of the companies’ management reports (i.e. at the same time as financial reporting in order to improve accessibility).

“We can definitely expect further developments in this area,” states Bart Van den Bussche, Director at PwC Belgium specialised in executive remuneration. “The European Commission is determined to bring sustainability reporting on a par with financial reporting. CSRD will definitely affect future reporting periods of Belgian listed companies, and the impact on their non-financial accountability should not be underestimated. Correspondingly, we also expect the ongoing increase in the use of ESG KPIs as criteria for executive pay to accelerate further.”

Greater diversity needed on Belgian boards

To make sure that decisions made by the company also take into account the legitimate interests and expectations of shareholders and all other stakeholders, the board should bring together expertise in the company’s areas of activity but also have diversity in terms of skills, knowledge, background, age and sex. With this in mind, board composition is increasingly under scrutiny from investors, regulators and other stakeholders, who all want more information about a company’s current directors and nominees.

“A more diverse board is needed to address the myriad geopolitical and economic challenges companies are facing,” states Aurore Zadeling, Senior Manager at PwC Belgium specialised in executive compensation. “On a positive note, the Belgian listed companies meet the requirement for gender diversity at board level. However, the current composition of corporate boards is still not very diverse; the average Belgian board is composed of 11 members, the average age is 60 and less than half of board members (38%) are women. The most heavily represented nationality on the boards of the Selected Index is Belgian, with 37% of board members having Belgian nationality, followed by French (12%) and German (10%). The current lack of diversity observed based on an analysis of nationalities indicates that racial and ethnic diversity may not currently be achieved within the Selected Index - but it’s precisely that diversity of background which can create a much needed variety of perspectives to tackle the current socio-economic problems we face, and consistently improve corporate governance over time.”

Say on pay: shareholders speak their mind

Shareholder acceptance of remuneration related items has decreased since the introduction in 2019 of shareholders’ ‘say on pay’ by SRD II (the revised Shareholder Rights Directive) set out enhanced disclosure and content requirements, confirming increased scrutiny of companies’ pay practices. Only 50% of the companies in the Selected Index have shareholder acceptance of 90% or more on their remuneration policy and/or remuneration report. In 19% of companies in the Selected Index, 20% or more of shareholders’ votes were cast against the remuneration items on their agenda during the 2022 AGM, revealing significant shareholder dissent where executive remuneration is concerned, despite efforts to design executive compensation to encourage sustainable value creation over the long term. ​ ​ ​

While there are currently no precise guidelines on the way companies should react to shareholder dissent around the remuneration report (contrary to votes expressed against the remuneration policy), it still signals shareholder disagreement with the company’s pay practices and it is not advisable to ignore it. It can be seen as weak governance on matters related to pay and damage the company’s performance, and inaction may also have an impact on the way in which shareholders vote on other matters. An open and transparent dialogue with shareholders on remuneration and governance is key for identifying the reasons for the dissenting votes and determining relevant actions, including potentially reviewing their remuneration policy. Consistent efforts to increase alignment on all aspects of executive pay are an essential aspect of good corporate governance and sustainable value creation over the long term.

About PwC’s 2022 Corporate Governance and Executive Pay Report

This report draws on data published by 55 companies based or headquartered in either Belgium (29) or Luxembourg (26) and whose shares are admitted to trading on a regulated market. The sample (the ‘Selected Index’) comprises listed companies of the BEL20, Euronext Brussels or LuxX indices based on the composition of these indices as of 29 April 2022. 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 data included in this survey is information publicly disclosed in the annual reports and remuneration reports of the companies in the Selected Index. All data in the survey is gathered and processed by Diligent Institute, the global corporate governance research arm and think tank of Diligent. The remuneration information for any given financial year is drawn from the corresponding annual report and remuneration report of that year. In this respect, when referring to the 2021 financial year, reference is made to companies ending their financial year on a date after 31 March 2021 or on 31 March 2022. The voting information relates to the annual general meeting (AGM) that took place in 2022. Please note that all amounts in this report are expressed in euro and refer to gross amounts.

Read the full 2022 Corporate Governance and Executive Pay Report

About The Diligent Institute

Diligent is the global leader in modern governance, providing SaaS solutions across governance, risk, compliance, audit and ESG. Serving more than 1 million users from over 25,000 customers around the world, we empower transformational leaders with software, insights and confidence to drive greater impact and lead with purpose. Learn more at diligent.com.

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