Explanatory note concerning the remuneration of non-executive directors and members of the executive management
We informed you of the release of the explanatory note on the remuneration report issued further to the introduction of the say on pay principle by the Revised Shareholders’ Rights Directive (SRD II) in our newsflash dated 24 February 2021.
In January 2022, the Belgian Corporate Governance Committee indeed released a new explanatory note on the remuneration of executive and non-executive directors. This note is intended to assist listed companies in complying with legal obligations arising from articles 7:89 – 7:92 and 7:108 of the Belgian Code on Companies and Associations and principle 7 of the 2020 Belgian Code on Corporate Governance (hereafter “the Code”).
The main takeaways of the new explanatory note are highlighted below.
To match: sustainable value creation and (non)-executive remuneration
The Code states in its principle 7 that “The company shall remunerate board members and executives fairly and responsibly”.
In its note, the Corporate Governance Committee emphasizes the expectation to tie (non)-executive pay to sustainable and long-term value creation. This goal is defined as “the pursuit by a company of objectives that go beyond short- and medium-term financial indicators and shareholder returns while integrating the needs and expectations of the wider society in which it operates as well as the legitimate interests of its shareholders and other stakeholders” (free translation). The explanatory note clarifies how to align long term value creation and (non-)executive remuneration.
For non-executive directors the Code states that they should not be compensated in any way that is directly tied to the company’s results. The fact that non-executive directors’ remuneration is not directly linked to the company’s short-term results is designed to encourage and prioritize sustainable and long-term value creation. In contrast, non-executive directors should receive part of their remuneration in the form of company shares (these shares must be held for at least one year after the non-executive director leaves the board and for at least three years after their award). In this respect, it is clarified that the proportion of remuneration paid out as shares should be sufficient to meet the requirements of the Code so as to align non-executive directors’ perspective with that of the company. For that purpose, the Committee recommends 15% to 30% of the remuneration being paid as company’s shares (this threshold should be interpreted in a flexible way depending on the specific situation of each company).
Members of the executive management must be compensated in a way that is consistent with the goal of creating long-term value. To begin, the Corporate Governance Code specifies that a suitable balance of fixed and variable remuneration, as well as cash and deferred remuneration, is assumed. In this regard, the variable component of remuneration cannot be solely based on individual success, but must also be related to the company’s overall performance. Secondly, the board of directors should establish a minimum number of shares that members of the executive management must own (no recommendation on how to determine this threshold has been established in the note however). Thirdly, short-term variable remuneration of the executive management should be subject to a cap. The note does not contain any recommendation about the determination of such a cap. Fourthly, stock options should not be exercisable within less than three years. Lastly, the board of directors must approve (after advice by the Remuneration Committee) the main terms of the contracts of the CEO and the other members of the executive management. The contracts must also contain specific provisions regarding claw back provisions and early termination. These provisions establish the behaviour (in the broad sense) of members of the executive management to the pursuit of sustainable value creation.
It is clear that (non-)executive remuneration should support the company’s sustainable value creation. This expectation is not only derived from law, but also from investors’ and shareholders’ demands (through voting guidelines for the firsts and their say on pay rights for the seconds). The call to link (non-)executive pay – and in particular long-term incentives – with ESG measures to support sound remuneration policies follows the same rationale: support the sustainable and long-term value creation strategy of the company. For more insights you may consult our 2021 Corporate Governance and Executive Pay Report.