PwC Belgium and corporate governance intelligence provider Diligent Institute examined the 2022 proxy season of 55 listed companies in Belgium and Luxembourg to shed light on some of the current trends in executive compensation and board composition.
The 2022 Corporate Governance and Executive Pay Report highlights a series of trends.
Among the key findings:
There is an increasing trend to link ESG indicators to both the short and long term remuneration of senior leaders, although it remains a challenge to achieve a balance with financial performance indicators
Only 50% of the companies in the Selected Index have shareholder acceptance of 90% or more on their remuneration policy and/or remuneration report
The average age of board members of the sample (the ‘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
ESG KPIs gain ground in executive pay
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. 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.
| Director remuneration - most common key performance indicators (KPIs) | |||
|---|---|---|---|
| Short term incentives (STI) | Long term incentives (LTI) | ||
| Top 5 financial KPIs | Top 5 non-financial KPIs | Top 5 financial KPIs | Top 5 non-financial KPIs |
1. (R)EBI(A)T(DA) * |
1. Operational objectives |
1. Total shareholder return |
1. Environment |
2. General financial indicators |
2. Qualitative targets |
2. Earnings per share |
2. Individual performance |
3. Cash flow |
3. Customer satisfaction |
3. (R)EBI(A)T(DA) * |
3. Employee satisfaction |
4. Revenue |
4. Environment |
4. Cash flow |
4. CSR and governance |
5. Capital |
5. Strategic objectives |
5. General financial indicators |
5. Customer satisfaction |
“We can definitely expect further developments in this area. The European Commission is determined to bring sustainability reporting on a par with financial reporting. The Corporate Sustainability Reporting Directive (CSRD) 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), 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. 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.”
Aurore Zadeling, Senior Manager, PwC Belgium
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.
