Sustainability targets and executive board remuneration in Germany

Environmental goals
Balancing sustainability criteria and financial criteria
Comment

Since 1 January 2020, the remuneration structure for executive board members of listed companies has to aim at the "sustainable and long-term development" of the company in accordance with section 87(1)(2) of the German Stock Corporation Act (AktG). With the terms "sustainable" and "long-term", the legislature wanted to make it clear that the supervisory board must also take into account social and ecological aspects.

Environmental goals

An obvious solution is the integration of environmental, social and governance (ESG) goals into the remuneration structure. Most companies listed on the German stock exchange (DAX) have included ESG goals into the variable remuneration for the executive board members. Environmental goals can include topics such as:

• the climate;
• resource consumption; or
• the preservation of biodiversity.

Whereas environmental goals had previously played a subordinate role in executive remuneration structures, they are now very popular. For example, many companies have set themselves targets relating to:

• the reduction of carbon dioxide emissions; or
• the increased use of electricity from renewable sources.

Balancing sustainability criteria and financial criteria

In addition to selecting ESG targets, the supervisory board must consider:

• the relationship between sustainability criteria and financial criteria – the Working Group on Guidelines for Sustainable Executive Board Remuneration recommends a weighting of at least 10% of the target total remuneration, while the government's Sustainable Finance Advisory Council recommends including a sustainability-related remuneration of 30% in the German Corporate Governance Code;
• whether sustainability-related remuneration should be integrated into short-term variable remuneration or long-term variable remuneration – while the Working Group on Guidelines for Sustainable Executive Board Remuneration favours anchoring the targets into long-term remuneration, this is by no means mandatory; and
• whether ESG targets should be agreed as an additive indicator alongside the financial indicators, or within the framework of a discretionary factor (usually 0.8 to 1.2), with which the target achievement of a variable remuneration component is multiplied.

Comment

In summary, listed companies should take sustainability issues into account when structuring the remuneration of the executive board. It can also be assumed that sustainability criteria are becoming more and more important and will increasingly be taken into account in the remuneration of non-listed companies.

For further information on this topic please contact Vera Rothenburg, Christian Arnold or Ricarda Zeh at Gleiss Lutz by telephone (+49 711 8997 0) or email ([email protected], [email protected] or [email protected]). The Gleiss Lutz website can be accessed at www.gleisslutz.com.