Incentive compensationTypical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?Non-recurring result-based bonus (CBA 90)
The company can introduce a bonus scheme that must meet a number of conditions. The most important of these is that the bonus must be subject to collective targets. The bonus plan must be adopted according to specific procedures and formalities, and apply to an objectively defined category of personnel. This may be the entire staff, but it could also be limited to a specific department or to a group of employees. Employers engaged in a collective dismissal procedure for closing down the company are no longer allowed to use the regime of the non-recurring result-based bonus. Employers using the procedure for collective dismissal when closing down the company are no longer allowed to use the regime of the non-recurring performance-related advantagesShare options (generally granted to executives)
Employers purchase such share options (also known as ‘warrants’) issued by financial institutions. The employer then offers these warrants to its employees, who then are able to resell them to the financial institution. By doing so, employees are exposed to stock market fluctuations for only a day or two, effectively minimising their overall market risk.Stock options (generally granted to executives)
Stock options are granted free to the employees (beneficiaries). During a lock-up period of generally one year the beneficiary can neither exercise nor transfer such stock options. After this one-year period, the beneficiary has the option to either exercise the stock options or to sell them to any party of his or her choice except for the company-employer or any other affiliated company.Bonus pension plan (generally granted to executives)
In the framework of a bonus pension plan, a part of the bonus budget is paid as a cash bonus (subject to ordinary taxes and social security contributions) and another part is paid as employer’s contributions under the pension rules.Bonus agreement or policy
It is possible to set for an employee, or for a specific group of employees, objectives that, if reached, will trigger a bonus for such employees. Except in specific cases (eg, the banking sector and Belgian-listed companies), the parties are free to set the objectives and the amount of the bonus.The profit bonus
This system offers companies the opportunity to share part of their profits with their staff (with the exception of company directors) in the form of a collective cash bonus.
Companies are allowed to make entitlement to this bonus dependent on seniority (maximum one year). In some situations, a pro-rata calculation can be used. The total amount granted cannot exceed 30 per cent of the total gross payroll for the accounting year and the bonus cannot be granted in lieu of existing benefits. The profit bonus is taxed at a rate of 7 per cent. It is not subject to ordinary social security contributions. Instead a solidarity contribution of 13.07 per cent is charged to the worker but withheld and paid by the employer in the same period and subject to the same conditions as ordinary social security contributions. The employer pays no contribution but cannot deduct the amount of the profit bonus from the corporate income tax.Restrictions
Are there limits generally on the amount or structure of incentive compensation? Are there limits that adversely affect the tax treatment of the compensation relative to the employer or the executive?Non-recurring result-based bonus
The bonus paid in the framework of a plan to award ‘non-recurring result-based advantages’, is, within yearly indexed limits, exempt from all taxes or ordinary social security contributions. The maximum amount is set at €3,383 for 2019, but there is a personal social security contribution of 13.07 per cent due in addition to the special employer’s contribution of 33 per cent.
Should the employee receive more than €3,383 in 2019, the amount of the bonus that exceeds this limit will be subject to ordinary social security contributions and income taxes.Share and stock options
Both stock options and warrants are exempt from social security contributions (and thus also from the calculation basis for holiday pay) in certain conditions (where there is no ‘in-the-money’ option or no guaranteed benefit).
If such options are listed on the stock market and can be sold at very short notice, the taxable value is equal to their actual value on the stock exchange on the date preceding the offer. If such options are not listed on the stock market, and providing that they are blocked for a period of at least 12 months, the taxable value is determined on the basis of a lump-sum assessment, which depends on the value of the underlying shares at the moment of the offer.
In recent years, several financial institutions have obtained rulings from the Ruling Commission with regard to the tax treatment of option plans on SICAV shares and listed warrant plans. The Ruling Commission has recently put a limit on the use of this kind of product for services rendered as of 1 January 2018 by using the concept of ‘disproportion’ with regard to the usually granted remuneration. In order for the use of options on SICAV shares or warrants not to be disproportionate, employees may only be granted options on SICAVs or warrants in an amount not exceeding 20 per cent of the sum of:
- the monthly gross salary, multiplied by 12.92 (thus including vacation pay, but without taking into account the benefits in kind);
- the 13th month; and
- the gross variable salary before conversion.
The total amount of the profit bonus granted to the employees cannot exceed:
- 30 per cent of the total gross payroll for the accounting year; and
- the amount of the profit after tax of the accounting year.
The profit bonus can be ‘identical’, which means a same amount or a same percentage of the remuneration to the beneficiaries, or ‘categorised’, which means that the calculation method depends on the category of each beneficiary. In case of a ‘categorised profit bonus’, the different methods of categorisation are determined by the law, and the amount granted to the most-favoured category can be maximum ten times the amount granted to the least-favoured category. In case of an ‘identical’ profit bonus, a decision of the general meeting of the company is required, but not a collective bargaining agreement with the trade unions. In case of a ‘categorised’ profit bonus, a decision of the general meeting of the company is required but also a collective bargaining agreement with the trade unions, following a specific procedure and certain formalities.Bonus pension plan
Occupational pension plans are subject to a very favourable tax and social security regime, compared with salary. Very briefly, instead of the normal social security contributions due on salary (about 27 per cent for white-collar employees and about 43 per cent for blue-collar employees for the employer, and 13.07 per cent for the employee), contributions to a pension scheme are subject to a special social security contribution of 8.86 per cent and an insurance tax of 4.4 per cent. There is an additional 3 per cent social security contribution (on the exceeding part) if the pension contributions exceed an annual pension target that corresponds to the maximum statutory pension for a civil servant (currently €78,453.60 a year).Bonus agreement or policy
There are no specific rules on bonus social security and taxation. Bonuses are subject to ordinary social security and income tax rules.Deferral
Is deferral and vesting of incentive awards permissible? Are there limits on the length or type of vesting and deferral provisions?
Deferral and vesting of incentive awards are permissible and valid, providing that the contractual provisions are correctly worded.
In listed companies, stock options granted to ‘executive directors’ may not be exercised before the end of three years after granting. Also, deferral rules apply to their variable compensation when it exceeds 25 per cent of the total compensation.
In banks, very strict rules apply to variable compensation granted to ‘identified staff’. Deferral rules must be applied (on at least 40 per cent of the variable remuneration). Also, half of the variable compensation must be granted in financial instruments. At present, the Belgian regulator tolerates that these rules are, by way of exception, not applicable when the variable compensation is lower than €75,000.
Are there limitations on the individuals or groups eligible to receive the compensation? Are there aspects of the arrangement that can only be extended to certain groups of employees?
See questions 11 and 16.Recurrent discretionary incentives
Can it be held that recurrent discretionary incentive compensation has become a mandatory contractual entitlement? Is this rebuttable?
If a premium is granted over several consecutive years, there will be an entitlement to this premium on the basis of ‘custom’.
The employee will have to prove the existence of such custom in the event of:
- repeated payments of the premium over a certain period. Case law accepts the existence of a custom when a bonus is paid over two to three years. It is therefore recommended to the employer to specify in the contract that the employee acknowledges that, even if a premium is awarded for several years, this will not constitute a custom and that the employee acknowledges that he or she is not entitled to expect such a premium in the future;
- payment to a certain category of employees (eg, all employees, all white-collar employees, all the managers, etc); and
- payment of a similar amount or payment based upon the same criteria (eg, a certain percentage of the profit or the turnover of the company). If the amount varies from year to year and is determined by the employer on arbitrary grounds, it could be argued there is no custom.
A custom can be abolished by an individual or a collective agreement. In the hierarchy of sources of law, the custom is preceded (in this order) by:
- the mandatory provisions of the law;
- the collective bargaining agreements that have been declared generally binding;
- the collective bargaining agreements signed by an employers’ federation to which the employer is affiliated;
- the company-level collective bargaining agreements, the written employment contract, the other collective bargaining agreements;
- the works rules;
- the additional provisions of the law; and;
- the oral employment contract.
It can be derived from this hierarchy that a custom can be overruled by a collective bargaining agreement, an individual agreement with the employees concerned or by the works rules.
The possibility of unilaterally terminating a custom with notice is not provided for in any legal text. It is, however, accepted by a majority of legal authors, at least if the following formalities are simultaneously complied with:
- notice can be given in any form, but it must be clear and unambiguous. The employer must be able to prove that each individual employee was informed (eg, by sending an email to all employees concerned, by sending a letter or by organising a staff meeting where all employees confirm their presence by signing an attendance sheet); and
- there are no legal guidelines to determine the length of the notice period to be respected. Legal authors state that the notice period must be determined taking into account the duration for which the custom has existed. The notice period is intended to allow the parties to negotiate a compromise and to give the employees the time to adapt to the new situation.
Does the type or amount of incentive compensation awarded to an executive potentially affect the compensation that must be awarded to other executives or employees?
The amount of incentive compensation awarded to an executive does, in principle, not affect the compensation that must be awarded to other executives or employees. In practice, however, it may be the case that employers ensure at least some sort of basic parity amongst employees of the same level or rank, possibly to avoid being subject to claims of discrimination.
An employer cannot discriminate with respect to promotion opportunities or working conditions. If an employee claims that he or she has been discriminated against before a competent court, and if he or she establishes facts from which it can be presumed that there has been direct or indirect discrimination, the burden of proving there has been no discrimination shifts to the employer.Mandatory payment
Is it permissible to require repayment of incentive compensation under certain circumstances? Are there circumstances under which such repayment is mandatory?
This is not specifically foreseen in Belgian law. On the basis of the general principles applicable to every contract, the repayment of a paid remuneration could be claimed by the employer if an amount was paid out by mistake, or owing to an unfair or a deceptive act or practice.
Can an arrangement provide that payment is conditioned on continuing employment until the payment date? Are there exceptions?
The validity of a clause conditioning the bonus on the presence of the employee at the service of the employer on the date of payment is controversial. When the employee leaves during the reference period, we believe it is possible to argue that no pro-rata bonus will be due if the parties so agreed an ‘indivisibility clause’. However, case law exists holding that there are no legal obstacles to linking the granting of the bonus entitlement to certain conditions, like the condition to be in service of the company at the moment of the grant, and that such a presence condition is considered legal. On the other hand, some case law also states that a clause subjecting the right of an employee to a bonus on the condition of being in service at the moment of the payment violates article 3 of the Remuneration Protection Act and article 6 of the Employment Contracts Act and is therefore void.
According to the Belgian Act of 25 April 2014 on the statute and control of credit institutions (the Banking Act), every Belgian credit institution requires a solid and appropriate company organisation, including control, to guarantee an efficient and prudent administration of the institution, relying among others on a remuneration policy that guarantees a healthy and efficient risk management and prevents the taking of risks that exceed the tolerance level as determined by the institution (article 21 of the Banking Act).
No provision of the Banking Act prohibits linking the payment of the deferred variable pay to a presence condition.
In our opinion (considering any grant and pay-out of variable remuneration to an identified staff must be especially justified), such a presence condition makes sense in the framework of the Banking Act since it also enables the bank to extend the period during which it can apply risk adjustments.