In depth
Environmental and social factors are increasingly influencing the long-term value creation of businesses. Climate change and societal inequalities affect both businesses and society, creating risks as well as opportunities. On the other hand, businesses impact nature and society through their production, products, and services. Corporate success therefore needs to be redefined along the lines of a multi-capital structure that encompasses a holistic view of financial, environmental, and social impact. The traditional Corporate Social Responsibility (CSR) approach has evolved into ESG driven strategies, which evaluate businesses performance through an integrated value lens. Integrated value refers to the sum of financial, environmental and social long-term impact created by the business. In practice, companies are increasingly setting ESG goals in their remuneration policies to support long-term sustainable value creation.
Amsterdam Exchange Index (AEX) companies exceed ESG targets
The Dutch financial newspaper Het Financieele Dagblad recently published an article on the research of ESG-driven bonuses of AEX companies executives in 2024. These bonuses totaled at least half a million euros. The AEX executives scored higher on sustainability targets than on financial or operational targets, exceeding their ESG targets by an average of 20%. The ESG targets are divided into environmental, social and governance categories. For instance reducing the company's CO2 emissions is an environmental target, while increasing employee satisfaction an example is social target. In 2024, executives exceeded their environmental targets by 36% and their social targets by 7%.
Responsible remuneration
Reward Value Foundation — a non-profit research initiative — believes that executive compensation practices no longer align with the societal context in which companies operate. To substantiate this view, its founder Frederic Barge, introduced the Guidebook of Responsible Remuneration. According to him, the aforementioned research results suggest that the targets are not ambitious enough and may not effectively drive behavioral change. Supervisory board members acknowledge that they are still seeking the right balance in setting ESG targets and aim to encourage executives to integrate climate considerations into their policies. Companies note that they have less experience in setting ESG targets compared to financial and operational goals, which may explain why these targets are not yet optimally assessed.
The employer's discretion
Bonus schemes and KPIs are not regulated by law, allowing employers flexibility to set their own policies. They are often linked to the achievement of specific targets, such as ESG targets. While bonus decisions typically fall under the employer's discretion, this must be clearly agreed upon with the employee and exercised in line with good employer practice (goed werkgeverschap). A ruling by the District Court of Midden-Nederland (ECLI:NL:RBMNE:2023:6876) emphasized that even when a bonus is discretionary, the employer must provide a clear and reasonable justification for withholding it — especially when the employee has met the agreed-upon targets and had a reasonable expectation of receiving the bonus. Key considerations include how bonus targets were communicated and whether employees reasonably expected a bonus upon achieving their targets. Any adjustment must be clearly justified and proportionate to the objective, balancing the interests of the employer and the employee.
Key takeaways
Linking bonuses to environmental goals is a relatively new practice, making it challenging for employers to set adequate targets. If the environmental targets are met but do not achieve the desired effect, it raises questions about whether employers can use their discretion to adjust the bonus payout or if they are obligated to award the bonus if the target is met. Case law such as ECLI:NL:HR:2023:693 and ECLI:NL:EBROT:2019:6939 indicates that achieving these targets while failing to deliver the desired effects will likely not be sufficient grounds for adjusting bonuses. Deviation from established targets may lead to legal ambiguity and subjectivity, potentially resulting in a violation of good employer practice.
It is understandable that employers seek flexibility, especially when newly established targets are difficult to evaluate. Implementing bonuses tied to ESG criteria requires careful preparation and documentation. It is advisable to clearly define the scope of the employer's discretion regarding environmental targets. For example, it should be made explicit that these targets are still under development, and a range should be provided to determine bonus eligibility. It is important to note that once the targets are achieved, adjusting the bonus retrospectively may be difficult. Testing certain ESG targets before incorporating them into short- or long-term bonuses is recommended. A 'dry swim' exercise may help the company understand the development of the targets and set realistic goals for such KPIs.
