Incentivised sustainability - CSR Goals in Employee Remuneration

Credible implementation of a CSR strategy requires more than just a published policy. The concepts formulated as a guiding principle should not just be put down on paper, but actively practised in the company. This is mainly a management task, but ultimately it is up to each individual in the company to promote the CSR goals.

But what can be done if, for example, employees are measured against goals that contradict the CSR strategy, such as the goal of reducing costs by appointing a cheaper supplier as opposed to a supplier that provides sustainable employment conditions for employees and is environmentally friendly? The sustainability goals set out in the CSR strategy should be reflected in the corporate culture. Since this often requires a change process, the question arises as to how employees can be encouraged to promote the CSR strategy. It is often asked how employee remuneration should be designed to promote the CSR strategy.  

Sustainability instead of increased profits in the GmbH?

The catalogue of duties for a managing director of a GmbH is primarily oriented towards the promotion of the company’s purpose. Consistently, the management of profit-oriented GmbHs is therefore fundamentally bound to generate profit and not to pursue any other goals. However, this is about more than just short-term optimisation. For it may be necessary, precisely in order to promote the company’s purpose, to incentivise sustainability goals and/or to place them at the centre of a long-term strategy. A classic form of incentivising is a remuneration structure for employees that is oriented towards sustainability. Depending on the importance of this aspect, a concrete sustainability goal can even be placed above the achievement of business objectives. After all, a company’s sustainability strategy has long been decisive for the company’s goodwill with customers, investors and also potential employees, and thus contributes to the company’s long-term success.

Legally, there is only a limited obligation to introduce sustainability targets in remuneration. Since the amendment of section 87 (1) sentence 2 German Stock Corporation Act, however, CSR targets may not expressly be decisive for the remuneration of executive boards of listed stock corporations. Indirectly, this effects group companies. However, the argument that remuneration structures in a GmbH should also be in line with sustainability principles is being increasingly voiced. The fundamental legality of agreeing sustainability targets in a remuneration structure can therefore no longer be seriously questioned.  

Remuneration Instruments

A target agreement can be considered as a legal instrument, especially in the area of managers. Possible targets can be related, for example, to the reduction of energy consumption of products, satisfaction of employees working for a manager or CSR compliance of suppliers. Employees in production, on the other hand, can be regularly motivated to pursue sustainability goals through simpler bonus pay agreements, such as the payment of a bonus for a reduction in material consumption. Rewards of time or “special leave” are also conceivable, for example to dedicate oneself to a social project. Employers can also reward employees for sensible internal suggestions that improve their own processes in line with the CSR strategy. There are other conceivable models - but it is crucial that there is sufficient awareness to think of the CSR strategy in terms of remuneration.  

Legally Compliant Implementation

Once sustainability goals have been defined, they must be implemented in a legally secure manner. There are various aspects that need to be reconciled with each other in this regard:

• Need for flexibility:
  All beginnings are difficult. After the introduction of new measures to promote sustainability, their effectiveness should be analysed and the system adapted if necessary. For legal implementation, fixed-term agreements are therefore generally recommended. In the absence of a works council (see below), a fixed-term overall commitment may be made for the purpose of testing the bonus system. It must be made clear that this is a voluntary benefit, the granting of which does not constitute an entitlement for a granting period, in order to exclude company practices.
• Transparency:
  A bonus promise or agreement must be transparent. The clearer it is for individual employees as to which conduct leads to which incentives, the greater the practical success of the measure. Less is often more. From a legal point of view, it must be comprehensible how targets are measured, what applies in the case of leaving and joining during the year or in the case of special circumstances. It is therefore worth taking a closer look, because the devil can be in the detail even in seemingly simple systems.
• Process credibility:
  The implementation process itself must be planned and predictable. Good communication involving legal/HR and compliance (e.g. who talks to whom about which goals and when? At what intervals should review meetings take place?) are necessary so that the CSR goals are quickly understood and have a motivating effect. There is a need for a practical explanation of how, for example, purchasing can ensure that the IT advice purchased is not in turn detrimental to third parties/the environment, etc., so as not to confront employees with seemingly unsolvable tasks. We recommend that the CSR strategy be communicated to employees, for example through online training using real-life examples. The process of reviewing goals must also be credible and transparent.
• Works council:
  If there is a works council, in addition to the question of competence (keyword: group/company-wide regulation), the mandatory co-determination in matters of remuneration (section 87(1) nos. 10, 11 Works Council Constitution Act) must be observed. The following principles apply: The employer is free to decide which goals it wants to achieve with the remuneration - therefore it can neither be forced by the works council to promote CSR compliance through remuneration, nor can the works council veto this if the employer wants to introduce this. This also applies to the question of for which positions in the company it would be sensible to give remuneration incentives for complying with and promoting sustainability goals. The costs of this additional remuneration are also at the employer’s discretion. The works council, on the other hand, can co-determine the legal form of the agreement and how its achievement is measured. Often - in view of the need for flexibility mentioned above - a fixed-term works agreement is preferable. Depending on the circumstances, after-effect should be excluded in order to provide an incentive for adjustment.

Summary

Motivating employees in the area of CSR not only helps to achieve self-imposed CSR goals, but also promotes the attractiveness of an employer. The CSR commitment of the employer is already today often an essential success factor in the decision of high potential or skilled workers for an employer. Used correctly, CSR-related remuneration can make an important contribution. CSR compliance can therefore pay off in several ways: For the employee and for the company as well as for society.