Ten Key Points Not to Overlook Regarding the Remuneration of Directors and the Chief Executive Officer

In this article, we outline ten essential points to consider regarding the remuneration of directors and the CEO (Chief Executive Officer):

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You can find further details in the video we have prepared for this purpose (it takes less than 2 minutes to watch):

1. The agreement entered into with a director or board member constitutes a key element, setting out the duties and the remuneration associated with the position.
2. While the remuneration of any other director is governed by Articles 217 et seq. of the Spanish Companies Act (Ley de Sociedades de Capital, or “LSC”), Article 249.4 LSC mandates the execution of a contract that specifies the compensation linked to the delegation or assignment of specific powers or responsibilities.
3. This is considered an exclusive competence of the full board of directors. Approval requires a qualified majority—two-thirds of the board members—excluding the affected director. Additionally, the contract must be attached as an annex to the minutes of the relevant meeting.
4. Why is a contract required? Although the appointment resolution and the definition of powers of the director are publicly disclosed through notarization and registration (Articles 214 and 215 LSC, and Articles 141, 142, and 149 et seq. of the Commercial Registry Regulations), the specific remuneration linked to such role historically lacked the same formality. In this context, the contract becomes the formal instrument that records the agreed remuneration between the company and the director for the performance of delegated or executive functions.
5. The nature of the contract is essentially remunerative. Remuneration, in a broad sense, is its core component. The law merely requires a detailed specification of the remuneration to be received for executive functions and enumerates potential types of remuneration. Although this is not its sole content, it is inferred to be its main focus, as the legal provision repeatedly references remuneration-related matters, whether permissible or prohibited, based on one single criterion: contractual inclusion. Additionally, Article 249.4 LSC refers to the heads under which a director may be compensated (referring to Article 217 LSC) and explicitly mentions particularly relevant concepts in such contracts, as reflected in corporate practice and governance indexes across different markets.
6. The company’s Bylaws must provide for and allow great flexibility in defining various compensation schemes, especially for accommodating both general and specific systems applicable to directors and managing directors, as envisaged in Article 217 LSC.
7. The general rule of gratuitousness established by Article 217.1 LSC applies to executive directors as well, unless otherwise provided in the Bylaws.
8. The 2018 Supreme Court Ruling (STS) emphasized this requirement, while rejecting the notion that Articles 217 and 249 LSC are mutually exclusive. Instead, it advocated for a cumulative interpretation that permits both forms of remuneration to coexist. The Court also stressed the need for a “less rigid” application of the Bylaws, granting the board of directors a margin of autonomy to adapt compensation to changing business demands.
9. The STS of 2018 made it clear that there can be no remuneration for directors without statutory provision authorizing it. In its absence, the rule of gratuitousness applies to all directors and all forms of compensation.
10. That said, the mere inclusion of remuneration provisions in the Bylaws does not in itself imply an obligation to remunerate all directors for all potential functions. However, it is crucial to recall that, under the 2018 STS, the criteria set out in paragraphs 3 and 4 of Article 217 LSC (duties, responsibilities, and performance) also apply to the remuneration of executive directors. This grants the board of directors a degree of discretion in determining the specific compensation for the CEO. Such discretion would be unduly restricted if any change in remuneration required prior statutory amendment in response to circumstantial changes in the company’s situation, which would contradict the flexible approach endorsed by case law. The remuneration setting, even for the CEO, tolerates a degree of variability within the statutory limits. The board enjoys autonomy to determine the methods, concepts, and amounts of this specific compensation, always acting with the due diligence expected of any manager (Articles 225 and 226 LSC).

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