CEO Remuneration (before and after March 2018)

CEO Remuneration.

Prior to March 2018, there were considered to be “rank-and-file” Directors who reduced their involvement to a deliberative role. That function was considered to be reduced – simplistically – to matters of strategy and control. In addition, it was considered that, together with these “regular” directors, there were executive directors or Chief Executive Officers (CEO). The executive function was an ordinary management function and was regulated by means of a contract.

CEO Remuneration (before and after March 2018).

There are 4 ways of organizing the management and administration of a company. One of these 4 modes is complex (Board of Directors). And the other three are simple (Sole Administrator, Joint and Several Administrators and Joint Administrators).

The present collaboration deals with how the complex mode should be remunerated.

The Judgment of the Supreme Court nº98/2018 of February 26th, marks a before and an after in this remuneration regulation. Judges Sancho Gargallo, Orduña, Sarazá and Vela Torres participated in the Judgment.

Before March 2018:

1. There were considered to be “rank-and-file” directors, also referred to as the “directors in their capacity as such,” who reduced their participation to a deliberative role. That function was considered to be reduced – simplistically – to strategy and control.
2. The remuneration of these “independent directors” was to be fixed in the Bylaws.
3. In addition, it was considered that, together with these “ordinary directors”, there were executive directors or Chief Executive Officers (CEO). The executive function was an ordinary management function and was regulated by means of a contract.
4. This executive function was considered “additional” and stemmed from a legal relationship in addition to that of the “ordinary” Director. And it was not conceived as inherent to the position of Director, and could in fact have the configuration of “general manager”, “manager”….
5. The duality between ordinary directors and executive directors can be extracted from the law itself, when it uses the expression “directors in their capacity as such” in Article 217 of the LSC.
6. The remuneration of these “executive directors” should not be regulated in the Bylaws. The contract they signed should emanate from the Board of Directors and not from the Shareholders’ Meeting.
7. The remuneration of these Chief Executive Officers (CEOs) was a bonus compared to the remuneration received by “ordinary” directors.
8. It was considered that the regulation of the “ordinary Directors” was regulated in Article 217 (paragraphs 2 and 3) of the Capital Companies Act. This provision is still in force.
9. The regulation of “Executive Directors” was considered to be regulated in Article 249 (paragraphs 3 and 4) of the Capital Companies Act. This article is still in full force and effect.

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Bylaws and directors’ compensation

The Bylaws and the remuneration of the Directors. What happens when the Bylaws state that the position of director is "Unpaid"?

As of March 2018

1. The Supreme Court recognizes a majority (and erroneous) interpretation derived from Judgments of the Provincial Courts and the General Directorate of Registries and Notaries.
2. There is no dual system of administration. In fact, there never has been. The administrators are administrators and it is not possible to differentiate whether they are executive or not. The Spanish system is monistic.
3. The majority interpretation until March 2018 was erroneous and the error derives from an incorrect interpretation of the expression “administrators in their capacity as such” that appears (in force) in article 217 of the LSC.
4. The majority and erroneous interpretation was based on the mere existence or reference to “directors in their capacity as such”. This evidenced the existence of others, the “executives”. The reality is that “directors in their capacity as such” should have been understood as a difference to the provisions of Article 220 of the LSC.
5. The meaning of the reform of the LSC 2014 diverges significantly from that interpretation, which until now has been the majority interpretation.

• The Preamble of the LSC literally states: “The Law requires the Bylaws to establish the system of remuneration of directors for their management and decision-making functions, with special reference to the remuneration system for directors who perform executive functions”.
• If the remuneration of executive directors depends only on the Board of Directors, it is subtracted from that maximum transparency that justifies the reform.
• The remuneration of the administrative body is not a mandatory mention in the Annual Report of the Abbreviated Annual Accounts. These ACGRs are mandatory for the vast majority of non-listed companies: therefore, if the information remains exclusively in the hands of the Board, it will be opaque for minority shareholders.
• In addition, the reform was intended to strengthen the role of the General Meeting. This majority interpretation is not compatible with this mission.

Three Levels

The system designed by the 2014 LSC Reform operates on 3 levels.

First Level: Bylaws

• The Bylaws must establish the free or remunerated nature of the position of director (director). Such remuneration must be one of those included in Article 217.2 LSC.

Second Level: The General Meeting

• The resolutions of the General Meeting must include the maximum amount of remuneration for non-listed companies. However, the Shareholders’ Meeting may establish a broader agreement, a “remuneration policy”.
• In addition, the Shareholders’ Meeting may issue instructions to the management body. Or it may also require that any resolution on the remuneration of the management body must be approved by the General Meeting.
• Additionally, if the Bylaws contemplate a maximum percentage of profits as a remuneration system. Then it will be the Shareholders’ Meeting that establishes that percentage within the range established in the Bylaws.
• If the Bylaws provide – as a remuneration system – for the delivery of shares or stock options, or remuneration linked to the value of the shares. Then it will be necessary for the Shareholders’ Meeting to determine the number of shares, the price, the calculation system, the reference value and the term of the plan.

Third Level: Board of Directors.

• The Board of Directors is responsible for the distribution of remuneration among the various directors according to the functions and responsibilities of each Director.
• The appointment of one or more Chief Executive Officers requires a contract that includes all the agreed remuneration and even the compensation for early termination. This contract must have the vote in favor of 2/3 of its members and the abstention of the affected Director.
• The relationship between the CEO and the company is two-fold:
  • By his appointment by the Shareholders’ Meeting (which appoints him as Director) and by the Board of Directors (which delegates powers to him).
  • By a bilateral legal transaction (contract) that binds him.
• The development of these three levels observe the following requirements:
  • Reasonable proportion to the importance of the society.
  • Compatibility and consideration with the economic situation of the Company.
  • Respect for the market standards of comparable companies.
  • Vocation to promote long-term profitability and sustainability.
  • Avoidance of excessive risk-taking.
  • Avoid rewarding unfavorable results.
  • Respecting the legally established limits for remuneration consisting of profit sharing.

If this article has been of interest, we also suggest you to read the following article published on our website:

Mortis causa transfer of shares and participations.

What kind of contract should the CEO have?.