Changes to directors´ pay rules – Linklaters

The bill to amend the Spanish Companies Act to improve corporate governance introduces major changes that affect directors’ pay. These changes relate to transparency, proportionality and stipulate that pay must adhere to market practices and standards.
The system of directors’ remuneration must be set out in companies’ articles of association and pay must be reasonably in line with the company’s importance and financial situation. Executive directors must sign contracts with companies that are approved by a qualified majority on the board. Remuneration policy for directors of listed companies must be approved by shareholders by way of a binding vote.

The following changes are applicable to all companies

– Remuneration policy in articles of association

Companies’ articles of association must set out the system of directors’ pay, which could consist of one or more of the following components: (a) a fixed payment, (b) allowances for attending meetings, (c) participation in profits, (d) variable pay based on general parameters or indicators, (e) payment in shares, (f) exit packages (where their exit is not due to a breach of their duties as directors) and (g) savings or provision-making systems that are considered appropriate.

Consequently, the company cannot pay any amounts based on items that are not provided for in the articles of association. However, the articles need not go into detail or specifically state those items.

– Approval

The maximum amount of annual pay for the directors as a whole must be approved by the shareholders and will remain applicable unless modified at a general meeting. In the absence of specific stipulation by the shareholders, how that amount is distributed among the different directors will be established by the board.

– Limits on excessive pay

Directors’ remuneration must be reasonably in proportion with the company’s importance, its financial situation and market standards based on comparable companies. The system of pay must also be aimed at ensuring the company’s long term profitability and survival, taking the necessary precautions to stop excessive risk-taking and rewards for bad results.

– Chief executive officers and executive directors

When a director is appointed chief executive officer or given executive duties by any other name, that director must sign a contract with the company that:
a) Must be previously approved by the board with a two-thirds majority among its members (the director concerned withdrawing from discussions and not voting)
b) Must include the minutes of that meeting as an appendix
c) Detail all possible remuneration items for the performance of executive duties, including, as the case may be, possible early exit packages and amounts payable by the company for insurance premiums or contributions to savings schemes, and
d) Must be in accordance with the remuneration policy approved by shareholders.

Directors cannot receive any remuneration for the performance of executive duties whose nature or amount is not provided for in contract.

The following rules are applicable to listed companies

The board, at the proposal of the nominations and remuneration committee, must approve a directors’ pay policy that is then submitted for approval by shareholders at the general meeting (binding vote).

Remuneration policy must at least contain the annual amount to be paid to all the directors as a whole and the system of remuneration for those performing executive functions.

In terms of pay for executive directors, the policy must contain:
a) A description of each of the pay elements to which they are entitled;
b) The amount of annual fixed pay for the executive directors as a whole and changes in that amount over the policy period;
c) The parameters for determining variable components; and
d) The main terms and conditions of their contracts with the company and, in particular, their duration, compensation for early exit or dismissal, exclusivity and post-contractual non-compete agreements and agreements relating to minimum terms or loyalty.

Naiara Rodríguez-Escudero is counsel at Linklaters. She can be contacted at