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On many occasions doubts arise as to how to correctly structure the remuneration of the members of the management body of a company.
Attention should be paid to the three different levels of regulation of such remuneration:
a) Company bylaws
b) Approval by the general meeting
c) Decision of the directors
In accordance with the provisions of the Spanish Companies Act, the office of director shall be free of charge, unless the bylaws provide for otherwise. In the bylaws, the remuneration system shall determine the components of the remuneration to be received by the directors in their office as such, and which may consist, among others, of one or various of the following:
a) a fixed allocation,
b) attendance allowances,
c) profit share,
d) variable remuneration with indicators or general reference parameters
e) remuneration in shares or linked to share performance
f) severance pay, provided that the termination was not due to non-fulfilment of the functions of director, and
g) savings or pension schemes, where appropriate.
That is to say, it shall establish whether the post of director is remunerated or not and which items shall form a part of the remuneration to be received, without going into the amounts to be received by any of the persons who form the management body.
Thereafter, it shall be determined that the general meeting shall establish the maximum amount of the annual remuneration of the directors as a whole, in their capacity as such, which shall remain in force as long as no further modification is passed. The distribution of the remuneration among the different directors, unless an agreement by the general meeting to the contrary exists, shall be established by decision of the directors themselves and, in the case of a board of directors, by decision thereof, which should be taken upon the consideration of the functions and responsibilities attributed to each board member.
This implies that:
a) when the management body is modified in respect of the number of directors, the amount must be revised both by the meeting (at least the amount to be distributed), as well a decision by the directors, which establishes the share.
b) when there are changes in the directors, without modifying the form of the management body, all that is required is a new agreement for the distribution, if this was done on a personal basis.
In this respect, we must refer to the criteria established by the Supreme Court in judgment dated 26th February 2018.
The judgment concludes that no distinction should be made between board members, because the letter of the law does not do so. Consequently, the managing directors must have the same consideration as the other board members and their remuneration must also be approved by the general meeting, given that they are, likewise, members of the management body. In other words, the maximum remuneration of the administration body includes the remuneration of the managing director, the board of directors cannot approve a separate remuneration for the managing director, as some companies have done up to now.
Likewise, in order to clarify the concepts under which directors are remunerated, the Supreme Court concludes that the paid functions will be both deliberative and executive. Precisely for the following reasons:
a) only one director may have executive functions delegated and
b) executive functions are inherent to the office of a director, since the act of delegating implies that it is not possible to delegate a power that one does not possess.
Thus the formula used by many companies is not correct, whereby the office of director is free of charge, in accordance with the bylaws, however the person is remunerated through a particular office, such as the case of top management personnel, furthermore this implies that said remuneration would cause serious fiscal problems for the company.
The ideal situation for remunerated directors would be the following:
a) Directors must be registered as self-employed
b) Their remuneration is set out in the bylaws
c) The general meeting has approved the remuneration of the board of directors in its entirety
d) The decision has been made by the management body establishing the distribution of the allocation approved by the general meeting.
e) The senior management relationship prior to the appointment as director, this being the case, is suspended or eliminated, where appropriate. Notwithstanding the above, a dual relationship through an ordinary employment relationship may exist, in accordance with the criteria of the courts. However, it must be clearly differentiated from the functions of management or administration.
Non fulfilment of any of the aforementioned conditions may generate serious consequences for the company, therefore we recommend the regularisation of the situation as soon as any irregularity is detected.
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Barcelona, 5th June 2020