Paying Company directors what they are worth

The dubious sight of well-paid businesspeople walking away from soon to be bankrupt companies—but not before pocketing millions of Euros (in some cases hundreds of millions of Euros)—rightly raised a stink, particularly with those less fortunate employees who lost their jobs and shareholders who lost their money.

            

It was even more unedifying when directors at some banks, which had accepted hundreds of millions of Euros in bailout funds, pulled the same trick. The perception of the leaders of badly run businesses enriching themselves and leaving the taxpayer and shareholders to pick up the tab has led to outrage amongst large sections of society. After all, what happened to captains going down with their ships?

In many cases these directors could say (or try to) that they had acted to the letter of the law, although not perhaps always in a fair or just manner. Many people believe that, in fact, greed had got the better of these ‘titans of industry’ and pushed them onto the wrong side of the law. A series of criminal court cases ensued.

However, it quickly became clear that the whole area of directors’ remuneration in limited companies was opaque and judges often seemed to be having to make up the law as they went along—sorry, perhaps we should say ‘establish case law’.

So the Spanish government decided to act in the form of tax reforms and changes to company law that came in at the start of 2015. The intention of the new legislation is to give greater legal certainty to the functions of company directors and their remuneration, following several high profile cases that raised serious issues over the legality of payments to them. In other words, make it easier for judges to find wrong doers guilty.

The general thrust of the reforms is to be applauded—greater transparency in corporate governance and a strengthening of the rights of minority shareholders, particularly when it comes to directors’ pay and rewards.

While the rights of shareholders have been strengthened in various ways primarily designed to stop a company being stripped of its assets without their knowledge, what has generally been seen as the most important change has been to transparency rules governing directors’ remuneration.

Perhaps the most important clause is that the maximum amount of remuneration of the directors “in their capacity as such” must be approved by shareholders at an AGM. Not only that, but this figure (it is a global figure—a total for all directors) has to be in proportion to the company’s importance, solvency and comparables. Or in other words not paying them more than the company is actually worth. Not only that, but if it is decided the directors have been overpaid they can be forced to repay the money to the company.

If you have any questions about company law in Spain or any other accounting or tax related issues, the experts at Spence Clarke are able to provide you with expert advice, so please do not hesitate to contact us.