Should Directors and Board Members Be Remunerated? Legal Analysis and Practical Considerations

The issue of whether corporate directors should receive remuneration has been widely debated in legal doctrine and jurisprudence in Spain. The Capital Companies Act (Ley de Sociedades de Capital, or LSC) establishes, as a general principle, that the role of a director is unpaid unless the company's bylaws expressly provide otherwise. This is set forth in Article 217.1 of the LSC, which states: "The position of director shall be unpaid, unless the company’s bylaws provide otherwise, specifying the remuneration system."

Board of Directors

Legal Requirements for Director Remuneration

For directors to receive compensation, the company’s bylaws must explicitly state that the position is remunerated and define the applicable remuneration system(s). Permissible forms of compensation include: fixed amounts, attendance fees, profit-sharing, variable remuneration, stock options, termination indemnities, or social benefit plans.

Additionally, under Article 217.3 of the LSC, the General Shareholders’ Meeting must approve, on an annual basis, the maximum aggregate amount allocated to director remuneration. In the case of a Board of Directors, the internal distribution of such remuneration among its members may be determined by the board itself, unless the bylaws or the General Shareholders’ Meeting establish alternative criteria.

Practical Considerations on Director and Board Member Remuneration

The decision to remunerate directors and board members should be based on strategic considerations, taking into account the specific characteristics of each company. Below are the key factors to consider:

1. Type of Company and Director Profile

• Family-owned businesses and SMEs: In these cases, directors are often shareholders themselves, so remuneration may not be necessary, as their financial interest is already tied to the company’s profits. However, if a director dedicates significant time and effort, reasonable compensation can prevent conflicts and ensure more professional management.

• Listed companies and large corporations: In complex corporate structures with institutional investors and regulated markets, the role of professional directors becomes more critical. Remuneration serves as a key incentive to attract individuals with expertise in corporate governance, risk management, and regulatory compliance.

2. Time Commitment and Responsibilities

• Executive directors: Those performing executive roles (such as a CEO) typically work full-time, so their compensation should be comparable to that of senior executives, with fixed and variable components linked to performance targets.

• Non-executive and independent directors: For non-executive board members, remuneration is usually structured as attendance fees or fixed annual retainers. Since their role involves oversight and control, their compensation should reflect time invested without creating conflicts of interest.

  
  

3. Alignment with Strategy and Good Governance

• Variable pay and performance linkage: To ensure directors act in the company’s best interest, part of their remuneration should be tied to financial, sustainability, or governance targets.

• Transparency and shareholder approval: Compensation should be clear, justified, and subject to shareholder scrutiny to avoid excessive pay that could provoke investor or public backlash.

4. Tax and Accounting Implications

• Director remuneration has tax implications (e.g., deductibility for the company) and must be recorded transparently in financial statements to prevent disputes with tax authorities.

• For in-kind compensation (such as stock or pension plans), objective valuation methods must be applied, and disclosure obligations must be met.

5. Risks of Not Remunerating in Certain Cases

• In high-responsibility companies (e.g., financial institutions or listed firms), the absence of remuneration may deter qualified professionals from taking on director roles, increasing the risk of less professionalized governance.

• In structures where directors are not shareholders, lack of compensation may lead to disengagement or insufficient oversight of management.

Practical Conclusion

Director and board remuneration should not be assessed solely from a legal perspective but also through strategic and governance lenses. A well-designed compensation policy helps:

• Attract and retain qualified directors.

• Align directors’ interests with those of the company and shareholders.

• Strengthen the independence and professionalism of the board.

• Prevent conflicts in family-owned businesses or investor-backed firms.

  
  

Therefore, each company should evaluate—based on its size, complexity, and objectives—whether director remuneration is necessary and, if so, implement a clear, balanced system subject to the legal controls established by law.