Oversight and governance of public company remuneration in Spain had long been straightforward – until a recent Supreme Court ruling muddied the waters. Article 217 of Spanish Companies Law (“LSC”) provides shareholders at the general meeting with a vote on the aggregate director fees that can be paid to the board, and article 249 provides a further vote on the company’s wider remuneration policy. However, in February the Court handed down a decision calling for articles 217 and 249 to be considered cumulatively; the result is uncertainty, with various companies acting on a variety of interpretations.

Article 217 is generally seen to cover non-executive fees paid in relation to board and committee service, with executive remuneration seen as separate, governed by the wider policy as well as employment contracts. This split is reinforced by articles 529 septdecies and 529 octodecies of the LCS, which relate specifically to listed companies and more clearly distinguish between board service and executive functions.

The court’s conclusion that articles 217 and 249 should be considered cumulatively has blurred the lines. While the ultimate meaning of the decision remains unclear, one potential implication is that the aggregate remuneration limit approved by shareholders should cover executive pay as well as director fees. Another is that the limit should be included in the remuneration policy.

During the past proxy season, most companies followed a traditional approach. However, some issuers’ legal teams apparently had different views, proposing amendments to their articles of association or remuneration policy to accommodate for the court decision.

Even amongst the companies that took action, there were a range of responses. For example, construction conglomerate Obrascon Huarte Lain SA hedged its bets, amending the wording of its articles association to specify that the maximum remuneration limit should be set by way of the remuneration policy (reflecting the court’s decision by effectively blending articles 217 and 249), but also allowing for the amount to be approved ‘ad hoc’ by the general meeting. Others went a step further; Metrovacesa, for example, amended the remuneration policy itself to set a new aggregate remuneration limit, which itself includes separate caps on directors’ fees (2 million) and executive pay (€4 million, excluding severance).

The current system for listed Spanish companies already gives shareholders a fair amount of say on director and executive pay. In addition to the aforementioned votes on remuneration policy and aggregate director compensation, an annual advisory vote on the directors’ remuneration report encourages additional disclosure and provides shareholders with a means to voice their opinion on how the policy has been applied during the year.

Including executive pay within the aggregate maximum approved by shareholders could provide a  new point of scrutiny going forward, but it wouldn’t necessarily lead to material changes. Look to Switzerland: with executive pay continuing to creep up year on year, the ultimate impact of the Minder Initiative’s binding shareholder votes appears somewhat muted. Regardless, with some companies adjusting their articles and remuneration policies as others stand pat, legal clarification on whether (and how) the Spanish court’s decision applies to listed companies is sorely needed.

Matti is an analyst covering the Spanish market.