What are the criteria for proportionality in determining directors' remuneration in Spain?

Judges and courts have limited authority over the remuneration of directors, which is governed by the principles of corporate freedom and minimal intervention. Judicial bodies should refrain from overriding the decisions made by shareholders during the General Meeting.

Oversight of management body compensation by the courts

A Supreme Court Ruling 194/2025, dated 7 February, emphasises that "the shareholders' meeting has the ultimate authority to determine remuneration. In this context, judicial review allows for challenges to corporate resolutions based on harm to corporate interests. This safeguards against abuses that can distort the true meaning of remuneration, which should reflect the responsibilities associated with the position."

In this context, the courts have consistently ruled that when evaluating a challenge to approved remuneration as abusive, they must focus solely on whether the amount exceeds legal limits. They cannot supplement the company's will and decide what would be an appropriate figure for the specific case. For example, this was established in the Judgment of the Barcelona Provincial Court 705/2022 on 21 April.

Legal criteria for determining remuneration: reasonable proportion

The Supreme Court examined the legal criteria that govern the board of directors' remuneration, as established in Article 217.4 of the Capital Companies Act. This provision states that:

"Directors' remuneration should be reasonably proportional to the company's size, current economic condition, and the market standards of comparable companies. The established remuneration system should promote the company's long-term profitability and sustainability while also including safeguards to prevent excessive risk-taking and discourage rewarding poor outcomes."

The key concept here is maintaining reasonable proportionality. Spanish courts emphasise that this principle governs minimum reasonableness rather than maximum reasonableness. This framework supports the judgment in which the Supreme Court states, "There is no disproportionate discrepancy that distorts the meaning of the remuneration." That is, the fixed remuneration must meet a minimum standard of reasonableness as defined by legal criteria.

These criteria are often vague, requiring analysis of each situation based on its circumstances.

In its judgment, the High Court examined the principle of reasonable proportionality in relation to the company's specific circumstances:

Economic situation

The ruling emphasises the significant increase in profits achieved by the company in the year when the disputed remuneration was determined. A favourable income statement supports the justification for remuneration; however, based on other rulings from our courts, the absence of distributable profits cannot solely mean that a director cannot be compensated.

For instance, technology start-ups often incur losses during their early years. This does not imply that their directors should work without compensation. In such cases, it is important to consider the criterion of proportionality, taking into account the company's importance, market valuation, and standards from comparable firms.

Nevertheless, remuneration during periods of loss must be aligned with the legal limit set by Article 217.4, which states that compensation should not be viewed as a reward for poor performance.

Responsibility of office

The ruling's assessment of the administrator's responsibility as the basis for remuneration is particularly insightful: "(...) it lies in controlling abuse that distorts the true meaning of remuneration, which is ultimately payment for a role that carries inherent responsibilities (...)."

The Supreme Court considers this situation even though, in this specific case, the sole director had hired an external company to manage the business. The court argues that this "does not absolve the management body of its duties or responsibilities".

It is important to emphasise that the director's responsibilities are closely linked to the criteria mentioned above, particularly the company's significance.

Osborne Clarke comment

Whether the remuneration for board directors is considered excessive depends on the specifics of each case.

Article 217 of the LSC states that a director's position is unpaid unless the articles of association specify otherwise. This can make small and medium-sized companies hesitant to introduce paid director positions, regardless of the salary amount. In contrast, larger companies generally do not question the need for remunerated director roles; their concerns focus on determining a reasonable salary for those positions.