The executive director: concept, nature and remuneration

What is an executive director?

The executive director is the person who, as a member of the company’s board of directors, holds a plus of activity. This is because he exercises executive functions directly inherent to the management of the company’s business, either by his appointment as managing director, or through the granting of general powers of administration in his favour. The function of the executive director goes beyond that of an ordinary director, which is limited to the deliberative and legal representation aspect of the company.

Nature of the relationship and the binding theory

As a rule, the relationship of executive directors with the company is excluded from the labour law (art. 1.3 c) Workers Statute). The nature of the relationship is therefore purely commercial.

However, given the mixed nature of the position of executive director, the question arises as to whether a commercial relationship can coexist with an employment relationship, in those specific cases in which the person simultaneously occupies the position of executive director and senior manager. This issue has been addressed by the jurisprudence and doctrine, consolidating the so-called binding theory (teoría del vínculo).

Thus, given that executive directors are characterised by having the maximum representation of the company in the two spheres, employment (senior management) and commercial (director), it is understood that there is a duplication of functions deriving from both positions and that the organic relationship of director should take precedence over the employment relationship. In this way, the binding theory prevents the coexistence of both relations, being the commercial relation the one that prevails, absorbing and annulling the special senior management employment relationship.

This position has once again been endorsed by the Supreme Court (STS 494/2018 of 26 February 2018). According to the Court, the functions exercised as a director are not only deliberative and representative, but also include those of an executive and management nature. The mere subsistence of the commercial relationship of director is thus justified, as it includes the development of the functions of the commercial relationship within the framework of a senior management employment relationship.

Besides, it should be taken into account that executive directors are excluded from the general regime applicable to employees as a result of the application of social security regulations. They must join the assimilated regime or the special regime for self-employed, depending on the circumstances of each specific case. This is further evidence of the predominance of the commercial nature of the relationship.

However, a distinction should be made between employees who combine an ordinary employment relationship (middle management) with the status of director (for example, a financial director who is a member of the Board of Directors). In these cases, the existence of double binding -commercial and labour- will be viable, while the limited function of middle managers does not overlap with the management and management functions corresponding to the position of director.

Remuneration and contract of the executive director

It cannot therefore be said that there are two bonds – one commercial/corporate and the other labour- concerning the position of the executive director. The result will be the prevalence of the corporate-commercial relationship, which closes the possibility of entering into a senior management employment contract with those persons who hold the function of executive director.

Also, under article 249 of the Spanish Corporate Law, whenever the company appoints an executive director, the signing of a commercial contract is mandatory. This contract, approved by the Board of Directors, must reflect all the remuneration and indemnity items to be received for the performance of executive functions. Nothing additional that is not specifically provided for in the contract, shall be perceived.

Likewise, insofar as they are considered directors, the remunerated nature of the post must be expressly provided for in the company’s bylaws. Their remuneration must respect the remuneration policy and the limits established by the General Meeting for the Board of Directors.

Finally, let’s not forget that the commercial relationship does not per se protect the executive director in the way and with the rights that the labour law provides for workers. It is therefore appropriate for the commercial contract with the executive director to specify certain points, such as the compensation to receive in the event of early termination of the position, or the possible reactivation of the previous senior management employment relationship, in the event of termination as a director.

María Fernández Duque

This article is not considered as legal advice

José María Mesa

A licensed attorney with both Business Administration and Law degrees, José María Mesa is specialized in the areas of commercial contract, corporate law and mergers and acquisitions. Working languages: Spanish and English. For any query Contact José María Mesa