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The compensation paid to directors and executives is a matter of growing public interest. Regulatory and supervisory bodies, institutional shareholders, and proxy advisors are all paying particular attention to the compensation policies in place for board members and senior company executives, viewing such policies as a reliable indicator of the quality of a listed company’s corporate governance.

Both in Spain and internationally, this attention has led in recent years to the publication of (i) good practice recommendations; (ii) good governance codes; and (iii) legislative rules on compensation.

In Spain, the capital companies law stipulates in relation to long-term incentive plans (LTIP) that when the system for the compensation of directors includes the award of shares, stock options, or remuneration linked to share value, this must be envisaged in the company´s bylaws and approved in a resolution of the shareholders’ meeting.

On the other hand, the boards of directors of listed companies are required to issue and publish annual reports on directors’ compensation with the content and structure stipulated by the National Securities Market Commission (CNMC) and with incentive plans of these types being included in the information to be reported.

Here are conclusions drawn regarding three aspects of the design of long-term incentive plans implemented for IBEX 35 executives:

1. Payment Instruments

Eight-eight percent of Spanish listed companies included in the IBEX 35 have a long-term incentive plan in place for their management team.

There are three types of long-term incentive plans most commonly used by such companies:

Appreciation

In these incentive plans, the reward is for the appreciation in the value of the company’s share over the time elapsing between the starting date and the end date of the plan, entitling the beneficiary to receive an amount in cash and/or a number of shares linked to such appreciation. These plans are the so-called stock options plans (SOP) and stock appreciation rights (SARs).

Value

With these incentive plans, the reward is for meeting certain requirements determined by the company, with the beneficiary entitled to receive shares. These plans are basically those known as performance share plans (PSP) and restricted stock units (RSU).

Cash Incentive

These are cash incentive plans linked to the attainment of certain strategic objectives.

The LTIPs most commonly used are those based on the appreciation or value of the company’s share as a means of ensuring that executives’ overall compensation remains balanced and competitive by linking their remuneration in part to the increase in value for the shareholders.

Of the LTIPs currently in place in IBEX’s 35 companies: 64 percent are PSPs/RSUs, 13 percent are SOPs/SARs, and 23 percent are cash incentives.

2. Measurement Parameters

The metrics used by companies in their LTIPs generally depend on the type of plan implemented.

In the case of SAR and SOP plans, owing to their design, the receipt of an incentive tends not to be linked to the attainment of metrics since the appreciation of share value is the target most commonly established.

PSP/RSU plans and cash incentives do tend to be linked to metrics. The financial and operational metrics most commonly used by companies include the following:

Generation of value for shareholders: total shareholder return (TSR).

Earnings/operating income: earnings per share (EPS); profit before tax (PBT); earnings before interest, taxes, depreciation, and amortization (EBITDA); etc.

Investor profitability ratios: efficiency ratio, return on equity (ROE), return on capital employed (ROCE), etc.

3. Frequency of Incentive

Award In relation to the frequency with which an incentive is awarded, the plans in place basically conform to two models:

Plans in which the incentive is awarded in overlapping cycles.

Plans in which there is a single award every so often (e.g., every three years).

In 64 percent of IBEX 35 companies, beneficiaries are awarded the incentive annually in overlapping cycles, whereas in the remaining 36 percent there is a single periodic award.