Are Spanish CEOs paid like Bureaucrats? | Finance Talks

Are Spanish CEOs paid like Bureaucrats?

By Juan Pedro Gómez

The majority are. This is the conclusion we reach after analyzing the data reported by the IBEX 35 firms to the CNMV (the Spanish SEC) in their Annual Directors Compensation Reports (IARC in Spanish) from 2013 through 2017.

The data is richer and more granular than the sources available in other countries, including Standard & Poor’s Execucomp in the USA, for instance. This allows us to estimate precisely the value of new and outstanding stock options, restricted shares, and other components of the compensation of board directors and CEOs. With these data, we study not only how much directors and CEOs are paid but, more importantly, how they are paid.

These are some of the stylized facts worth mentioning:

  1. The variable remuneration (the bonus) accounts for an average of 33% of the total remuneration among Ibex 35 CEOs. However, it is fundamentally short term. This contrasts with the average bonus share among our European neighbours (18%).
  2. Only 10% of the directors in the sample have a portfolio of restricted shares or options.
  • On average, the value of the restricted shares and options granted to the CEOs of IBEX 35 companies accounts for only 5% of their estimated annual remuneration, compared with an average of 19% in Europe.
  1. When the value of the company increases by 1,000 euros, the value of the expected wealth of the mean director increases by only 6 cents (14 cents in the case of CEOs). As a reference, when this measure was calculated for the first time for a sample of CEOs in the United States from 1975 to 1986, Jensen and Murphy (1990)[1] estimated that the mean CEO’s portfolio grew by 3.25 dollars for every 1,000-dollar increase in the value of the company’s shares. This led them to state that CEOs are “paid like bureaucrats”, i.e., with hardly any incentives. Yermack (2004)[2] estimates that the expected wealth of independent board directors in the US increases, on average, by 11 cents for every 1,000-dollar increase in the value of the company’s shares.
  2. Firm size is the main variable explaining the differences in total compensation across firms in the IBEX 35. For every 1% increase in firm size, the total compensation increases by an average of 34 basis points. Thus, larger firms, pay more to their directors and executives. On the other side, with the exception of the compensation paid in restricted stock and stock options, the remuneration of directors and CEOs barely moves with changes in the company’s stock performance.

It is tempting to conclude that, in the light of this evidence, CEOs have incentives for “empire building” rather than shareholder value creation.  We do not have enough evidence to support this conclusion. Theoretically, larger firms are more difficult to manage and their executives’ decisions have, potentially, a larger impact on performance. Therefore, the argument goes, they must attract and retain more skillful managers who, in a competitive market for talent, will demand higher salaries. There is evidence that this the case in other advanced economies. Additionally, more powerful incentives (i.e., more “skin in the game”) may trigger off unwanted adverse risk-incentives, which may run against the interest of shareholders. According to this argument, the link between compensation and performance should be attenuated. Finally, Crespí-Cladera and Gispert (2003)[3] suggest that more concentrated ownership of Spanish firms may act as a substitute for pay-performance sensitivity.

With these caveats, we can still reach some conclusions. Based on anecdotal evidence, the Spanish market for CEOs lacks the mobility and turnover observed in other more competitive markets. CEOs typically have long tenures in the firm and often belong to the company’s founding family. In theory, this scenario is more prone to managerial entrenchment. Absent alternative disciplining mechanisms (like, for example, product market competition) this would call for higher, not lower pay-performance sensitivity, the opposite of what we, on average, find in the data. Unfortunately, the sample is too small to test these predictions across firms.

We observe a high skewness in the provision of incentives among firms in the sample. When we analyze CEO compensation among the 10% of the observations that have a portfolio of restricted shares and options, the conclusions are very different.

  1. The average term of the options granted during the years of the sample is a little over 3 years, and in some cases reaches almost 6 years.
  2. A hypothetical 100% increase in the company’s return would lead to an estimated increase of between 61% and 115% in the value of the expected wealth of CEOs.
  • Directors’ exposure to the company’s return mainly comes through options and, to a lesser extent, through restricted shares.

These statistics denote, a priori, a much stronger alignment between CEOs and shareholders.  Consistent with previous studies in other countries, the bulk of the long-term incentives comes from the stock of outstanding restricted stock and, especially, stock options. We would need a longer time series to analyse if this patter corresponds to a strategic design of incentives for these CEOs and directors and to what extent it is correlated with shareholder value creation.

To conclude, it is important to mention a couple of things. First, given the weight of the bonus in the total compensation of CEOs and directors, a more thorough analysis of its structure, drivers and trigger points is merited. Second, long-term saving schemes (like retirement plans and insurance policies) may attain a considerable value in some cases. It is doubtful to what extent this form of compensation represents long-term incentives.


The complete analysis can be found in the First Quarterly Bulleting of the CNMV from 2019 (pages 119-154):

[1] “Performance Pay and Top-Management Incentives,” Journal of Political Economy 98, 225-264.

[2] “Remuneration, Retention, and Reputation Incentives for Outside Directors,” Journal of Finance 59 (5), 2281-2308.

[3] “Total board compensation, governance and performance of Spanish listed companies,” Labour 17 (1), 103-126.