Executive Bonuses in Spain: How to Design a Variable Remuneration Scheme That Does Not End Up in Court

Almost no dispute over variable remuneration arises simply because the bonus exists. It arises from three words that are often used as if they were interchangeable, but are not: accrual, payment and retention. When an incentive plan confuses them, the dispute is built into the plan from the moment it is signed.

This article explains how to structure a bonus system that can withstand a claim, what the courts have said about the clauses that appear most frequently, and the issues — taxation, long-term incentives, directors and regulated sectors — that are often left out of the plan and later become costly.

Accrual, Payment and Retention: Three Concepts That Are Not the Same

Accrual determines when the economic right arises. Payment determines when it must be paid. Retention may operate, depending on how the plan is drafted, as a condition for accrual or simply as a condition for payment. That distinction determines most disputes.

1.1. Requiring an Employee to Remain Employed on the Payment Date

It is the most widespread clause and the most fragile. If the incentive has already accrued under the rules of the plan itself, making payment conditional on the individual remaining with the company on a later date amounts to withholding remuneration that has already been earned. The Spanish Supreme Court declared this requirement unlawful in its judgment of 2 December 2015 (appeal 326/2014), confirmed it in Supreme Court Judgment 308/2022 of 5 April, and addressed it again in Supreme Court Judgment 197/2025 of 13 March (appeal 2128/2023).

The reasoning is twofold: the clause places performance in the hands of one party and results in unjust enrichment for the company, which has already received the agreed work.

1.2. Requiring Continued Employment Until the End of the Accrual Period

This is different and may be fully effective. Supreme Court Judgment 934/2020 of 22 October (appeal 285/2018) accepted the loss of variable remuneration where an employee resigned before completing the annual accrual period, where the system clearly provided for it. The same judgment notes that the analysis changes where the failure to remain employed results from circumstances beyond the employee’s control.

The practical conclusion: a retention condition works if it is structured as an accrual condition, drafted without ambiguity and linked to the relevant target period. It does not work if it merely states that payment will take place on a date when the executive will no longer be employed.

1.3. When the Company Decides to Terminate the Relationship

Articles 1115, 1119 and 1256 of the Civil Code become relevant here: no one can benefit from the non-fulfilment of a condition that they themselves have prevented. Supreme Court Judgment 125/2020 of 11 February (appeal 3624/2017) awarded variable remuneration to an employee who was dismissed before the end of the financial year where the relevant objectives had been met.

This does not turn pro-rating into an automatic rule. The outcome depends on the calculation formula, the degree of fulfilment demonstrated at the time of termination and the reason for termination. But the company’s starting position is weak where it was the party that brought the relationship to an end.

1.4. The Table That Should Be in Front of You When Drafting

A robust plan addresses four different scenarios in writing: voluntary resignation before the end of the period; voluntary resignation after the period has ended but before payment; termination decided by the company; and termination for reasons outside the control of either party (incapacity, retirement, death). Case law has recognised entitlement to incentives in this last group of circumstances, and a plan that does not address them may be interpreted against the party that drafted it.

“Discretionary” Is Not a Legal Category

Calling a bonus discretionary does not determine its legal treatment. What matters is how it has actually been structured: what was communicated to the executive, which criteria were established, what documentation exists and whether the company genuinely reserved a margin of assessment before accrual or established parameters allowing an enforceable right to be identified.

The limit is set by Article 1115 of the Civil Code: a condition that depends exclusively on the debtor’s will is void. A plan stating that the bonus will be paid “if management considers it appropriate”, without more, does not protect the company; it leaves it without a defence when the executive demonstrates that the work was performed.

Repeated Payments, by Themselves, Do Not Create an Established Right

A common concern among Human Resources departments should be put into perspective. Paying a bonus for several consecutive years does not automatically create a more favourable employment condition. This requires a clear and unequivocal intention by the company to grant an advantage beyond what is legally, collectively or contractually due. Mere repetition, or payment in profitable years, is not enough.

That said, evidence of that intention is built through documentation. If the same target structure has been communicated in writing for six years and settled using the same formula, it will be difficult for the company to argue that the payments were merely discretionary.

Objectives: The Problem Is Not Qualitative Criteria, but Uncertainty

It is a common mistake to assume that every objective must be numerical. There is nothing preventing companies from combining quantitative metrics — EBITDA, margin, revenue, budget compliance — with qualitative elements such as leadership, team management, regulatory compliance or the integration of an acquisition. What cannot happen is for accrual to depend on a purely unilateral decision or criteria that cannot be verified.

Where there is a margin for management assessment, the plan should define four things:

• Who assesses: the board, remuneration committee, chief executive or parent company.
• Which factors are weighted and what relative weight they carry.
• Which data source is used: audited accounts, internal reporting or a specific system.
• Whether the decision can be reviewed and through which mechanism.

What Happens If the Company Does Not Set the Objectives?

It happens more often than it should: the financial year begins, nobody communicates the targets and in December the parties start debating whether a bonus was earned. This scenario is generally resolved in favour of the executive because the failure to define the objectives is attributable to the party responsible for setting them. It is preferable to include a fallback mechanism in the plan — for example, applying the previous year’s objectives — rather than leaving a gap.

Corporate Approval of Results

Many plans make payment conditional on the approval of results by the parent company or board. This is legitimate, but it must be clearly defined: which body approves, which results are subject to approval, whether approval is a condition of accrual or merely of calculation and payment, the maximum period within which the decision must be taken and what happens if approval is delayed or never given.

Approval without a time limit or defined parameters effectively operates as an unlimited power to frustrate an already-earned right, and may be invalidated on the same grounds.

Whoever Documents, Wins: The Burden of Proof

This is the most practical point in the entire article and one that is rarely addressed. In a variable remuneration claim, the evidence of performance is generally in the company’s possession: reporting, dashboards, accounts and the manager’s assessment. The principle of ease and availability of evidence (Article 217.7 of the Spanish Civil Procedure Act, applicable by reference through Article 96 of the Labour Jurisdiction Act) may work against the company when it fails to produce the relevant evidence.

Put simply: a company that does not document the assessment may lose claims that, in substance, it could have defended successfully. Three practices prevent most of them:

• Communicate the objectives in writing at the beginning of the period, with acknowledgement of receipt.
• Record the assessment in writing, signed and identifying the source of each data point.
• Keep the settlement calculation broken down, rather than only the final amount reflected on the payslip.

Changing the Plan Midway Through the Period

Changing the rules once the target period has begun is sensitive, but the applicable framework is not the same in every case:

Ordinary employment relationship. If the system arises from the employment contract, collective agreement or an established more favourable condition, a substantial modification requires compliance with Article 41 of the Employees’ Statute, including its grounds and procedure.

Senior management. The Employees’ Statute does not apply automatically: only where Royal Decree 1382/1985 expressly refers to it or where the parties have incorporated it into the contract (Article 3.2). The contract and plan therefore govern.

That greater contractual freedom, however, has a consequence that is often overlooked. Article 10.3(a) of Royal Decree 1382/1985 allows a senior executive to terminate the contract with compensation where substantial changes to their conditions cause significant detriment or are adopted in serious breach of good faith. Unilaterally reducing the variable remuneration of a chief executive may therefore result in a compensated exit. Contractual flexibility in senior management is not immunity.

Long-Term Incentives: LTIPs, Phantom Shares and Options

In senior executive packages, multi-year incentives often carry greater weight than the annual bonus and generate disputes involving larger amounts. They require their own structure.

Vesting period and cliff. It should be clear when each tranche vests and whether there is a minimum period below which nothing vests.

Good leaver and bad leaver. This is the real battleground. It is not enough to use the labels: the exits falling within each category must be defined, and the classic mistake is placing unfair dismissal in the bad leaver category. If the company terminates without an established cause and this triggers the total loss of the incentive, the clause faces the same issue under Article 1256 of the Civil Code discussed in Section 1.

Change of control. It must be decided and written down whether a sale accelerates vesting, maintains it or terminates it. In senior management, this should also be coordinated with the compensated exit right under Article 10.3(d) of Royal Decree 1382/1985.

Phantom shares. They do not grant shareholder status or voting rights: they constitute a contractual monetary claim that tracks the value of an equity interest and is settled in cash. The valuation method and the party responsible for applying it should be defined, because this is where disputes tend to concentrate. Their salary-related nature should be analysed, with consequences for both the Social Security contribution base and dismissal compensation.

Share options. In addition to the design of the plan, the tax treatment should be reviewed before they are offered: the tax exemption for the delivery of shares to employees requires the offer to be made under the same conditions to the entire workforce, a requirement that a plan limited to the executive team does not satisfy.

The Tax Treatment of Variable Remuneration Is Decided When the Plan Is Designed, Not When It Is Paid

Ordinary annual bonuses are taxed as employment income without the reduction: their accrual period does not exceed two years.

Incentives with an accrual period of more than two years may qualify for the 30% reduction under Article 18.2 of the Personal Income Tax Law, provided they are attributed to a single tax year. If the plan provides for payment in instalments across several tax years, the reduction is lost: it is a design error that affects the executive’s tax return and is often discovered too late.

The maximum base to which the reduction applies is €300,000. For income arising from termination of the employment relationship, where the amount is between €700,000.01 and €1,000,000, that base is reduced by the amount exceeding €700,000; above €1 million, the reduction is zero.

There is also a little-known but highly relevant recurrence rule for rolling plans: the reduction does not apply where, during the five previous tax years, the taxpayer has already applied it to other income generated over a period of more than two years. A rolling three-year LTIP therefore loses the tax advantage from the second cycle onwards, meaning that the plan’s attractiveness is not the same as what was presented to the executive in the first year.

Designing variable remuneration without considering this can result in plans that cost the company the same while being worth considerably less to the person receiving them.

If the Beneficiary Is a Director or Administrator, the Framework Changes

An incentive designed according to employment-law principles cannot simply be transferred to an executive director. Their remuneration is subject to the statutory reservation under Article 217 of the Spanish Companies Act and, where executive functions are performed, to the agreement approved by a two-thirds majority of the board specifying all remuneration components (Article 249). If the bonus is not reflected in that corporate documentation, the company may face challenges concerning validity and deductibility, while the director may be unable to claim it.

The link theory also becomes relevant where the same individual combines senior management functions with membership of the company’s governing body, affecting both jurisdiction and the protections associated with the special employment relationship.

Before drafting the plan, it is advisable to identify which of these four situations applies to each beneficiary: employee under an ordinary employment relationship, senior executive under Royal Decree 1382/1985, non-executive director or executive director. Each requires different documentation.

Regulated Sectors: The Parent Company’s Plan May Not Be Applicable in Spain

In credit institutions, investment firms and insurance companies, variable remuneration is not designed freely. Sector-specific regulations — in banking, Law 10/2014 and its implementing regulations — impose rules concerning the proportion of variable remuneration relative to fixed remuneration, deferral of part of the incentive over several years, payment in instruments, risk-adjusted assessment and malus and clawback mechanisms.

The best-known limit concerns the ratio between variable and fixed remuneration: it cannot exceed 100% of fixed remuneration, a percentage that may only be increased to 200% with a general meeting resolution adopted in accordance with the enhanced requirements established by law.

This is a critical issue for international groups because plans are often designed at headquarters using parameters from the group’s own jurisdiction and then deployed in Spain without sufficient local review. The result can be an incentive that has been promised but cannot be paid on the terms offered.

Bonus in Severance and Social Security Contributions

Where variable remuneration is salary in nature — meaning that it remunerates services performed or objectives linked to the employment — it forms part of the salary used to calculate dismissal compensation. This was confirmed by Supreme Court Judgment 640/2018 of 14 June (appeal 414/2017) in relation to an annual performance bonus accrued in the previous year and paid during the same year as the dismissal.

The classification must nevertheless be assessed on a case-by-case basis: a genuinely exceptional and non-recurring incentive may be treated differently, as may deferred remuneration instruments or amounts received in the capacity of a director. What does not work is excluding the bonus from the calculation base through a simple contractual clause where it forms part of ordinary remuneration.

Drafting Checklist

• Does the plan define accrual and expressly distinguish it from the payment date?
• Is retention structured as a condition of accrual or merely of payment? Is this expressly stated?
• Are the four exit scenarios addressed, with different treatment for voluntary resignation and termination decided by the company?
• Is it clear who assesses performance, which data source is used and within what timeframe?
• Is there a fallback mechanism if the company fails to set the objectives?
• Does corporate approval have a defined deadline and consequences in the event of delay?
• Are good leaver and bad leaver categories clearly defined, and is unfair dismissal correctly classified?
• Has the tax treatment in a single tax year and the five-year recurrence rule been checked?
• Where directors are among the beneficiaries, is the incentive reflected in the corporate documentation?
• If the company operates in a regulated sector, does the plan comply with the applicable limits and deferral requirements?

At Suárez de Vivero, we design and review variable remuneration systems and long-term incentive plans for national and international companies, and represent both parties in bonus claims. If you would like us to review a plan before it is implemented, or a settlement that is already under dispute, you can contact us.

Frequently Asked Questions About Executive Bonuses