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Aneta Samkoff
Aneta Samkoff

Teardown 7: Inditex (Zara, Oysho, Massimo Dutti et al.)

European company manages succession and environmental concerns while reducing risk


Inditex is the largest fast-fashion holding in the world, with a market capitalization of €81.03 billion euros, traded exclusively in Madrid.

Founded in 1985 and headquartered in Arteixo, Spain, the group owns close to 7300 stores in 93 countries and employs over 162 000 people. The brands under its umbrella include Zara, Massimo Dutti, Pull&Bear, Bershka, Stradivarius, Oysho, Zara Home, and Uterque.

The company built its success on fast response to fashion trends. Store collections change bi-weekly, and the end-to-end process of new product design and production takes less than two months compared to a year in traditional companies.

This is partly done through local manufacturing and close control of the supply chains, which are crucial in ensuring short lead times. Such mass production does, however, negatively affect the environment. And the concern for the environmental issues across the company is increasing, as reflected in the executive compensation plans design, where ESG metrics are becoming more prevalent.

Besides the environmental concerns, Inditex is also experiencing a change in leadership structure. The company is transitioning from a corporate structure with an executive Chair of the Board of Directors to one where the role of the Board Chair and the CEO are separate, and the Board Chair is non-executive. This has been reflected in the Inditex compensation plans.

Executive compensation plan at Inditex

Main goal: To provide a smooth transition of power and reduce exposure to excessive risks while building a long-term company strategy

Means: This is done through two long-term incentive plans, each with two performance periods, strong emphasis on the STI bonus that comprises almost 41% of the package, and increasing emphasis on ESG metrics in the incentive plans.


Elements of Inditex compensation package

Base salary:

For the transitional period for the transfer of duties from Executive Chariman Pablo Isla Alvarez de Tejera to the new CEO Oscar Garcia Maceiras from February 1st 2022 to March 31st 2022 the CEO salary amounts to € 1.5 million on an annualized basis.

Starting April 1st, 2022, the CEO will receive a salary of € 2.5 million per year in 14 installments, comprising 27.2% of the total compensation package.

Short-term incentive plan:

STI bonus for the CEO Oscar Garcia Maceiras is equivalent to 120% of the fixed remuneration and 125% cap (150% of fixed compensation) equal to € 3.75 mln or 40.8% of the total direct compensation.

Performance metrics for the short-term incentive:

  1. net sales at 35% weight

  2. contribution margin at 35% weight

  3. personal performance and company's strategic development at 15% weight: increase of store and online integration through new processes and tools providing a differentiated customer experience

  4. ESG metrics: sustainability metrics at 15% weight:

    • increase in the number of:
    • sustainable raw materials: cotton, linen, polyester, and cellulose fibers
    • garments featuring the Join Life sustainability label
    • number of audits and control of discharges at dying facilitates (wet processes) within the scope of the Zero Discharge of Hazardous Chemicals (ZDHC) program

    • percentage of waste reduction at Inditex facilities such as headquarters, logistics centers and stores

    • percentage of packaging material collected to be recycled or reused in the supply chain (Green to Pack program)

    • percentage of the renewable energy consumption at Inditex facilities

    • progress in the roll-out of the "reusable shopping bag" project

    • progress in the elimination of the single-use plastic from customer sales

    • innovation projects related to textile recyclability

  5. ESG metrics concerning diversity, compliance, and corporate governance weight at 15%

What are ESG metrics?

ESG stands for environmental, social, and governance metrics companies use to measure performance in the area of transparency, sustainability, and compliance risk in non-financial terms. Common ESG metrics include:

  • environmental metrics: carbon emissions, energy efficiency, sustainable investing, waste management, and product safety and lifecycle, virtually any measures that help assess the environmental risks and environmental impact
  • social metrics: supplier diversity, supply chain, product safety, data security, employee health, and safety
  • governance metrics: business ethics, board diversity, disclosure and transparency, and other key metrics which assess whether the business operates within ethical practices, in agreement with the company values, and social responsibility

ESG metrics are becoming more prevalent as risk management in compensation plans of different companies. The World Economic Forum has developed a set of ESG metrics to standardize the ESG reporting, unify the ESG indicators and promote transparency in sustainability reports.

A couple of hot ESG metrics on the governance side include: -CEO to median employee pay ration -executive pay-for-performance -the percentage of shareholders approval on the executive compensation plans


Jack Connell

Leading Expert Consultant and CEO at Jack Connell Compensation Consulting

Long-term incentives:

There are two long-term incentive plans in place currently at Inditex. Each with a 4 year vesting and 2 performance cycles. The payouts for both plans are 40% cash and 60% in the company stock.

2019-2023 long-term incentive plan:

Both the Executive Chair Pablo Isla and the new CEO Oscar Maceiras receive this LTIP.

The total amount for the grant cannot exceed € 6.8 million or € 1.7 million per year, and 9 800 000 stock shares (0.3% of the company's total). Since this period covers the corporate restructuring and change of leadership, this is reflected in the grant amounts, metrics, and payouts as follows:

The Executive Chair is eligible for an award of 105% of the annual fixed income with € 1.36 million cash grant and 87 291 shares for the first performance cycle, and 105% of annual salary with € 1.36 million cash and 65 010 shares for the 2nd cycle (the lower amount of shares compared to the cycle 1 reflects the increase in the stock price).

The CEO Oscar Maceiras receives 13% of annual salary for the first performance cycle. This amounts to €165 000 and 7 090 shares. For the second cycle the CEO is eligible for 70% of salary, which equals €700 000 and 33 460 shares.

Performance metrics used:

  1. profit before taxes (PBT) at 30% weight: for PBT and same-store sales below, the CEO needs to reach a minimum to receive a 50% payout, on target ensures 75% incentive payout, maximum 100%, and if he overachieves then its capped at 125%. Linear interpolation is used for in between positions.
  2. same-store sales (MMTT - Spanish acronym) at 30% weight: sales in comparable physical and online stores
  3. relative TSR at 30% weight: reaching the median of the peer group (15th position) ensures 30% payout, maximum is set to 75th - 90th percentile (5th to 8th position) for 100% payout, and overachievement is set for more than 90th percentile (1st to 4th position in the peer group) capped at 125 %.
  4. ESG metrics at 10% weight based on 4 factors:

a) environmental, health and safety, and sustainability metrics: increase in the percentage of wet processing factories within the company's supply chain (those that wash, dye, and print fabrics) that use The List by Inditex standard, which classifies the chemical products according to compliance with health standards. This is verified by audits each cycle. The minimum target is set to 45%, 51% is considered on target (100% incentive payout), and above 55% grants overachievement.

b) waste management: the percentage of internally generated waste reduction at Inditex facilitates - waste that is recycled and recovered, preventing its discharge to the landfill. The minimum target with a 50% payout requires 85% of urban waste reuse and 80% of hazardous waste -if not hit, then the CEO forfeits the payout. 100% incentive payout is set 91% recycled urban waste and 85% of hazardous, the overachievement is granted at 95% urban waste reuse and 88% hazardous with a cap at 125%.

c) decarbonization: energy efficiency and greenhouse gas emissions (GHG) reduction in operations: 4% for the minimum payout of 50%incentive, 6% for 100% payout, and 8% or more considered an overachievement capped at 125%.

d) social: increase in Inditex's suppliers of goods ranked A and B following social audit: 90% as a minimum with a 50% payout, 93.5% maximum with a 100% payout, and overachievement set to 95% capped at 125% incentive payout.

2021 -2025 long-term incentive plan:

Only the CEO Oscar Maceiras is eligible for this LTIP. Similarly to the previous one, this plan also consists of two cycles 2021-2024 and 2022-2025, and is 40% cash and 60% stock-based.

The CEO Oscar Maceiras receives 118% of annual salary equal to € 1.183 million and 68 568 shares for the first performance period.

Performance metrics used:

  1. profit before taxes (PBT) at 25% weight: PBT in euros for the financial year 2023 compared to the amount pre-set by the Board at the first cycle's beginning. The hit of minimum target results in 30% incentive payout with maximum at 100% payout, no overachievement. The in-between targets payouts are calculated using linear interpolation.
  2. store and online sales (TTTT - Spanish acronym) at 25% weight: total in-store and online sales in 2023 at constant currency, in euros, compared to the preset target at the beginning of the performance cycle. The hit of the minimum target results in 30% incentive payout with the maximum at 100% payout, no overachievement. The in-between target payouts are calculated using linear interpolation.
  3. absolute TSR at 12.5% weight: the hit of the minimum target results in 30% incentive payout with the maximum at 100% payout, with no overachievement. The in-between target payouts are calculated using linear interpolation.
  4. relative TSR at 12.5% weight: meant to track the evolution of investment in Inditex's stock compared to an investment in the share of the peer companies expressed as the ratio between the initial and final value of a hypothetical stock investment. The minimum target is set to the 15th position in the peer group and results in 30% incentive payout. The maximum at 100% payout is set to 5th position or above, no overachievement. The in-between targets payouts are calculated using linear interpolation.
  5. ESG metrics at 25% weight. The hit of the minimum target results in 30% incentive payout with the maximum at 100% payout, no overachievement. The in-between target payouts are calculated using linear interpolation. ESG metrics are based on 4 factors:

a) sustainable product: increase in the percentage of sustainable garments production

b) waste management: increase in the percentage of internally generated waste reduction at Inditex facilitates (headquarters, logistics centers, and stores)- waste that is recycled and recovered, preventing its discharge to the landfill.

c) decarbonization: measured as the reduction in greenhouse gas emissions in Inditex's operations

d) social: increase in the percentage of Inditex suppliers rated A or B in social audtis.

Benchmarking and Peer Group:

Inditex hired an independent WTW consultant to research and analyze the current market to tailor the executive compensation to the geographic and economic conditions in which the company operates.

Hence the peer group consists of the companies traded on relevant European indices such as Ibex-35 in Spain (e.g. Iberdrola, Santander, Telefonica, and BBVA), CAC40 in France, FTSE MIB in Italy, DAX40 in Germany, SMI 20 in Switzerland, FTSE 100 in the UK, and in particular those from STOXX Europe 50 (50 European companies with the largest market capitalization), Dow Jones Retail Titans 30 Index (30 retail companies with largest market cap, revenue, and net profit).

Performance metrics drive change in sustainability and encourage effective response to volatile market conditions

The executive compensation plan at Inditex exemplifies the European style of directors' remuneration.

Fixed yearly salary at 27,2%, STI bonus at 40.8%, and an LTIP at 32% of the total direct compensation roughly reflect the average for the European and Australian companies, where 30% of the package consists of the base salary, 29% of the short-term incentive, and 41% LTIP.

This stands in stark contrast to the American-style packages, where over 90% of the compensation is variable, and close to 80% comes in the form of long-term incentives.

Additionally, contrary to the American stock-based LTIPs, the Inditex LTIP is 40% cash and only 60% shares.

According to the company, the 4-year vesting and 30% of variable pay based on shares is enough to ensure the alignment of the executive decisions with the long-term interests of the shareholders.

This example shows the cultural and conceptual differences between European and American compensation styles. Have we had an American company own such plan, we would have assumed that it is designed to encourage the achievement of the short-term goals - STI bonus forms a whopping 40.8% of the total package and the stock-ownership is on a relatively low level.

Such a service-oriented mindset expressed in heavy emphasis on variable long-term pay is rare in Europe, where the traditional salary-based approach to employee compensation is still prevalent.

It is worth noting though that Inditex does require the CEO to hold an equivalent of his 2-year salary (€ 5 million) in stocks for the time he is employed by the company, providing some form of ownership mindset.

Inditex package is also designed to reduce exposure to excessive risks. This is done mainly by the heavy emphasis on short-term incentives whose metrics, for example ESG metrics, are also found in the LTIPs, deterring any decisions that may impede the achievement of those goals.

Notably, Inditex consistently increases the emphasis on the ESG factors.

ESG in general was listed as a performance metric only for Inditex on this list of companies, with primary focus on environmental responsibility, and this will also start to become a greater focus, especially in certain industries.


Rekha Gurnani Chowdhury

Head of Compensation & People Analytics at Box, Wharton Executive MBA Candidate

The ESG metrics form 30% of the current short-term incentive plan and increased from 10% in 2019-2023 LTIP to 25% of the metrics used in the 2021-2025 LTIP. This is probably the company's response to the environmentalists' criticism, since despite the consistent increase in waste mangement the absolute numbers of industrial waste and water consumption rise.

The two LTIPs also reflect the structural reorganization and leadership change at Inditex. The second plan is designed mostly for the new CEO, Oscar Maceiras. The main differences occur in the rise of the ESG metrics in the performance components reflecting Maceiras's particular focus on this area and in the introduction of absolute TSR.

Moving from Executive Chair to Board Chair and/or Lead Independent Director and CEO here is what the stock exchanges mandated US public companies years ago.


Jack Connell

Leading Expert Consultant and CEO at Jack Connell Compensation Consulting

The absolute TSR notably showed up in the package post-Covid-19 pandemic's onset.

In general, Inditex and the whole retail sector have been undeniably hurt by the restrictions introduced on commercial spaces in physical stores as governments worldwide tried to contain the spread of the disease.

For example, as many as 20% of the company's stores remained closed in the first quarter of 2021, and disruptions in supply chains affected the lead times of product placement. Additionally, the rapid changes in currency exchange increased the profits in the eurozone but substantially penalized the sales in currencies devalued against the euro.

In light of such unforeseen developments, Inditex, wanting to ensure effective allocation of the resources and agile response to volatile market conditions, introduced absolute TSR as one of the LTIP metrics.

Unlike the relative TSR, absolute TSR traces the raw stock price change without considering any market conditions changes. In this way, absolute TSR can be used to encourage the decision-makers to quickly and effectively adapt to unforeseen environmental changes.