The compensation of Executive and Non-Executive Directors has traditionally been one of the most thoughtful and contentious corporate governance topics. The subject has gained in significance since it affects the company’s cash outflow, the computation of net profits, the disclosure of information to shareholders, and the approval of Directors, shareholders, and the Remuneration Committee.
All the directors should be fairly compensated considering their role in a company. Since directors are themselves running the company and they can’t pay themselves abruptly. Therefore, the Companies Act, 2013 provides detailed provisions related to remuneration payable to directors under Section 197 to 200.
This article will help you to determine the remuneration payable to directors as per Companies Act, 2013 and what are the penal consequences of non-compliance.
Meaning of Directors
- Managing Director – A managing director is a director who has been entrusted with substantial management powers of a company by virtue of the company’s articles, an agreement with the company, a resolution passed in the company general meeting, or by the Board of Directors.
- Executive Director – An Executive Director is the company’s full-time working Director. They are in charge of the company’s affairs and are held to a higher standard. They must be diligent and cautious in all of their dealings.
- Non- executive Director – A Non-Executive Director is not involved in the day-to-day operations of the company. They might take part in the planning or policy-making process and challenge the executive directors to make decisions that are best for the company.
Meaning of Remuneration
Remuneration, often used interchangeably with salary, refers to the compensation directors receive for their services. It encompasses various elements, including salaries, bonuses, benefits, and perksRemuneration is defined in Section 2(78) of the Companies Act, 2013 (“Act”) as “any money or its equivalent granted or delivered to any person for services done by him,” which includes perquisites as specified in the Income Tax Act, 1961. As a result, any payment made to a director in exchange for services given by him will be considered “remuneration,” and any benefit supplied to a director by the business will also be considered “remuneration” and must be factored into the directors’ compensation.
Remuneration to Directors of a Company
The limitation under Sections 197 and 198 of the Companies Act, 2013 states that it only applies to management compensation or other compensation paid by a public company. Therefore, any compensation provided to or due by a private company to its director must be outside the scope of the aforementioned clause and shall not be taken into account when determining the maximum compensation that the company may pay.
Remuneration to Directors of a Company in case the company has insufficient Funds
| Effective Capital | Limited Yearly Remuneration |
| 0 or below 5 Crore | 60 Lakhs |
| 5 Crore to 100 Crore | 84 Lakhs |
| 100 Crore to 250 Crore | 120 Lakhs |
| 250 Crore and above | 120 lakhs + 0.01% of the excess of 250 crores in effective capital. |
Important Points for consideration regarding Remuneration to Directors of a Company
- Determine the Director’s Remuneration: The Director’s Remuneration shall be decided by:
- Articles of a Company
- A Resolution passed by the Company
- If the articles of the meeting necessitate it, a special resolution must be adopted.
- The remuneration due under these regulations must also account for the remuneration due to those serving in any other roles. Exceptions are available, though, if the services were provided in a professional capacity and the nominating and remuneration committee or board of directors considers the director has the qualifications required to perform their profession.
- Director’s Fees: Directors may be paid for attending meetings, but these payments cannot go beyond the established thresholds. Different fees may be set for various sorts of companies.
You can pay the fees by:- Monthly
- As a Particular Percentage of the Annual Net Profits
- Using technique (a) mostly but also method (b)
- Remuneration of Independent Directors: Independent directors are compensated in accordance with the Board’s approval with respect to profit-related commissions, sitting fees, and reimbursement for travel expenses. He will not, however, be eligible for ESOP.
- Refund of Excess Remuneration: Any excess remuneration that a director gets beyond what is required by law must be returned to the business or held in trust for the company. This recovery cannot be waived without the Central Government’s consent.
- Disclosure by a listed Company: In addition to other required information, every listed company is required to report the ratio between the compensation paid and the median employee’s compensation.
- Insurance: When a company covers the actions of its employees against carelessness, default, misfeasance, breach of duty, and breach of trust, the premium paid for such insurance is not considered part of the director’s remuneration unless the director is found to have committed a crime.
- Any managing director or full-time director who receives a commission from the company is also eligible to accept remuneration or a commission from its holding company or subsidiary, as long as they mention it in the board report.
Limitations to Remuneration to Directors of a Company
The entire management compensation paid by a public company to its directors, including the managing director, whole-time directors, and its manager in respect of any financial year may not exceed 11% of the company’s net earnings, according to Section 197 of the Act. As a result, a public company is only permitted to pay its executive and non-executive directors’ compensation that does not exceed 11% of net earnings, and only with the previous consent of the company’s members expressed by an ordinary resolution.
The payment due to a director includes the remuneration payable to him for services provided in any other capacity. This indicates that if a director is paid for services other than directorial duties, the amount must be included in the overall pay in order to determine the 11% net profit maximum specified in Section 197(1) of the Act.
The sole exemption is when payment given to a director for professional services supplied to the company without any restriction is not included in the limit, if the following two requirements are met:
- The services provided are of a professional nature and;
- The Nomination and Remuneration Committee believes that the director has the necessary qualifications to practise the profession. If the company is not required by section 178 to have such a committee, the board can form this view.
FAQs
Q: Can directors receive remuneration from multiple companies?
Yes, directors can serve on the boards of multiple companies and receive remuneration from each, as long as it aligns with legal and regulatory requirements.
Q: Are there tax implications for director remuneration?
Director remuneration is subject to taxation, and directors are responsible for complying with tax laws related to their earnings.
Q: Are directors employees of the company?
While directors play a pivotal role, they aren’t necessarily employees. They may receive compensation, but their relationship with the company differs from that of typical employees.
Q:Is remuneration fixed or variable?
Remuneration can have both fixed components, like a base salary, and variable components, such as performance-based bonuses.
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