Allowable Remuneration/Salary to Directors of a Company

Regulation of the payment of directors’ compensation is important for a number of reasons, chief among them the need to stop company money from being used for personal gain and excessively large executive incentives. The rules of the Companies Act, of 1956 and the Listing Agreement’s standards for corporate governance govern the compensation given to directors of Public Limited Companies. But are there any rules governing the payment of directors’ compensation for Private Limited Companies? Many of us believe that there are no restrictions on the amount of compensation that can be paid to a director of a Private Limited Company, leading us to believe that any sum can be considered compensation. In this article, we’ll discuss Remuneration for Directors of a Company.

Quick Look

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. Before learning about director remuneration, let’s first discuss directors and their different types.

Meaning of Directors

Members of the Board of Directors, who are in charge of supervising, managing, and directing a company’s activities, are known as Directors.

There are three basic forms of Directors exist in a Company, which are as follows:

• Managing Director: A managing director is a director who has been given significant managerial authority over a company as a result of the company’s bylaws, a contract with the company, a resolution adopted at the general meeting of the company, or by the board of directors.
• Executive Director: An executive director serves as the organization’s director full-time. They are responsible for running the business and are held to a higher level. They must use caution and diligence at all times.
• Non-Executive Director: A non-executive director is not involved in the day-to-day management of the company. They could participate in the formulation of plans or policies and push the executive directors to make choices that are best for the business.

By delivering the greatest support, prompt delivery, and the highest level of customer satisfaction, Legal Window can assist you with the appointment of the Company’s Director with only a few simple actions. Contact our staff by phone at 072407-51000 or by email at admin@legalwindow.in.

Now let us also take a short look at the meaning of remuneration of Directors in a company and the basic meaning of remuneration.

Meaning of Remuneration

A sum of money given to someone as payment for labor performed is referred to as remuneration. It also goes by the names reward and compensation. Remuneration 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.

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.

Remuneration to Directors of a Company in case the company has insufficient Funds

If a company has insufficient profits or no profits in any fiscal year, no payment is given unless certain rules are followed.

Points to Remember

The sitting fees of the directors (managing director, full-time director/manager) are exempt from these limitations. Only if a special resolution is approved by the shareholders may remuneration that exceeds the aforementioned restrictions be paid.

• Remuneration within the aforementioned parameters may be paid if:
• A manager is working in a capacity that is related to their job.
• The management has no ownership stake in the company’s, holding companies, or subsidiary company’s capital, either directly or indirectly or through any statutory structures.
• The management individual has not had a direct or indirect interest in or relationship with the company’s directors, promoters, holding company, or subsidiary company at any point in the two years before to, concurrent with, or subsequent to the date of appointment.
• He or she has a graduate degree, as well as competence and specific knowledge in the area where the organisation mostly works.

Important Points for consideration regarding Remuneration to Directors of a Company

The following are the 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.

Penalty for Failure to Comply

If someone fails to comply with section 197’s requirements, they would be subject to a fine of one lakh rupees, and if a company fails to comply, they will be subject to a fine of five lakh rupees.

Endnote

A company’s directors, or the persons in charge of its activities, are accountable for making sure that everything runs smoothly. They must work together while looking out for the interests of the shareholders and stakeholders. The corporation must carefully evaluate the appointment, remuneration, and other associated issues of the directors because the success of the business depends on their competence.