Every person seeks rewards for services offered. Similarly, a director is paid for services rendered to the company. Such
What is Remuneration?
“Remuneration is Pay for Service”. Payment in form of salary or wages or reward for services offered to the company. It can be monetary or non-monetary, including any perks.
How does a Private Limited Company decide Remuneration?
When there are no specific norms in law, the company may decide remuneration considering different aspects. Below are some modes to decide remuneration.
• Articles of Association- AOA
This constitutional document governs the company’s affairs. Like the clause of the roles and responsibilities of directors, the company may also provide a clause for returns and remuneration. AOA can provide any specific ceiling limit or manner of calculation.
• At the time of Appointment
• In General Meeting/Board Meeting
The other way is to pass a resolution in a general meeting or board meeting for any Changes in current payment.
• Any other manner
Instead of calculation steps, the AoA can also prescribe any other manner. If AOA specifies any other manner, it should be implemented by the company.
In case of no or inadequate Profit
Profit is not constant, especially, during the initial years of business. If so, the following mode is accepted.
In such cases, no returns and remuneration
Is there any ceiling on return?
The Act provides ceiling limits for remuneration in case of Public Companies. Here, total remuneration shall not exceed 11% of the net profit of the company. The limit is further classified based on types and number of directors.
Total returns and remuneration paid to Managing Director, Whole-time Director and Manager shall not exceed the limits as described under.
|One Managing Director/ Whole-time Director /Manager||5% of net profit of the company|
|More than one Managing Director/ Whole-time Director /Manager||10% of net profit of the company|
Moreover, the Remuneration limit for directors who are neither managing director nor whole time director should not exceed the following limit:
|If the company has Managing Director/ Whole-time Director /Manager||1 % of the net profit of the company|
|If the company do not have a Managing Director/ Whole-time Director /Manager||3 % of the net profit of the company|
How a Company Pays Remuneration to Directors?
• Monthly Remuneration
A company can pay a fixed amount of remuneration to its directors. It can be on a monthly basis or in any pre-decided manner.
• Percentage of Profit
The company can also decide to pay a certain percentage of profit to its director. The basis of percentage of profit is the value added by the director to the company and position. Such returns are payable to technical or expert directors.
• Sitting fees
Generally, independent directors or non-executive directors are paid sitting fees. It is the amount paid to a director to attend Board/Committee Meetings. Any specific amount or rate can be prescribed in AoA or decided while making the appointment.
• Remuneration in form of Insurance Premium
Some companies take insurance against negligence and breach of duty by directors or KMP (Key Managerial Personnel). The premium paid is considered remuneration, but only if the director is found to be guilty.
• Sweat Equities
Sweat equities are issued at discount or for considerations other than cash. They are issued to a person for any value addition or contribution of know-how or assignment of IP rights. The directors can also take benefit of this. Such rewards are for unusual contribution or technical expertise for business growth.
ESOP is a type of equity, issued to the directors and specified employees of the company with certain terms. Such equity is to retain good talent within the company. It is not related to the company’s profit hence can be issued even in case of losses.
The company can choose to provide any of the above types other than the monthly payments. It can also choose a combination.
Effects of Remuneration
The payment of remuneration will impact both – the directors and the company. Effects are as under:
For a Company: Remuneration is as an expense of the company. Hence, there will be a deduction in the financial statements.
For a Director: It is an income for the director. Hence director has to pay tax on it as per the tax slab.
In a Private Limited Company, there are no prescribed limits and restrictions. But, the company needs to abide by the law and specific restrictions, if any. For appointing a director, all these points should be kept in mind. Also, there are no specific forms of remuneration prescribed. But it can be in any form as mentioned above. Remuneration is vital to retain good talent.