How are the returns and remuneration paid to the directors
Published On: Aug 6, 2019 • Last Updated: Oct 14, 2023 • 5.1 min read •
Every person seeks rewards for services offered. Similarly, a director is paid for services rendered to the company. Such a payment to a director is called “Remuneration”. Companies Act, 2013, regulates a Company including remuneration terms. Further, the Act implies restrictions on withdrawal of the amount. There are different terms of payment for different types of directors. The work and position are the basis of payment.
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. This is the standard policy or guideline for the company in all cases. The Act allows changes in the future if required.
• At the time of Appointment
This is the most widely used and convenient mode when the company has no set policy to pay returns and remuneration paid to the directors. The remuneration terms are fixed at the time of appointment itself, as in an employment offer letter. The company and director mutually decide the terms of appointment including returns. If the company adopts this method, it must be there in the resolution passed for appointment in the meeting.
• 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 paid to directors considering some exceptions under Act. In case of public company, refer to section 197 (3) of Companies Act, 2013.
Is there any ceiling on return?
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?
There are various ways to pay returns and remuneration to the directors besides a monthly salary. It can be in any form such as in cash or in kind. Listed below are the various types of remuneration.
• 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
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
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
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
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.
Role of Directors can Define their Remunerations?
Click ‘Read Now’ to Know the Role of Company Directors!
Shivani is a Company Secretary at Legalwiz.in with an endowment towards content writing. She has proficiency in the stream of Company Law and IPR. In addition to that she holds degree of bachelors of Law and Masters of commerce.