How are the returns and remuneration paid to the directors

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? 

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.

Condition	Limit
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:  

Condition	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

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

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. 

Conclusion 

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.