Remuneration to Directors : Key Points

Ayush (Executive ) (6432 Points)

26 April 2023  

Remuneration to Directors refers to the payment made to members of a company's board of directors for their services and expertise. It can include a variety of forms such as salaries, bonuses, stock options, and other benefits. The remuneration is determined by the company's board of directors and is typically based on factors such as the director's experience, responsibilities, and performance.

Remuneration payable by a public company, to its directors in respect of any financial year:

  • In a company with only one Managing Director/Whole Time Director/Manager, the maximum amount of remuneration they can receive in any financial year is capped at 5% of the net profits of the company.
  • In a company with more than one Managing Director/Whole Time Director/Manager, the maximum amount of remuneration that can be paid to all such directors combined in any financial year is capped at 10% of the net profits of the company.
  • The overall limit on managerial remuneration refers to the maximum amount of remuneration that can be paid to all directors and key managerial personnel in a company in any financial year. This limit is capped at 11% of the net profits of the company, which means that the total amount paid to all directors and key managerial personnel cannot exceed 11% of the company's net profits.

If a company does not have profits or has inadequate profits in a financial year to pay the remuneration fixed by the board of directors, it cannot pay any remuneration to its directors, including managing or whole time directors or managers, except as per the provisions of Schedule V of the Companies Act. Section II Part II of Schedule V specifies that if a company has no profits or inadequate profits during the tenure of a managerial person, it may pay remuneration to the person, but within the limits specified under (A) and (B). These limits are determined based on factors such as the company's financial position:

  • If the effective capital is negative or less than 5 Crores, the limit is 60 Lakhs per year.
  • If the effective capital is 5 crores and above but less than 100 Crores, the limit is 84 Lakhs per year.
  • If the effective capital is 100 Crores and above but less than 250 Crores, the limit is 120 Lakhs per year.
  • If the effective capital is 250 Crores and above, the limit is 120 Lakhs per year plus 0.01% of the effective capital in excess of 250 Crores.

These limits are set to ensure that the remuneration paid to managerial personnel is reasonable and in line with the company's financial position.

Important Points regarding Remuneration to Directors of a Company

  • Director's remuneration should be decided by the company's articles, a resolution passed by the company, or a special resolution if required.
  • Director's fees should not exceed established thresholds and can be paid monthly or as a percentage of annual net profits.
  • Independent directors are compensated with profit-related commissions, sitting fees, and travel expense reimbursements, but are not eligible for ESOP.
  • Excess remuneration must be returned to the company or held in trust, with Central Government consent required to waive recovery.
  • Listed companies must disclose the ratio between director compensation and median employee compensation.
  • Insurance premiums paid for employee protection are not part of director remuneration, unless the director committed a crime.
  • Managing directors and full-time directors may accept commissions from holding companies or subsidiaries, but must mention it in board reports.

Penalty

Failure to comply with section 197 requirements can result in a fine of Rs. 1 lakh for individuals and Rs. 5 lakh for companies.