One of the most thought-out and heatedly discussed issues in corporate governance has always been remuneration of Executive and Non-Executive Directors. The topic has become more important as it involves the cash outflow from the company, the calculation of net profits, disclosures to Shareholders, the approval of Directors, Shareholders, and the Remuneration Committee.

1. Allowable Remuneration/Salary to Directors of a Company

2. One of the most thought-out and heatedly discussed issues in corporate governance has always been
remuneration of Executive and Non-Executive Directors. The topic has become more important as it
involves the cash outflow from the company, the calculation of net profits, disclosures to
Shareholders, the approval of Directors, Shareholders, and the Remuneration Committee. Before
knowing about remuneration to Directors first we will talk about Director and its types. Directors
are members of the group known as the Board of Directors, who are responsible for charge of
overseeing, managing, and guiding a company’s operations. Managing Director – A managing
director is a director who has been entrusted with substantial management powers of a company
by virtue of the company’s articles, an agreement with the company, a resolution passed in the
company general meeting, or by the Board of Directors. Executive Director – An Executive Director
is the company’s full-time working Director. They are in charge of the company’s affairs and are
held to a higher standard. They must be diligent and cautious in all of their dealings.

3. Executive Director – An Executive Director is the company’s full-time working Director. They are in
charge of the company’s affairs and are held to a higher standard. They must be diligent and
cautious in all of their dealings. Non- executive Director – A Non-Executive Director is not involved
in the day-to-day operations of the company. They might take part in the planning or policy-making
process and challenge the executive directors to make decisions that are best for the company.
Directors Salary vs. Remuneration: Salary is a subcategory of remuneration. A salary is a fixed
amount of money paid to an employee on a regular basis; this amount is fixed and agreed upon by
both the Employee and the Employer. “Remuneration” is a method of compensating a person for
services rendered to a company. It refers to any money or equivalent given to anyone in exchange
for services rendered. It includes perquisites as defined by the Income-tax Act of 1961. A director
must be aware of the managerial remuneration authorized by Companies Act, 2013. Both a private
limited company and a public limited company are required to follow regulations regarding the
payment of managerial remuneration.

4. There are some various methods at which Public Limited Company can pay remuneration/salary to Directors –
1. If a company having only one managerial person then the maximum remuneration payable is 5% of the
net profits of the company. 2. Company with more than one managing director/whole time
director/manager shall pay maximum remuneration of 10% of the net profits of the company 3. Overall
limit on remuneration/salary payable is maximum of 11% of the net profit. Whether it is managing
director or whole time directors. However, if company does not have a profit or has an inadequate profits
or losses in that case Company can still pay remuneration by following the below mentioned limits
Maximum remuneration for a Director :
If paid up share capital of a Company is (Rupees) Highest limit for Remuneration to a Director (Rupees)
Less than 5 crores 30 lakhs
5 crore or more but less than 100 crore 42 lakhs
100 crore or more but less than 250 crore 60 lakhs
250 crore and above 60 lakhs along with 9.99% of the capital in excess of Rs.250 cr

5. If a company makes a sufficient profit, it can pay its managing director or full-time manager remuneration of up
to 200% of the above-mentioned managerial remuneration if shareholders approve through a special
resolution. A managerial director who does not own shares worth Rs.5 lakhs or more and is not related to
any promoter during the two years preceding his appointment as a managerial person, the company may
pay him 2.5% of current relevant profits and up to 5% with shareholder approval via a special resolution.
The profit calculated under section 198 is the current relevant profit. It relates to all normal working
charges incurred during the years in which the managerial person was not an employee, director, or
shareholder of the company, its holding companies, or subsidiaries.
The following perquisites shall not be included in the computation of the remuneration ceiling specified in
sections II and III:
• Under the Income-tax Act of 1961, a PF, superannuation fund, or annuity fund is not taxable (43 of 1961).
• Gratuity shall not be exceeding half a month’s salary for each year of service
• Encashment of leave at the end of the tenure.

6. Any contribution made to a PF (Provident fund), superannuation fund, or annuity fund that exceeds the tax-deductible
limits under the Internal Revenue Code of 1961 is not to be counted toward determining managerial
compensation, according to clause (a). Whether there will be a profit or not. Section 197 applies only to Public
Limited Companies and not to Private Limited Companies. Therefore, Private Limited Companies are allowed to
pay remuneration at any rate without any limit whether there is adequacy or inadequacy of profits. Penalty for
non-compliance If any person makes any default in complying with the provisions of section 197, he shall be liable
to a penalty of one lakh rupees and if any default has been made by a company, the company shall be liable to a
penalty of five lakh rupees.
Tags: Companies Act, Companies Act 2013
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