December 14, 2018

MANAGERIAL REMUNERATION

MANAGERIAL REMUNERATION

Just as profits drive business, incentives drive the mangers of business. Not surprisingly then, in a fiercely competitive corporate environment, managerial remuneration is an important piece in the management.

While it is important to incentivize the workforce performing the challenging role of managing companies. This session related to the remuneration provided to key personnel.

REMUNERATION OF MANAGERIAL PERSONNEL

Section 197 of the companies Act, 2013 prescribed the maximum ceiling for payment of managerial remuneration by a public company to its managing director, whole-time director and manger which shall not exceed 11% of the net profit of the company in that financial year computed in accordance with section 198 except that the remuneration of the directors shall not be deducted from the gross profits.

Then, the company in General Meeting may, with the approval of the Central Government, authorize the payment of remuneration exceeding the 11% of the net profits of the company, subject to the provisions of Schedule V.

The manner of calculation of net profits referred to in section 198.

REMUNERATION TO MANAGING DIRECTOR / WHOLE TIME  DIRECTOR / MANAGER

The remuneration Payable to any one managing director or whole-time director or manager shall not exceed 5% of the net profits of the company and if there are more than one such director remuneration shall not exceed 10% of the net profits to all such directors and manager taken together.

Except with the approval of the company in General Meeting, the remuneration payable to directors who are neither managing directors nor whole-time directors shall not exceed –

1% of the net profits of the company, if there is a managing or whole-time director or manager;

3% of the net profits in any other case.

REMUNERATION PAYABLE TO EXCLUSIVE OF SITTING FEES

The percentages mentioned above shall be exclusives of any fees payable to directors for attending the meeting of the board/committees or such other purposed as decided by the board.

REMUNERATION BY A COMPANY HAVING NO PROFIT OR INADEQUATE PROFIT

If, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including managing or whole-time director or manager, any remuneration exclusive of any fees payable to directors except in accordance with the provisions of Schedule V and if it is not able to comply with Schedule V, with the previous approval of the Central Government.

Where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has effect of increasing the amount thereof, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.

REMUNERATION TO DIRECTORS IN OTHER CAPACITY

As per the section 197 (4) the remuneration payable to the directors including managing director or whole-time director or manager shall be inclusive of the remuneration payable for the services rendered by him in any other capacity except the following:

♠ the services rendered are of a professional nature;

♠ in the opinion of the Nomination and Remuneration Committee (if applicable) or the Board of Directors in other cases, the director possesses the requisite qualification for the practice of the profession.

SITTING FEES TO DIRECTORS FOR ATTENDING THE MEETINGS SECTION 197(5)

A director may receive remuneration by way of fee for attending the Board/ Committee meetings or for any other purpose as may be decided by the Board . provided that the amount of such shall not exceed the amount as may be prescribed.

The Central Government through rules prescribed that the amount of sitting fees payable to a director for attending meetings of the Board or Committees thereof may be such as may be decided by the Board of directors or the Remuneration Committee thereof which shall not exceed the sum of rupees 1 lakh per meeting of the Board or committee thereof.

The Board may decide different sitting fee payable to independent and non-independent directors other than whole-time directors.

MAXIMUM REMUNERATION PAYABLE BY THE COMPANY

Managerial remuneration under schedule v (part ii)

SECTION I : salary by companies having profits

A company having profits in a financial year may pay remuneration to its managerial persons in accordance with section 197.

SECTION II : salary by companies having no profits or inadequate profits without Central Government approval

Where in any financial year during the currency of tenure of a managerial person, a company has no profits or its profits are inadequate, it, may, without Central Government approval, pay remuneration to the managerial not exceeding the higher of the limits under (A) and (B) :

(A):

WHERE THE EFFECTIVE CAPITAL IS                             Limit of yearly remuneration payable shall not                                                                                                                                             exceed(Rs)

NEGATIVE OR LESS THAN 5 CRORE                                    30 Lakhs

5 CRORE AND ABOVE BUT LESS                                            42 Lakhs

           THAN 100 CRORE

100 CRORE AND ABOVE BUT LESS                                       60 Lakhs

         THAN 250 CRORE

250 CRORE AND ABOVE                                                      60 Lakhs plus 0.01% of                                                                                                                                               the effective capital in excess of Rs. 250 Crore

 The above limits shall be doubled is special resolution is passed by the shareholders.

Explanation : it is hereby clarified that for a period less than one year, the limits shall pro-rated.

(B) : 

In the case of managerial person who was not a shareholder, employee or a Director of the company at any time during the two years prior to his appointment as managerial person- 2.5% of the current relevant profit.

If Special Resolution is passed by the shareholders, this limit is doubled.

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