MANAGERIAL REMUNERATION

INTRODUCTION:
Any discussion on compensation in organisations has always generated
considerable heat, not only because of the unfulfilled desire for money, but also
for the existence of differential pay in organisations. While differences are bound
to exist in an organisation, the existence of glaring disparities (say, between the
highest and lowest levels) will attract attention, if not severe criticism. This has
often been the cause of many upheavals in organisational history. Major
industrial conflicts between management and labour bear testimony. While the
widening gap between the highest and the lowest paid employee is a matter of
concern, it is perhaps more important to look into the relationship between CEO
pay and corporate performance.
Through the board of directors, shareholders retain the services of a CEO to
maximize the shareholder value of the firm. Thus, there is every reason to expect
a close relationship between CEO compensation and a firm's financial
performance. However, research in developed countries suggests that the
relationship is either poor, or at best non-existent.
In India the Companies Act, 2013 is the legislation that primarily shapes the
remuneration of
a Key managerial personnel.1 Key Managerial Personnel is an altogether new
concept introduced in the new companies act. As definition as in Section 2(51) of
Key Managerial Personnel includes an exhaustive list of managerial position vis
the Chief Executive Officer or the Managing Director or the Manager; the
Company Secretary; the Whole- Time Director; the Chief Financial Officer and
such other officer as prescribed. Now as per the new act not only a MD and the
manager has been identified as Key Personnel but also few more functional
figures like CEO, CFO or the Company Secretary have been brought under the
same umbrella
However as far as remuneration of these managerial position are concerned the
new Companies Act have stuck to the old theory of managerial personnel and

1 Key Manegerial Position as defined in Section 2(51) of the Companies Act,

2013

have sought to control the remuneration of only Manager, MD and Whole Time
Director.2

Until 1993, the Act provided for an upper limit in the amount of compensation to
be paid. The need for an upper limit appears to have been the outcome of the
socialistic ideology prevalent then.
It had been pointed out that the "regulation of director's remuneration becomes
necessary for several reasons, prominent among them being the prevention of
diversion of corporate funds for personal use and the impact which an unduly
high executive reward has upon the rest of society."
However, over the years, with the shift in India's economic policy towards a
market oriented capitalistic economy, this particular legislation has been
amended to increase the maximum pay package limits that are payable to the
managerial personnel. While other reforms have taken their time to be
incorporated in to the Act, the maximum pay ceiling for CEOs has been increased
systematically and more frequently.
One of the main reasons put forward for this regular increase has been the need
to attract and retain talent at the senior level. Additionally, it has been argued
that the risk and responsibility at the senior level needs to be compensated by a
sufficient increase in the pay packet. Needless to mention the risk and
responsibilities at the CEO's level pertain to the uncertainty associated in
fulfilling

organisational

objectives.

This

automatically

indicates

strong

relationship between the CEO's compensation and organisational performance.

Logically the CEO's job should be at stake if the organisational objectives are not
fulfilled.

MANAGERIAL REMUNERATION AND COMPANIES ACT :

The Companies Act, 2013, unlike the previous companies act (now repealed) has
identified the positions of managerial function under a single head of Key
Managerial Position as defined in Section 2(51) of the Act. As mentioned
previously the provision identifies broadly five categories of managerial
personnel. The list is exhaustive in nature i.e. the act has left no scope of other
positions be included in this category.
2 vide Section 197 of the Companies Act, 2013

a) Chief Executive Officer or the Managing Director or the Manager

Although summarised into the same category under this provision; all
three of these managerial position has been defined separately under the
act
Chief Executive Officer as defined in Section 2(18) reads as an officer of a
company, who has been designated as such by it;
Managing Director has been defined in Section 2(54) as a director, who
by virtue of the articles of a company or an agreement with the company
or a resolution passed in its general meeting or by its Board of Directors,
is entrusted with substantial powers of the management of the affairs of
the company and includes a director occupying the position of a managing
director, by whatever name called;
whereas Manager according to Section 2(53) means an individual who,
subject to the superintendence, control and direction of the Board of
Directors, has the management of the whole, or substantially the whole, of
the affairs of a company, and includes a director or any other person
occupying the position of a manager, by whatever name called, whether
under a contract of service or not
b) the Company Secretary; as defined in Section 2(24) states that
company secretary or secretary means a company secretary as
defined in clause (c) of sub-section (1) of section 2 of the Company
Secretaries Act, 1980 who is appointed by a company to perform the
functions of a company secretary under this Act.
c) the Whole- Time Director; Section 2(94) defines this position as a
director in the whole-time employment of the company
d) the Chief Financial Officer is defined in Section 2(19)
e) and such other officer as prescribed
The remuneration payable to a director may take any one or more of the
following forms:
Sitting fee for each meeting of the Board, or a committee thereof, attended by
him; monthly, quarterly or annual payments made to him; or a commission
payable to him at specified percentages of the net profits of the company
computed in the manner referred to in Section 198(1). Thus, the Companies Act
enlarges the ordinary meaning to the word `remuneration' to payment in money
or otherwise for services rendered.
A CEO may be paid remuneration by way of a monthly payment and/or at a
specified percentage of the company's net profits. While, some companies prefer
not to pay any commission and in lieu thereof absorb the element of commission

into the monthly salary so as to ensure a steady income for the CEO irrespective
of fluctuations in the net profits of the company from year to year, others go to
the extent of linking the CEO's pay with the share price of the firm by issuing
employee stock options to him/her.
Consider the remuneration paid to Corporate CEOs (that is, Managing Directors
or Executive Chairman in some organisations). Section 197 of the Companies
Act, 2013, limits the overall maximum managerial remuneration payable by a
public company to persons entrusted with managerial functions to 11 per cent of
the company's net profits except the remuneration of the directors shall not be
deducted from the gross profits (percentage of the net profits to be calculated in
a manner as mentioned in Section 198 of the Companies Act).

WHO ARE MANAGERIAL PERSONS?

It is crucial to understand what constitutes a Managerial position that entitles a
person to receive Managerial Remuneration. In the 2013 Act the term managerial
position has been expressly defined on the Act unlike the 1956 Act. However
there are certain grey areas in this provision as to the matter that what all
position will be subject to remuneration control. The definition of KMP lists down
seven different odd positions however the provision to control remuneration
enlists only three namely MD, Whole Time Director and Manager. The confusion
that arises out of it is that whether the other positions mentioned in the Key
Managerial Position will be included within the scope of list subject to
remuneration control because the list is an inclusive one and the provision
speaks of managerial personnel.
The earlier presumption was that an executive in a company, howsoever lofty
position he may holding in the company will not come under the concept of
managerial personnel and accordingly any remuneration or compensation
package received by him will not be counted as managerial remuneration
contemplated in the Act. However in Section 197 of the present act they have
followed the trend as to not include Executive. But since the provision reads as
managerial remuneration and managerial personnel includes CEO there
remains an element of doubt as to whether the remuneration CEO will be subject
to the bar put by the statute.

WHAT IS MANAGERIAL REMUNERATION?

Managerial Remuneration may take form of monthly payments, say, salary, or a

specified percentage of net profit or a commission and/ or by way of fee for each
meeting of the Board (called sitting fees). Besides, as per the definition in
Section 2(78), the expression remuneration shall not only cover money or
money equivalent paid to him for the services rendered by him but also include
perquisites as defined by Section 17(2) of Income Tax Act.
Summarily it includes:

The value of rent-free accommodation provided to the assessee by his

employer;

The value of any concession in the matter of rent respecting any

accommodation provided to the assessee by his employer;

The value of any benefit or amenity granted or provided free of cost or at

concessional rate in any of the following cases:
(a) by a company to an employee who is a director thereof;
(b) by a company to an employee being a person who has a substantial
interest in the company;
(c) by any employer (including a company) to an employee to whom the
provisions of paragraphs (a) and (b) of this sub-clause do not apply and
whose income under the head Salaries (whether due from, or paid or
allowed by, one or more employers), exclusive of the value of all benefits
or amenities not provided for by way of monetary payment, exceeds fifty
thousand rupees

Any sum paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee;

Any sum payable by the employer, whether directly or through a fund, other
than a recognised provident fund or an approved superannuation fund or a
Deposit-linked Insurance Fund to effect an assurance on the life of the
assessee or to effect a contract for an annuity;

The value of any specified security or sweat equity shares allotted or

transferred, directly or indirectly, by the employer, or former employer, free of
cost or at concessional rate to the assessee.

The amount of any contribution to an approved superannuation fund by the

employer in respect of the assessee, to the extent it exceeds one lakh rupees;
and

The value of any other fringe benefit or amenity as may be prescribed.

Provided that nothing in this clause shall apply to, (i) the value of any medical treatment provided to an employee or any
member of his family in any hospital maintained by the employer;
(ii) any sum paid by the employer in respect of any expenditure actually
incurred by the employee on his medical treatment or treatment of any
member of his family

However there are some perquisites which are not included in managerial
remuneration provided in Section IV of Schedule V for Section 196 and 197 which
reads as follows
1. A managerial person shall be eligible for the following perquisites which
shall not be included in the computation of the ceiling on remuneration
specified in Section II and Section III:
(a) Contribution to provident fund, superannuation fund or annuity fund
to the extent these either singly or put together are not taxable under
the Income-tax Act, 1961 (43 of 1961);
(b) Gratuity payable at a rate not exceeding half a months salary for
each completed year of service; and
(c) Encashment of leave at the end of the tenure.
2. In addition to the perquisites specified in paragraph 1 of this section, an
expatriate managerial person (including a non-resident Indian) shall be
eligible to the following perquisites which shall not be included in the
computation of the ceiling on remuneration specified in Section II or
Section III
(a) Childrens education allowance: In case of children studying in or
outside India, an allowance limited to a maximum of Rs. 12,000 per month
per child or actual expenses incurred, whichever is less. Such allowance is
admissible up to a maximum of two children.
(b) Holiday passage for children studying outside India or family staying
abroad: Return holiday passage once in a year by economy class or once
in two years by first class to children and to the members of the family
from the place of their study or stay abroad to India if they are not residing
in India, with the managerial person.

(c) Leave travel concession: Return passage for self and family in
accordance with the rules specified by the company where it is proposed
that the leave be spent in home country instead of anywhere in India.
All payments made to directors are not necessarily managerial remuneration.
Guarantee Commission received by the director is for personal liability which
the director undertakes. Therefore, guarantee commission is not remuneration
within the meaning of section 309, of Companies Act, 1956 - Suessen Textile
Bearings Ltd. V. Union of India [ 1984 ] 55 Comp. Cas. 492 (Delhi)

ENTITLEMENT TO REMUNERATION:
There is no specific provision in the Companies Act suggesting that directors
must be paid remuneration for their services. However, sub section (5) and (6) of
section 197 lays down the manner of payment of remuneration to a director and
limits thereto. Also, section 197 deals with overall maximum managerial
remuneration. Besides, clause 11 of the provision deals with scope of increment.
Again proviso (1) of 197(1) deals with payment of remuneration to managerial
personnel obviating requirement of the approval of the Central Government.
However, none of the provisions can be cited as the authority to remunerate the
directors. Thus, for the services rendered, the director is not automatically
entitled to remuneration Hutton v. West Cork Railway Co. 23 Ch. D.654.
Directors must show some contractual authority for their entitlement to
remuneration- Anglo Australian Printing & Publishing Union, In re [1892] 2 Ch.
158.
There is no doubt that there is a contact between the company and the directors,
as soon as they are appointed, namely the contract of agency, but an agent,
unless the contract specifically provides so, is not entitled to any remunerationDikshit & Co. v. Mathura Prasad AIR 1925 All. 71

CEILING ON MANAGERIAL REMUNERATION:

Section 197 provides that the total managerial remuneration payable by a public
company or a private company which is a subsidiary of a public company to its
director or manger in respect of any financial year must not exceed 11% of the
net profits of that financial year computed in the manner laid down in sections
198 of the Act except that remuneration to director will not be deducted from
gross profits of the company. In computing the aforesaid ceiling of 11%, section
197(5) says that the fees payable to directors for attending Board Meeting shall
also be included.

Proviso 1 of Section 197(1) dealing with managerial remuneration, provides that

subject to the general provisions of section 197, the remuneration be increased
by the Articles, or by a resolution or, if the articles so require, by a special
resolution, passed by the company in general meeting however with prior
approval from the Central Government.
According to Proviso 2(ii) of Section 197(1), a director who is neither in the whole
time employment of the company nor a managing director may be paid
remuneration subject to the following:

Condition Maximum Remuneration Payable

If the company has a managing director or a

1% of the net profits of the company

whole time director or a manager;

In any other case

3% of the net profits of the company

Further according to Proviso 2(i) of Section 197(1),, a director who is either in the
whole time employment of the company or a managing director may be paid
remuneration subject to the following:

Condition Maximum Remuneration Payable

For one such director

5% of the net profits of the company

If there is more than one such director

10% of the net profits of the company

It is further provided in 197(2) that these percentages provided above shall be

excluded from the fees payable for services rendered by him (mentioned in subclause 5). However the total amount summarily should not cross the ceiling of
11% as mentioned in Proviso 1 of 197(5).

Remuneration paid to Director in a Professional capacityThe proviso to sub-section (4) of section 197 excludes the remuneration received
by a director on any other capacity provided the services rendered to the
company are of a professional nature and, in the opinion of the Central
Government, the director concerned possesses the requisite qualification for
practice of the profession. This only means that the director must hold a position
by virtue of which he can render services in his professional capacity. A mere
expression of opinion by the Central Government to say that the person
concerned possesses the requisite qualifications is enough.

Private Companies-

The provisions relating to managerial remuneration, as aforesaid shall not apply

to a
private company unless it is a subsidiary of a public company [section 197(1)]
A private company has to take care of the matters of remuneration through
provisions in its articles. In the absence of any such authority in the articles, the
directors of a private company are not entitled to draw any remuneration
[Radhey Shyam v. Official Liquidator [1969] 39 Comp. Cas. 340(Raj)].

MANAGERIAL REMUNERATION VIS--VIS SCHEDULE V :

The new companies act introduced Schedule V u/ss. 196 & 197 to provide
guidelines in respect of managerial remuneration. Accordingly, it is now
mandatory for a public company or a private company which is a subsidiary of
public company, to appoint its managerial personnel, i.e. managing or whole
time director and/ or manager and fix their remuneration so long as the same is
in accordance with the conditions laid down in Schedule V, except in one case,
without seeking the prior approval of the Central Government. Schedule V is
divided into three parts. Part two talks about managerial remuneration. Part two
is further segregated into two Sections which are as follows;

SECTION I:
Remuneration payable by companies having profits
Subject to the provisions of sections 197, a company having profits in a financial
year may pay any remuneration, by way of salary, dearness allowance,
perquisites, commission and other allowances, which shall not exceed 5% of its
net profits for one such managerial person, and if there is more than one such
managerial person, 10% for all of them together.

SECTION II:
Remuneration payable by companies having no profits or inadequate
profits 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
person not exceeding the higher of the limits under (A) and (B) given below:
(A):
(1)

(2)

Where the effective capital is

Limit of yearly remuneration

payable shall not exceed (Rupees)

(i) Negative or less than 5 crores

30 lakhs

(ii) 5 crores and above but less than

100 crores
(iii) 100 crores and above but less than
250 crores
(iv) 250 crores and above

42 lakhs
60 lakhs
60 lakhs plus 0.01% of the effective
capital in excess of Rs. 250 crores:

Provided that the above limits shall be doubled if the resolution passed by the
shareholders is a special resolution.
Explanation.It is hereby clarified that for a period less than one year, the limits
shall be pro-rated.

(B) In the case of a managerial person who was not a security holder holding
securities of the company of nominal value of rupees five lakh or more or an
employee or a director of the company or not related to any director or promoter
at any time during the two years prior
to his appointment as a managerial person, 2.5% of the current relevant
profit:
Provided that if the resolution passed by the shareholders is a special
resolution, this limit shall be doubled:
Provided further that the limits specified under this section shall apply, if
(i) payment of remuneration is approved by a resolution passed by the Board
and, in the case of a company covered under sub-section (1) of section 178
also by the Nomination and Remuneration Committee;
(ii) the company has not made any default in repayment of any of its debts
(including public deposits) or debentures or interest payable thereon for a
continuous period of thirty days in the preceding financial year before the date
of appointment of such managerial person;
(iii) a special resolution has been passed at the general meeting of the company
for payment of remuneration for a period not exceeding three years;
(iv) a statement along with a notice calling the general meeting referred to in
clause (iii) is given to the shareholders containing the following information,
namely:
I. General Information:
(1) Nature of industry
(2) Date or expected date of commencement of commercial production
(3) In case of new companies, expected date of commencement of
activities as

per project approved by financial institutions appearing in the prospectus

(4) Financial performance based on given indicators
(5) Foreign investments or collaborations, if any.
II. Information about the appointee:
(1) Background details
(2) Past remuneration
(3) Recognition or awards
(4) Job profile and his suitability
(5) Remuneration proposed
(6) Comparative remuneration profile with respect to industry, size of the
company, profile of the position and person (in case of expatriates the
relevant details would be with respect to the country of his origin)
(7) Pecuniary relationship directly or indirectly with the company, or
relationship with the managerial personnel, if any.
III. Other information:
(1) Reasons of loss or inadequate profits
(2) Steps taken or proposed to be taken for improvement
(3) Expected increase in productivity and profits in measurable terms.
IV. Disclosures:
The following disclosures shall be mentioned in the Board of Directors
report under the heading Corporate Governance, if any, attached to the
financial statement:
(i) all elements of remuneration package such as salary, benefits,
bonuses, stock options, pension, etc., of all the directors;
(ii) details of fixed component and performance linked incentives along
with the performance criteria;
(iii) service contracts, notice period, severance fees;
(iv) stock option details, if any, and whether the same has been issued at
a discount as well as the period over which accrued and over which
exercisable.

SECTION III
Remuneration payable by companies having no profit or inadequate
profit without Central Government approval in certain special
circumstances
In the following circumstances a company may, without the Central Government
approval, pay remuneration to a managerial person in excess of the amounts
provided in Section II above:
(a) where the remuneration in excess of the limits specified in Section I or II is
paid by any other company and that other company is either a foreign company
or has got the approval of its shareholders in general meeting to make such

payment, and treats this amount as managerial remuneration for the purpose of
section 197 and the total managerial remuneration payable by such other
company to its managerial persons including such amount or amounts is within
permissible limits under section 197.
(b) where the company
(i) is a newly incorporated company, for a period of seven years from the
date of its incorporation, or
(ii) is a sick company, for whom a scheme of revival or rehabilitation has
been ordered by the Board for Industrial and Financial Reconstruction or
National Company Law Tribunal, for a period of five years from the date of
sanction of scheme of revival, it may pay remuneration up to two times the
amount permissible under Section II.
(c) where remuneration of a managerial person exceeds the limits in Section II
but the remuneration has been fixed by the Board for Industrial and Financial
Reconstruction or the National Company Law Tribunal:
Provided that the limits under this Section shall be applicable subject to meeting
all the conditions specified under Section II and the following additional
conditions:
(i) except as provided in para (a) of this Section, the managerial person is not
receiving remuneration from any other company;
(ii) the auditor or Company Secretary of the company or where the company
has not appointed a Secretary, a Secretary in whole-time practice, certifies
that all secured creditors and term lenders have stated in writing that they
have no objection for the appointment of the managerial person as well as
the quantum of remuneration and such certificate is filed along with the
return as prescribed under sub-section (4) of section 196.
(iii) the auditor or Company Secretary or where the company has not appointed
a secretary, a secretary in whole-time practice certifies that there is no
default on payments to any creditors, and all dues to deposit holders are
being settled on time.
(d) a company in a Special Economic Zone as notified by Department of
Commerce from time to time which has not raised any money by public issue
of shares or debentures in India, and has not made any default in India in
repayment of any of its debts (including public deposits) or debentures or
interest payable thereon for a continuous period of thirty days in any
financial year, may pay remuneration up to Rs. 2,40,00,000 per annum.

CONCLUSION:
No doubt that managerial remuneration is a dynamic concept. It is interesting to
note here that since 1956 till late 1986 all agreements relating to appointment of

managerial personnel were requiring prior approval of the Central Government.

After 1988, the scenario started changing, the economy opened up and it was
felt necessary to give due importance to this very dynamic issue of managerial
remuneration. Obliging to the frequent demands/representations of the different
industry chambers and with the shifting economic policy, the Companies Act was
amended from time to time with regard to the managerial remuneration. After
the liberalization of the economy, it was felt necessary to increase the ceiling of
the managerial remuneration so as to attract the top most talent at the
managerial level. But at the same time, the regulation of director's remuneration
becomes necessary for several reasons, one of the reasons among them being
the prevention of diversion of corporate funds for personal use.