Remuneration of Managerial Personnel

In one line

A public company may pay its directors and manager together no more than eleven per cent of its net profits, and within that no more than five per cent to one managing or whole-time director or manager, ten per cent to all of them together, one per cent to the other directors where there is a managing or whole-time director or manager, and three per cent where there is not; the members may authorise more; net profits are computed under section 198; excess drawn must be refunded and is held in trust until it is; and where there are no profits or they are inadequate, Schedule V governs.

In exam wording: section 197 fixes the overall maximum managerial remuneration; section 198 tells you how to calculate the profits on which those percentages bite; section 199 requires recovery on a restatement of accounts; section 200 lets the company fix the remuneration where profits are absent or inadequate; and section 201 prescribes the form and procedure for applications.

Why the law has this at all

Managerial remuneration is the one payment a company makes where the recipients sit on the body that decides it. Left alone, a board could pay itself the whole of the profit and leave the members with nothing, and the members would learn of it only after the year had closed.

So the Act does four things.

It fixes a ceiling as a share of profit, so that pay rises only when the members' returns rise.

It defines the profit, in section 198, because a ceiling expressed as a percentage is worthless if the company may choose what the denominator means. Without section 198 a company could revalue its land, call the increase profit, and pay eleven per cent of it.

It makes the excess recoverable, in section 197(9) and (10), and holds it in trust until it is refunded, which gives the company a proprietary remedy and not merely a claim in debt.

And it deals with the awkward case of a company with no profits, where a percentage ceiling means nothing, by sending it to Schedule V.

Some words this chapter uses

Net profits here means profits computed under section 198, not book profit or taxable profit. Sitting fees are the fees under section 197(5). Managerial remuneration covers directors, including the managing and whole-time directors, and the manager. Restatement of financial statements means their revision to correct an error or a fraud. Median employee's remuneration is the middle figure in the ranked list of employees' pay.

The overall ceiling: section 197(1)

The total managerial remuneration payable by a public company to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven per cent of the net profits of that company for that financial year computed in the manner laid down in section 198, except that the remuneration of the directors shall not be deducted from the gross profits.