Comprehensive Guide to Managerial Remuneration in Companies

Every listed company’s annual report carries a number that gets more attention than almost any other line item: how much the CEO or managing director took home that year. Behind that figure sits a fairly precise piece of company law called managerial remuneration. It is not just “salary” in the everyday sense. It is a defined, regulated concept that decides how much a company can pay the people who run it, and how that pay must be structured so it does not come at the cost of shareholders or creditors.

What is managerial remuneration? 🔗

Managerial remuneration refers to the compensation paid by a company to its directors, including its managing director and whole-time directors, and to its manager, in return for the services they render in running the business. It covers everything from monthly pay to commission linked to profits to fees for attending Board meetings.

The Companies Act, 2013 does not leave this term open to interpretation. Section 2(78) of the Act defines remuneration as any money or its equivalent given or passed to a person for services rendered by them, and clarifies that it also includes perquisites as defined under the Income-tax Act, 1961. This is a deliberately wide definition. It is not limited to cash salary; it pulls in non-cash benefits too, such as rent-free accommodation, a company car, or club memberships, provided these qualify as perquisites under tax law.

This broad scope matters in practice. A company cannot dodge the remuneration limits under company law simply by dressing up part of a director’s pay as a “perquisite” or “benefit” instead of salary. If it has monetary value and is given for services rendered, it counts.

Who does the term apply to? 🔗

Managerial remuneration specifically applies to what the law calls “managerial personnel”: the managing director, whole-time director, and manager of a company, along with other directors who receive remuneration for their role on the Board. Ordinary employees are governed by their employment contracts, not by these provisions.

Why the law regulates director pay so closely 🔗

Directors sit on both sides of the pay decision. They often have significant influence over the Board that approves their own compensation. Left unchecked, this creates an obvious conflict of interest: promoters or managing directors could pay themselves extravagant sums even when the company is barely profitable, leaving less for shareholders and creditors.

To prevent this, the Companies Act, 2013 builds in a system of caps, approvals, and disclosures. As one detailed analysis of the remuneration provisions notes, the entire amount of perquisites paid, not just their taxable value under income tax law, is treated as part of remuneration for the purpose of these caps. This closes a loophole that could otherwise let companies understate how much they are really paying their top executives.

The forms managerial remuneration can take 🔗

In practice, remuneration to managerial personnel is usually structured as a combination of the following:

• Salary: A fixed monthly or annual amount paid regardless of company performance.
• Commission: A variable amount linked to the company’s net profits, giving directors an incentive tied to performance.
• Perquisites: Non-cash benefits such as housing, medical reimbursement, or a company vehicle, valued as defined under the Income-tax Act, 1961.
• Sitting fees: Payments made to directors for attending Board or committee meetings, separate from their role as an executive.

Sitting fees deserve a special mention because they are treated differently from the rest. Under Section 197(5) of the Act, read with Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a company may pay a director a sitting fee for attending Board or committee meetings, but this fee cannot exceed one lakh rupees per meeting. Independent directors and women directors cannot be paid less than what other directors receive for the same meeting. Sitting fees are also excluded when calculating the overall remuneration limits discussed below, since they are treated as compensation for time given, not as part of managerial pay linked to company profits.

The legal framework governing the limits 🔗

Managerial remuneration in a public company is governed primarily by three provisions read together:

• Section 197: Sets the overall ceiling on remuneration and what happens when profits are inadequate or absent.
• Section 198: Lays down how “net profits” are calculated for the purpose of this ceiling.
• Schedule V: Provides detailed remuneration limits and conditions for companies that have no profits or inadequate profits.

Section 197(1) caps the total managerial remuneration payable by a public company to its directors, including the managing director and whole-time director, and its manager, at 11% of the company’s net profits for that financial year, computed as per Section 198. Interestingly, the remuneration paid to directors is not itself deducted while arriving at this net profit figure. If a company wants to pay more than 11%, it needs shareholder approval through a special resolution, along with compliance with Schedule V.

Sub-limits within the 11% ceiling 🔗

The 11% figure is an overall cap, but the Act breaks it down further depending on who is being paid. Here is how the limits typically work out for companies with adequate profits:

These percentages are exclusive of sitting fees, which are governed separately under Section 197(5) as discussed above.

When the company has no profits or inadequate profits 🔗

Not every company is profitable every year, and the law anticipates this. When a company has no profits or its profits are inadequate, it can still pay remuneration to its managerial personnel, but only within the specific limits and conditions set out in Schedule V. This typically ties the permissible remuneration to the company’s “effective capital” rather than its profits. A useful overview from the Institute of Company Secretaries of India notes that amendments effective from 2021 extended this framework to non-executive and independent directors as well, allowing them minimum remuneration even when the company is not profitable, provided Schedule V conditions are met.

What happens if a company pays in excess of the limit 🔗

The Act does not merely set limits; it also builds in a recovery mechanism. If a director draws remuneration in excess of what is permitted, or without the required approvals, they are required to refund the excess to the company. Until the amount is refunded, the director holds it in trust for the company, and the company cannot waive recovery of this amount without approval. This provision exists precisely because directors are in a position of trust, and the law treats any unauthorised excess payment as something that belongs to the company, not the individual.

Private companies and the remuneration cap 🔗

One distinction that often confuses students is that these detailed limits under Section 197 and Schedule V apply to public companies, and to private companies that are subsidiaries of public companies. A standalone private limited company is generally free to decide its own directors’ remuneration through its articles of association or shareholder resolutions, without being bound by the 11% cap. This flexibility reflects the fact that private companies do not raise capital from the public and have a narrower, more directly involved shareholder base that can negotiate pay terms on its own.

How this fits into corporate governance 🔗

Managerial remuneration is not just a compliance exercise. It reflects a broader principle in company law: those who manage a company are accountable to those who own it. By tying executive pay to profit, requiring shareholder approval for exceptions, and mandating disclosure through the auditor’s report, the framework tries to keep a reasonable link between how well a company performs and how much its top managers are paid. Studying this topic also gives you a practical lens into real corporate disputes, since disproportionate managerial pay is one of the most common issues raised by shareholders and proxy advisory firms at annual general meetings.

What do you think? If a managing director delivers strong profits in one year but the company barely breaks even the next, should the 11% cap flex with performance, or does a fixed ceiling protect shareholders better regardless of how well the company is doing?

References

1. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
2. https://indiacorplaw.in/2015/03/definition-of-remuneration-under.html
3. https://ca2013.com/rule-4-companies-appointment-and-remuneration-of-managerial-personnel-rules2014/
4. https://indiankanoon.org/doc/168868116/
5. https://www.icsi.edu/media/webmodules/JULYCOMPANY_LAW_CORNER.pdf