Remuneration of Directors (Managerial Remuneration) — Company Law Notes

Remuneration of Directors (Managerial Remuneration)

Directors sit closest to the till. If they could vote themselves any salary they liked, a profitable company could be drained before a single rupee reached the shareholders. So the Act does something blunt but effective: it puts a ceiling on what a public company may pay its whole managerial team — 11% of net profits — and then slices that ceiling among the managing director, the whole-time directors and the rest. Learn the percentages and you have the topic.

Managerial remuneration under the Act (s.197)

Remuneration means any money or money’s worth paid to a director or manager for services rendered — salary, commission, perquisites and fees (s.2(78)). Section 197 and Schedule V cap it for a public company; a private company is free to pay as its articles provide.

A. The overall ceiling. The total managerial remuneration payable by a public company to its directors (including the managing and whole-time directors) and its manager in a financial year must not exceed 11% of the net profits of that year, computed under s.198. The company in general meeting may authorise payment beyond 11%, subject to Schedule V.

B. The individual limits (within the 11%).

• to one managing director / whole-time director / manager — not more than 5% of net profits;
• to more than one such person taken together — not more than 10%;
• to directors who are neither managing nor whole-time directors — not more than 1% of net profits if there is a managing/whole-time director or manager, and 3% if there is none.

C. Sitting fees. A director may also be paid a fee for attending Board or committee meetings (s.197(5)). Sitting fees are outside the 11% ceiling; the fee per meeting is capped by the Rules (at present ₹1,00,000 per meeting).

D. Where profits are inadequate or nil. If a company has no profits or inadequate profits in a year, it may still pay its managerial persons, but only within the limits fixed by Schedule V, Part II — a table of maximum yearly remuneration graded by the company’s effective capital (broadly, up to ₹60 lakh where effective capital is negative or below ₹5 crore, rising in slabs to ₹120 lakh for the largest companies), and these figures may be doubled if the members pass a special resolution.

E. Recovery of excess. If a director is paid more than is permitted, he must refund the excess and holds it in trust for the company until it is repaid (s.197(9)); the company may not waive the recovery except by a special resolution passed within the prescribed time (s.197(10)).

In Simple Terms: A public company can spend at most 11% of its profits on its managers. Of that, one boss (MD/WTD/manager) may take 5% (two or more, 10% together), and the ordinary directors 1% (or 3% if there is no boss). Meeting-attendance sitting fees sit outside the cap. If the company made little or no profit, Schedule V lets it pay a fixed slab based on its capital instead. Anything overpaid must be given back.

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… except that the company in general meeting may… authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject to the provisions of Schedule V.”

flowchart TD
    ROOT["Managerial remuneration (s.197)"]:::root
    ROOT --> CAP["Overall cap: 11% of net profits (s.198)"]:::mid
    CAP --> M1["One MD/WTD/manager: 5%"]:::leaf
    CAP --> M2["More than one: 10% together"]:::leaf
    CAP --> M3["Other directors: 1% (or 3% if no MD)"]:::leaf
    ROOT --> SF["Sitting fees: outside the cap (s.197(5))"]:::leaf
    ROOT --> SV["No/low profit: Schedule V slabs (double by special resolution)"]:::mid2
    ROOT --> EX["Excess: refund + held in trust (s.197(9)-(10))"]:::mid2
    classDef root fill:#FFF8DC,stroke:#000,color:#000;
    classDef mid fill:#DCFCE7,stroke:#166534,color:#000;
    classDef mid2 fill:#FDE2E2,stroke:#991B1B,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

🧩 WORKED EXAMPLE — dividing the 11% ceiling

Facts. A public company’s net profit (computed under s.198) for the year is ₹10 crore. It has one managing director and three other directors, and asks the maximum it may pay each without members’ special approval.

Rule. Total managerial remuneration ≤ 11% of net profits; one managing director ≤ 5%; directors who are neither MD nor WTD ≤ 1% together (there being a managing director) — all of net profits (s.197).

Apply. 11% of ₹10 cr = ₹1.10 crore overall. The managing director may take up to 5% = ₹50 lakh. The three other directors may take up to 1% = ₹10 lakh between them. Sitting fees for attending meetings are extra.

Conclusion. Within the ceiling the managing director may be paid up to ₹50 lakh and the ordinary directors up to ₹10 lakh together; to exceed 11% overall the company needs a special resolution and must observe Schedule V.

Case Laws

• (Managerial remuneration is governed almost entirely by statute; cite s.197, s.198 and Schedule V rather than case law. The limits exist to protect the shareholders’ fund from being consumed by those who manage it.)

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