A Guide to Compensation to Director in Indian Corporates
Remuneration to director is more than a fee for services—it is a tactical choice that has direct consequences for corporate governance, leadership retention, and investor confidence. In the Indian corporate sector, how corporates design and report company director compensation is both a regulatory necessity and an indicator of ethical governance.
This paper provides a detailed examination of the compensation of director, including statutory guidelines, best practices, and the subtle approach needed in independent director compensation. We will also examine the policy design, approval processes, boundaries, and disclosure standards as provided in Indian company law.
- The Legal Framework for Director Remuneration
- Section 197: Regulates remuneration of director in public companies and states the maximum of 11% of net profits earned in a year.
- Schedule V: Gives the terms under which remuneration can be granted in case of insufficient or no profits.
- Section 198: Outlines the process for calculation of net profits for the purpose of ascertaining the allowed company director remuneration.
- Section 149(9): Directly deals with independent director remuneration.
- Capping and Approvals for Director Remuneration
- 11% of Net Profits: Total cap on aggregate remuneration to all directors (including managing and whole-time directors).
- 5% for a Single Managing Director (or whole-time director): Where only one such director exists.
- 10% for All Whole-time Directors and Managing Directors Combined.
- 1% for Non-executive Directors (where there is a managing/whole-time director).
- 3% for Non-executive Directors (where there is no managing/whole-time director).
- Obtain shareholder approval through special resolution.
- Meet Schedule V (especially where profits are insufficient or nil).
- Ensure disclosure in the Board's Report and company filings with the Registrar of Companies.
- Company Director Remuneration: Components and Trends
- Independent Director Remuneration: Maintaining Neutrality
- Sitting fees under Section 197(5)
- Reimbursement of expenses
- Commission approved by shareholders
- Remuneration of Director: Transparency and Disclosures
- Reason for increase in remuneration
- Permanent number of employees
- Comparison with industry practices
- Global and Governance Mindsets
- Tied to long-term performance
- Fair relative to peers
- Transparent in design and disclosure
The core of India's corporate regulatory framework is the Companies Act, 2013, that regulates remuneration to director in public and private companies. In particular, Sections 196 to 202 and Schedule V detail the legislation on appointment and remuneration of key managerial persons (KMPs) such as directors.
Key Provisions
These provisions establish a strong legal framework to ensure that director remuneration is fair and within regulatory limits.
Director remuneration in public companies should be within prescribed limits unless shareholders agree for higher payments through a special resolution.
Statutory Capping under Section 197:
Exceptions:
Where a company wishes to pay over the above limits, it must:
Company director remuneration may be broadly categorized under the following components:
A. Fixed Compensation:
Basic salary
Perquisites (housing, car, medical)
Retirement benefits (PF, gratuity)
B. Variable Compensation:
Performance bonuses
Commission on profits
Long-term incentives (e.g., ESOPs)
C. Sitting Fees:
Compensated independent and non-executive directors for attending committee and board meetings. A maximum of ₹1 lakh is allowed for each meeting under the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
D. Reimbursement of Expenses:
Any meetings or company-related work expenses can be reimbursed.
To promote ethical and sustainable leadership, an increasing number of firm director compensation plans are being created in conjunction with Environmental, Social, and Governance (ESG) goals and performance metrics.
Independent director remuneration requires careful calibration. These directors are expected to offer unbiased, independent judgment—so their compensation must not impair that independence.
As per Section 149(9) of the Companies Act:
An independent director may receive:
However, independent director remuneration cannot include stock options, as per the second proviso to Section 149(9), ensuring there is no undue financial alignment with company fortunes.
Furthermore, SEBI’s LODR Regulations (Regulation 17(6)**) mandate disclosure of remuneration policies in listed entities and require shareholder approval for granting commissions or fees beyond the set thresholds.
The law emphasizes disclosure and accountability to shareholders:
Key Requirements:
Under Section 197(12), all listed companies are required to make a disclosure about the ratio of each director's remuneration to the median employee's remuneration.
Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 necessitates disclosure of:
These rules lead to greater transparency of remuneration of director as well as equitable compensation practices.
In both global and Indian scenarios, company director compensation is usually a point of concern for proxy advisory companies, institutional investors, and regulators. Good governance requires that director compensation be:
Conclusion
The director remuneration is not only a regulatory requirement but also a governance imperative. Companies have to remain compliant with the Companies Act, SEBI rules, and changing market practices. Structuring remuneration of director for executive positions or designing fair and moral independent director remuneration, organizations have to focus on transparency, linkage with performance, and compliance with the law.
In the process, they not only reward leadership successfully but also maintain the ethos of corporate accountability and stakeholder trust.