In this blog post, Arun Singh, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, describes the monetary cap on compensation to KMPs in India according to the Companies Act, 2013.
The Companies Act 2013, has introduced many new Concepts and Amendments, and KMP (Key Managerial Personnel) is one of them. Key Management Personnel are employees who have the authority to directly or indirectly manage or control business operations, and they are responsible for the day-to-day business of the company. There are six types of Key Managerial Personnel, namely, Managing Director, Manager, Chief Financial Officer, Company Secretary, Whole Time Director, Chief Executive Officer. The amendment, Appointment, and Remuneration of Managerial Personnel Rules, 2014 were introduced by MCA in Companies Act on 9 June 2014 by introducing rule 8A pertaining to the appointment of whole-time company Secretary.
Appointment and Remuneration of KMPs
Section 203(1) of the Companies Act, 2013 provides for appointment of KMPs in companies as follows:
Every Listed company and every other public Company having a paid-up share capital of ten crores or more shall have whole time Key Management Personnel (i.e. MD or Manager, Company Secretary, Chief Finance Officer)
A Company which is required to appoint a whole time Key Managerial Personnel (whole time CS) and is having paid up share capital of Rs.5 crores or more.
Section 197 and Schedule V to the Companies Act, 2013 prescribes certain caps and compliances only in regards to the remunerations of Directors including MD, WTD, and Manager. So the provisions related to the managerial remunerations are not applicable on all Key Managerial Personnel, but they are applicable only on such Managerial Personnel as mentioned in Section 197 and Schedule V to the Companies Act, 2013.
The Company Board appoints the Directors and KMPs after assessing and selecting the candidates for the said post. A Nomination and Remuneration Committee is formed, and the same is responsible for reviewing the structure, size, and composition of the Board, identifying individuals based on their qualification and specialisation and skills to be appointed as Key Managerial Personnel. NRC also recommends on the remuneration payable to directors and KMPs. Further, it also ensures that level and composition of remuneration is also reasonable and sufficient, relationship of remuneration to performance is clear and meets appropriate performance benchmarks.
The guiding principle is that the level and composition of remuneration shall be reasonable and sufficient to attract, retain and motivate Directors, Key Managerial Personnel, and other senior officials. The remuneration of Directors, KMPs, and other senior officials shall be based and determined on the individual person’s responsibilities and performances and in accordance with the limits as prescribed by the Act. The Nomination and Remuneration Committee determines individuals remuneration packages for the Directors and Key Managerial Personnel and other Senior Official taking into account various factors it deems fit and relevant, including but not limited to market, business performance and practices in comparable companies, having due regards to financial and commercial health of the Company as well as prevailing laws and guidelines laid by the Government for this purpose.
The NRC committee consults with the chairman of the Board as it deems appropriate. The Nominations & Remuneration Committee determines individual remuneration packages for Directors, KMPs and Senior Officials of the Company taking into account factors it deems relevant, including but not limited to market, business performance and practices in comparable companies, having due regard to financial and commercial health of the Company as well as prevailing laws and government/other guidelines.
The Committee consults with the Chairman of the Board as it deems appropriate. Remuneration of the Chairman is recommended by the Committee to the Board of the Company.
Remuneration
Base Compensation (fixed salaries) must be competitive and reflective of the individual’s role, responsibility, and experience in relation to the performance of day-to-day activities, usually reviewed on an annual basis; (includes salary, allowances and other statutory/non-statutory benefits which are a normal part of a remuneration package).
Variable salary: The Nominations & Remuneration Committee may in its discretion structure any portion of remuneration to link rewards to corporate and individual performance, fulfilment of specified improvement targets or the attainment of certain financial or other objectives set by the Board. The amount payable is determined by the Committee, based on performance against pre-determined financial and non-financial metrics.
Statutory Requirements under the Act
- Section 197(5) provides for remuneration by way of a fee to a director for attending meetings of the Board of Directors and Committee meetings or for any other purpose as may be decided by the Board.
- Section 197(1) of the Companies Act, 2013 provides for the total managerial remuneration payable by the Company to its directors, including managing director and whole time director, and its manager in respect of any financial year shall not exceed eleven percent of the net profits of the Company computed in the manner laid down in Section 198 in the manner as prescribed under the Act.
- The Company with the approval of the Shareholders and Central Government may authorise the payment of remuneration exceeding eleven percent of the net profits of the company, subject to the provisions of Schedule V.
- The Company may with the approval of the shareholders authorise the payment of remuneration up to five percent of the net profits of the Company to any one of its Managing Director/Whole Time Director/Manager and ten percent in the case of more than one such official.
- The Company may pay remuneration to its directors, other than Managing Director and Whole Time Director up to one percent of the net profits of the Company if there is a managing director or whole-time director or manager and three percent of the net profits in any other case.
- The net profits for the purpose of the above remuneration shall be computed in the manner referred to in Section 198 of the Companies Act, 2013.
The Independent Directors shall not be entitled to any stock option and may receive remuneration by way of fee for attending meetings of the Board or Committee thereof or for any other purpose as may be decided by the Board and profit related commission as may be approved by the members. The sitting fee to the Independent Directors shall not be less than the sitting fee payable to other directors.
The remuneration payable to the Directors shall be as per the Company’s policy and shall be valued as per the Income Tax Rules. The remuneration payable to the Key Managerial Personnel and the Senior Management shall be as may be decided by the Board having regard to their experience, leadership abilities, initiative taking abilities and knowledge base.
Payable Remuneration
S 197(1) clearly defines the total managerial remuneration payable by a public company to its directors, KMPs, WTDs in respect to any financial year shall not exceed eleven percent of the net profit of that Company for that financial year computed in the manner laid down u/s 198 except that the remuneration of the directors shall not be deducted from the gross profit. However, the excess of payment can be authorised by the Company in the general body meeting by seeking permission of the Central Government.
Provided further that the remuneration payable to anyone managing director shall not exceed five percent of the net profit of the company and if there is more than one such director remuneration shall not exceed ten percent of the net profits to all such directors and manager.
The remuneration payable to directors who are neither managing directors nor whole time directors shall not exceed –
- One percent of the net profits of the company and
- Three percent of the net profits in any other case.
The percentage mentioned above shall be fixed and exclusive of any fees payable to directors u/s.s (5)
But subject to schedule V, in any financial year, a company suffers loss or has no profits it shall not pay to any of the KMPS or directors any remuneration or any fees.
Further the remuneration payable to the directors, KMPs of the company shall be determined in accordance with and subject to the provision the section, either by article of company or resolution or by special resolution passed by the Company in general body meeting and such remuneration shall be payable to a director shall be inclusive of remuneration payable to him for the services rendered by him in any capacity.
The Non-Executive Directors shall be entitled to receive remuneration by way of sitting fees for attending every meeting of the Board/ Committees as approved by the Board of Directors, profit related commission as may be recommended by the Committee to the Board and subsequently approved by the members. The remuneration payable to the Directors shall be as per the Company’s internal policy and shall be governed as per the Income Tax Rules.
A director or manager may be paid remuneration either by way of monthly salary or at a specified percentage as discussed above. Subsection 7 states that independent directors shall not be entitled to any stock option and may receive remuneration by way of fees only.
Subsection 9 mentions if any director or KMP draws or receives directly or indirectly any remuneration in excess shall be liable to refund such sums to the company. The company shall not waive off such excess amount which is recoverable by the Company.
