In this blog post, Angela D’souza,  a student pursuing her LL.B (4th year) from School of Law, Christ University, Bangalore and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, enlists and elaborates on the positions that are eligible for executive compensation.

The growing number of corporations in the country often results in a dearth of qualified staff, especially those deemed to be fit to occupy managerial positions. Organizations competing tend to devise means to attract, retain and motivate the workforce of the organization. One such method is that of executive compensation.

Executive Compensation is the compensation paid to executives of business corporations. It primarily comprises of the salary, bonus, long-term incentives and prerequisites. The concept of executive compensation gained significance after the economic liberalization of 1993. With the rise of India as a hub for international investment, increased trade and commerce has resulted in the springing up of several commercial organizations. With it came in an increased demand for qualified workforce and hence the idea of executive compensation gained momentum.

Historically, executive salaries in India had been low and were stringently regulated by way of Government regulations. However, these caps were regularly raised until there was a gaping wage disparity between the employees and those at managerial positions. It was at this juncture that the need for a fixed cap was felt. The advent of the Companies Act and subsequent amendments helped achieve this goal.

The Companies Act 2013 and Executive Compensation: Who is entitled?

Though the Companies Act has undergone several amendments, it would be beneficial to consider the 2013 Act which is currently in force. However, at first, it is essential to understand as to who is qualified or eligible for executive compensation. The essential provisions with regard to executive compensation are contained in Chapter XIII of the Companies Act, 2013.

Section 196 essentially states who would comprise of managerial personnel entitled for executive compensation under Chapter XIII of the Act. By Section 2 (51), the key managerial personnel would include:

• The CEO or the managing director or the manager.
• The Company Secretary.
• The Whole-time director.
• The Chief Financial Officer
• Any other officer as may be prescribed.

The Chief Executive Officer means an officer of the company, who has been designated as such by it [Section 2 (18)] while a manager is an individual who has the management of the whole or substantially the whole of the company. However, the definition of a manager u/s 2 (53) further states that such manager will be subject to the superintendence of the Board of Directors. On the other hand, a managing director is defined by Section 2 (54) as a director who by the AoA or an agreement with the company or by a resolution of the general meeting or Board of Directors is entrusted with substantial powers of the management and the affairs of the company.

A Chief Financial Officer means a person appointed as a Chief Financial Officer of the company [Section 2 (19)], while a whole-time director as defined under Section 2 (94) is a director in the whole-time employment of the company.

The Companies Act 2013 and Executive Compensation: Computing Remuneration

Section 197 provides for the overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. Clause 1 states that the total managerial remuneration by a public company to its directors in any financial year should not exceed eleven percent of the net profits of that company in that financial year. The net profits should be calculated in the manner prescribed in S 198 of the Act, and such remuneration should not be deducted from the company’s gross profits.

At this juncture, it is essential to note that the term ‘director’ in this case would include the managing director and whole-time director. It is also essential to note that a general meeting can only raise the cap of eleven percent after the prior approval of the Central Government.

Further, it should be noted that the remuneration payable to anyone, a managing director, whole-time director or a manager should not exceed five percent of the net profits of the company. Also, the remuneration payable to directors who are neither managing nor whole-time directors should not exceed one percent of the net profits if there is a managing or whole-time director. In case there is no managing or whole-time director, the remuneration cannot exceed three percent of the net profits.