Understanding the Remuneration of Employees

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Understanding the Remuneration of Employees

In this article, we will understand the remuneration of employees with respect to the provisions of the Companies Act. 

Remuneration is always a buzzing issue in the corporate world. Companies can not freely spend the money on top executives' remuneration. There are certain restrictions which put some limit on the total salary of employees. In certain cases, there are certain approvals which companies need to take. The Companies Act, 2013, covers the maximum amount of managerial remuneration that a public company is allowed to pay to its directors and managers.

What is Remuneration?

Remuneration definition is, “the money and other types of compensation an employee of a company receives in return for their service”. It generally includes base salary/wages, any bonuses or commissions and sometimes, it excludes tips and reimbursement for expenses. 

Remuneration has been defined under the Companies Act of 2013 as any money or equivalent given to a person for services rendered, including perquisites. The Income Tax Act of 1961 defines the perquisites. The maximum amount of managerial remuneration that a public company can pay to its directors and managers has been defined in Section 197 of the Companies Act, 2013.

Determination of Remuneration of Employees

The determination of remuneration of employees is done in mainly three ways as stated under Section 194(4) of the Act. They are:

• By the articles of the company, or

• By a resolution or,

• By a special resolution passed in a general meeting by the company.

Maximum Remuneration of Employees

The maximum limit for remuneration of personnel has been defined in the Companies Act under Section 197. This limit is as follows:

• A public company's directors and managers cannot receive more than 11% of the company's net income for that fiscal year in total managerial remuneration.

• No managing director, full-time director, or manager may be paid more than 5% of the company's net profits.

• The total remuneration of employees awarded to all managing directors, full-time directors, and managers cannot be more than 10% of the net earnings of the business.

• If there is a managing or full-time director or manager, the remuneration awarded to non-management directors cannot be more than 1% of the company's net earnings.

• In any other situation, the remuneration given to directors who are not full-time or managing directors cannot be more than 3% of the net profit of the business.

Subject to shareholder permission at the general meeting, the company may pay aggregate remuneration that exceeds 11% of net profits.

Also Read: Employee Stock Ownership Plan

What is not Included in Remuneration?

When the 11% limit on remuneration for a public company is calculated, the following items are not taken into account:

• Sitting Fees: Remuneration excludes sitting fees up to Rs. 1 lakh. 

• Annuity, Superannuation, or Provident Funds: These are excluded if they are not taxable under the Income Tax Act of 1961.

• Employee‘s Gratuity Amount: Gratuity isn’t included if it is less than half a month's pay for each year of service completed.  

• Leave Encashment: While calculating the remuneration limit, leave encashment isn’t included.

• Director’s Professional Service: Remuneration given to a director for professional services is not taken into consideration while calculating the 11% limit.

• Insurance Premium for Key Managerial Personnel: The insurance premium paid to indemnify the KMP from liability for any negligence or default is not included if they are found not to have committed any defaults.

Modes of Payment for Remuneration of Employees

Section 197(6) of the Companies Act, 2013 prescribes the modes of payment of remuneration of employees. These modes are as follows:

• By way of a monthly payment or,

• Partly in one way and partly in another way or,

• At a specified percentage of the company’s net profits.

Conclusion

Remuneration of employees refers to the compensation paid by the employer to employees for their services to the company. While paying remuneration to employees, there are certain limitations. One is that, in a financial year, the maximum limit for managerial remuneration for employees in a public company cannot exceed 11% of the company's net profits. This limit applies to the overall remuneration the company pays its MD, whole-time directors, and managers. During the calculation of the 11% remuneration limit, items such as sitting fees, leave encashment, gratuity, professional service of director, insurance premium for KMPs. etc. are not taken into account subject to certain conditions.

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