Payment of Remuneration to Key Managerial Personnel

Key Managerial Personnel (KMP) are the senior executives of a company who play a vital role in its management, administration, and overall growth. According to Section 2(51) of the Companies Act, 2013, KMP includes the Chief Executive Officer (CEO), Managing Director (MD), Company Secretary (CS), Whole-time Director, Chief Financial Officer (CFO), and such other officers as prescribed. Since these individuals occupy critical positions, the law provides detailed provisions regarding the payment of their remuneration, ensuring fairness, transparency, and protection of stakeholders’ interests.

Legal Provisions under Companies Act, 2013:

The Companies Act, 2013, particularly Sections 196, 197, 198, and Schedule V, regulates the payment of remuneration to KMP. These provisions specify the maximum permissible limits, the approvals required, and the conditions under which remuneration can be paid.

• Overall Limit of Remuneration

The total managerial remuneration payable by a public company to its directors, including Managing Director, Whole-time Director, and Manager, in any financial year must not exceed 11% of the net profits of that company. This percentage is calculated in accordance with Section 198 of the Act.

• Individual Limits

A Managing Director or Whole-time Director or Manager cannot be paid remuneration exceeding 5% of the net profits. If there is more than one such director, the remuneration must not exceed 10% of the net profits for all of them together.

• Remuneration to Other Directors

Directors who are neither Managing nor Whole-time Directors may receive up to 1% of net profits, if there is a Managing/Whole-time Director, or 3% of net profits in other cases.

Modes of Payment of Remuneration:

Remuneration to KMP may be paid in the following ways:

1. Monthly Payment (Salary): Fixed regular salary for their services.

2. Commission: A share of the company’s profits, linked to performance.

3. Perquisites/Allowances: Benefits such as housing, medical, travel, or car facilities.

4. Sitting Fees: For attending meetings of the Board or Committees.

Payment in Case of No or Inadequate Profits:

Sometimes, companies may not earn sufficient profits to pay the prescribed remuneration. In such cases, Schedule V of the Companies Act, 2013 allows payment of remuneration to KMP within specified limits based on the company’s effective capital. The limits range from ₹30 lakhs to ₹120 lakhs per annum, depending on the size of the company. Beyond these limits, approval of the Central Government is required.

Approval Process:

1. Board Approval: Payment of remuneration must first be approved by the company’s Board of Directors.

2. Nomination and Remuneration Committee (NRC): In listed companies and certain public companies, the NRC recommends the remuneration policy.

3. Shareholders’ Approval: In cases where remuneration exceeds the prescribed limits, shareholders must pass a special resolution in a general meeting.

4. Central Government Approval: Required only if remuneration goes beyond limits specified under Schedule V without shareholder approval.

Corporate Governance and Disclosure:

To ensure accountability and transparency, companies must disclose details of remuneration paid to KMP in:

• Board’s Report

• Annual Return

• Corporate Governance Report (in listed companies)

This disclosure enables shareholders and regulators to evaluate whether the compensation is fair, reasonable, and linked to company performance.

Importance of Regulating KMP Remuneration:

1. Prevents Misuse of Power: Ensures directors and executives do not pay themselves excessive salaries.

2. Aligns with Shareholder Interests: Remuneration is linked with profits and performance.

3. Ensures Transparency: Disclosures allow stakeholders to assess fairness.

4. Encourages Professionalism: Helps attract and retain qualified professionals.