Managerial remuneration isn’t just about paying senior leaders well. It’s about balancing reward with responsibility, performance with protection, and ambition with accountability. In India, this balance is carefully guided by the Companies Act, 2013, especially for public companies.
At its core, managerial remuneration refers to the money or its equivalent paid to managerial personnel—but legally, it’s far more structured than a simple salary. There are limits, approvals, disclosures, and calculations that most people don’t fully understand until they’re actually responsible for compliance. This guide breaks it all down in plain, practical language.
What Is Managerial Remuneration?
In simple terms, managerial remuneration refers to the total pay package for key management personnel of a company.
This includes:
- Salary and allowances
- Commission and bonuses
- Perquisites (car, housing, insurance, etc.)
- Stock options or performance-linked incentives
Under law, it applies specifically to:
- Managing Directors (MD)
- Whole-Time Directors (WTD)
- Managers
- Other key managerial personnel, where applicable
So yes, it’s money or its equivalent paid to the managerial person, but regulated very differently from normal employee pay.
Why Is Managerial Remuneration Heavily Regulated?
This question comes up often: “If shareholders approve it, why should the law interfere?”
The reason is simple—protection of stakeholders.
Excessive payouts can:
- Drain company profits
- Harm minority shareholders
- Reward poor performance
That’s why public companies, especially, must tie managerial pay closely to profits and board approvals.
Maximum Limit Under Companies Act, 2013
This is the most searched—and most misunderstood—rule.
👉 Total managerial remuneration cannot exceed 11% of net profits of the company for a financial year.
This limit applies collectively to all managerial personnel taken together.
Breakup of Limits
The Companies Act further specifies:
- 5% of net profits for one Managing Director or Whole-Time Director
- 10% of net profits for multiple MDs/WTDs together
- 11% overall ceiling for all managerial remuneration combined
These limits exist to ensure fair distribution and align rewards with company performance.
How Are “Net Profits” Calculated?
Net profits for managerial remuneration are not the same as accounting profits.
They are calculated as per Section 198 of the Companies Act, after making specific additions and deductions.
Common adjustments include:
- Excluding capital profits
- Adjusting depreciation
- Removing extraordinary items
In practice, this calculation needs technical accuracy—small mistakes can push remuneration beyond legal limits.
Is Managerial Remuneration a Related Party Transaction?
Here’s an important point many directors breathe easier after hearing:
👉 Managerial remuneration is not classified as a related party transaction (RPT).
That means:
- Section 188 doesn’t apply
- RPT disclosures are not mandatory for remuneration
- Approval routes are governed separately
However, board and shareholder approvals may still be required depending on the structure and amount.
When Can Remuneration Exceed 11%?
Yes, it can exceed 11%—but not casually.
Companies can go beyond limits if:
- There are adequate profits, and
- Special Resolution is passed by shareholders, or
- Remuneration follows Schedule V when profits are inadequate
This flexibility exists, but documentation and compliance must be watertight.
Managerial Remuneration in Case of Loss or Inadequate Profits
This is where many startups and growing companies struggle.
Even when profits are low or negative:
- Managerial remuneration may still be paid
- It must fall within limits specified in Schedule V
- Central Government approval may be required in specific cases
This ensures competent leadership isn’t lost during tough phases—but also prevents misuse.
Real-Life Scenario (Seen Many Times)
A growing company once appointed a new MD with a generous package, assuming profits would justify it later. By year-end, profits dipped, and suddenly the remuneration breached legal limits.
The money wasn’t illegal.
But the process was incomplete.
The fix? Shareholder approval, revised resolutions, and delayed filings—stress that could have been avoided.
Practical Compliance Checklist
Before finalising managerial remuneration, ensure:
- ✅ Articles of Association permit it
- ✅ Board resolution passed
- ✅ Shareholder approval obtained (if required)
- ✅ Net profit calculated as per Section 198
- ✅ Limits (5%, 10%, 11%) respected
- ✅ Proper disclosures made in financial statements
This checklist saves real money and real time.
Why Thoughtful Remuneration Matters
Well-structured managerial pay:
- Attracts and retains leadership
- Aligns incentives with growth
- Builds investor confidence
- Protects directors from personal liability
It’s not about how much is paid—but how wisely.
Conclusion
Managerial remuneration sits at the intersection of performance, trust, and law. Governed by clear numerical limits—5%, 10%, and 11% of net profits—the Companies Act ensures balance between rewarding leadership and safeguarding stakeholders.
Understanding these rules isn’t optional for directors—it’s essential. And when handled correctly, remuneration becomes a strength, not a risk.
👉 Need help structuring or approving managerial remuneration compliantly? Visit callmyca.com for expert support you can rely on.
