A Comparative Analysis of Managerial Remuneration in Different Jurisdiction

Jurisdiction

Remuneration as defined by Collins Dictionary, “refers to the payment made to an individual in exchange for their work”[1]. This term has its roots in the Latin word ‘remuneratus,’ which translates to ‘to reward.’ It represents the compensation an employee receives for their contributions to an organization or company and is closely linked to their needs, motivation, and recognition. “In simple terms, it denotes the financial package offered to an individual working in a company or organization for their services”[2].

In the Companies Act of 2013, the term “remuneration” is defined in Section 2(78)[3]. According to this section, it encompasses money or any form of compensation given to an individual in exchange for their services. This definition also encompasses perquisites, which are essentially benefits provided in Section 17(2)[4] of the Income-tax Act of 1961.

Offering competitive salaries to managers and directors not only attracts talented professionals but also encourages current employees to remain committed to their roles. Furthermore, appropriate compensation is essential to effectively oversee the company’s operations and achieve success. It is essential to carefully assess managerial compensation to ensure it stays within reasonable boundaries and does not become overly excessive. This evaluation should consider not only basic salaries but also additional benefits and allowances. From a legal perspective, the Company Law provides guidelines on these issues, aiming to balance the prevention of unwarranted profit depletion by the company with the need to offer fair and adequate remuneration to managerial staff.

The Companies Act of 2013 does not provide a precise definition for the term “managerial remuneration.” However, it is generally understood as the compensation given to managerial personnel. This concept is crucial in corporate governance as it ensures equitable remuneration for key managerial personnel and directors.

Laws of different Jurisdiction on Managerial Remuneration

Spain[5]

• Remuneration Committee: Responsible for drafting and assessing the company’s remuneration policy.
• General Shareholder’s Meeting (GSM): The general meeting must approve the remuneration policy, which can be implemented for up to three fiscal years. This policy should outline, at a minimum, the maximum remuneration for all directors with supervisory responsibilities and the criteria for distributing it based on the roles and responsibilities assigned to each director.
• Governing Body: Within the scope of the bylaws and remuneration policy, the governing body determines the compensation for each director performing supervisory duties. For directors with executive responsibilities in listed companies:
  1. GSM: The general meeting approves the remuneration policy, which must specify at least the fixed annual compensation for executive directors and include other legally required details.
  2. Governing Body: When assigning executive responsibilities to a director, through delegation or other means, a management agreement must be signed, detailing all compensation for these duties, in alignment with the bylaws and remuneration policy. The governing body, after reviewing a report from the appointment and remuneration committee, determines individual compensation for each director in accordance with the management agreement and within the framework of the policy.
• Annual Compensation Report: This report, prepared annually, must detail the compensation directors receive or are entitled to for supervisory and, if applicable, executive duties. It should include a breakdown of the individual compensation for each director for the fiscal year. The report must also be published as relevant information on the company’s website and the CNMV platform.

United Kingdom[6]

• “Quoted companies must have their directors’ remuneration report approved by the board of directors and signed by either a director or the company secretary on behalf of the board”[7].
• These reports must include a directors’ remuneration policy, which requires shareholder approval through a binding vote at least once every three years. The annual remuneration report, detailing how the policy was implemented during the reported financial year and how it will be applied in the next year, is subject to an annual advisory vote by shareholders.
• The annual accounts of all companies, except for small ones, must provide details of directors’ remuneration and benefits[8].
• Under the Companies Act 2006, “quoted companies are required to provide shareholders with a detailed annual remuneration report”[9].
• “The remuneration report must comply with the requirements outlined in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008”[10].

United States[11]

• The listing rules of the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) mandate shareholder approval for equity plans applicable to directors. However, shareholder approval is not typically sought or required for cash compensation or specific equity grants.
• Public companies must disclose directors’ compensation for the previous fiscal year on an annual basis, including details on fees, stock and option awards, and other benefits, presented in a table with accompanying explanatory notes.
• “Nasdaq-listed companies are also required to disclose any compensatory arrangements between directors or nominees and third parties related to the director’s candidacy or service, commonly referred to as “golden leashes””[12].

India

The provisions outlined in Sections 197 and 198 of the Companies Act, 2013, govern the determination of managerial remuneration. Section 197(1) specifies the maximum limit a public company may allocate for managerial remuneration. “According to this section, the total remuneration payable to the company’s directors, including managing and whole-time directors, as well as its manager, within a financial year, must not exceed 11% of the net profits for that year, calculated in accordance with the method prescribed under Section 198”[13]. It is crucial to understand that the directors’ remuneration cannot be treated as a deductible expense when determining gross profits. If a public company intends to provide managerial remuneration exceeding the 11% limit, it must obtain approval from its members through a resolution passed at a general meeting. This is subject to compliance with the guidelines provided in Schedule V of the Companies Act, 2013. Additionally, specific considerations must be taken into account during the computation of managerial remuneration[14].

Section 197 of the Companies Act, 2013, applies exclusively to Public Limited Companies and does not extend to Private Limited Companies. As a result, private companies are not bound by any restrictions on the amount of remuneration they can pay to their managerial personnel[15]. Furthermore, they are not obligated to adhere to the requirements outlined in Section 197 or Schedule V of the Act.

Under Section 197(9) of the Companies Act, 2013, if a director receives remuneration—directly or indirectly beyond the prescribed limits or without obtaining the necessary approvals under this section, “[16]they are required to return the excess amount to the company within two years or a shorter timeframe as determined by the company”. Until refunded, the director is obligated to hold the excess amount in trust for the company. Additionally, Section 197(10) restricts the company from waiving the recovery of such refundable sums unless approved by the shareholders through a special resolution within two years of the amount becoming refundable. “Furthermore, if the company has defaulted on payments to any bank, public financial institution, non-convertible debenture holders, or other secured creditors, it must first secure prior approval from these entities before proceeding with a waiver request”[17].

Section 199 of the Companies Act, 2013, “provides for the recovery of remuneration, including stock options, granted to designated Managerial Personnel when the benefits received by them exceed the amounts disclosed in the revised financial statements”[18].

Analysis of Laws on managerial Remuneration across different Jurisdiction

The Corporate Laws in different jurisdiction have some similarities while few differences do serve for transparency and fairness in the paid-out terms of managerial positions. Such variations reveal significant divergence in the approval of the remuneration given to these employees. In specific countries, the remuneration is submitted to the General Meeting of Shareholders (GSM) or to the governing bodies or Boards of Directors or, else, to the shareholders for demystification and transparency purpose. At the year end, remuneration reports are required to be published as per the stipulation regarding the managerial remuneration. Many countries make the reports also available to the public from the company’s website or an institution regulated by the CNMV.

Moreover, procedures to penalize the non-compliance or even exceeding of the remuneration amounts prescribed obviously differ amongst them. Clawback provisions have been inserted in some jurisdictions to minimize the possible loss of profits due to overpaid compensation from exercised company directors. Corporate Governance laws primarily focused on regulated the managerial remuneration in public or listed companies, there are few regulatory requirement for private company in this regard.

An analysis of corporate laws concerning managerial remuneration across various jurisdictions, it is evident that there is a pressing need to adopt a more standardized approach. This would enhance transparency, accountability, consistency, and comparability in corporate governance on a global scale.

Author: Rakesh Singh, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing

[1] Collins Dictionary. accessed January 14, 2025, https://www.collinsdictionary.com/

[2] Kang, L. S., & Nanda, P. (2017). How is managerial remuneration determined in India?. Journal of Accounting in Emerging Economies, 7(2), 154-172.

[3] Companies  Act, 2013, § 2(78)

[4] Income Tax Act, 1961, § 17(2)

[5] Corporate Governance Laws and Regulations Spain 2024-2025, accessed January 14, 2025, https://iclg.com/practice-areas/corporate-governance-laws-and-regulations/spain

[6] Companies  Act, 2006

[7] Companies  Act, 2006, § 234C

[8] Companies  Act, 2006, § 412

[9] Companies  Act, 2006, § 420

[10] Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, R.11

[11] Gregory J Holly, Grapsas Rebecca and Holland H Claire.(2021) Corporate Governance and Directors’ Duties in the United States: Overview, accessed January 14, 2025, https://law.stanford.edu/wp-content/uploads/2023/01/Corporate-Governance-and-Directors-Duties-in-the-United-States-Overview.pdf

[12] Ibid.

[13] Companies  Act, 2013, § 197

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] Companies  Act, 2013, § 199