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Why Managerial Remuneration is an Important Parameter of Corporate Governance?

Why Managerial Remuneration is an Important Parameter of Corporate Governance?

Published on 15 September 2022 .Views 46 .Comments 0
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Managerial Remuneration simply refers to the remuneration or other benefits paid to the managerial person. Managerial remuneration is an important factor of corporate governance and hence in this article, we will be discussing what is managerial remuneration, why it is important to study, and what are the provisions for the same under the Companie Act.

Why Studying Managerial Remuneration is Important?

  • Managerial Remunerations are the remuneration and benefits given to the top management of the company like the Chief Executive Officer (CEO), Managing Director (MD), Board of Directors, etc.
  • Managerial Remuneration becomes an important parameter to look upon as a high amount of money is given to these Key Managerial Personnel (KMPs) from the profits of the company.
  • The remuneration paid to such KMPs can be found in the Annual Report of the company under the ‘Corporate Governance Report’ segment.
  • An Investor should check that the managerial remuneration should not be higher than the prescribed limit of the Companies Act.
  • Another factor that should be kept in mind while looking at the managerial remuneration of the company is that the growth in the salary of KMPs should follow the growth of the salary of the employees.

Provision of Companies Act for Managerial Remuneration:

Section 197 of the Companies Act, 2013:

  • Under this provision, Total Managerial Remuneration payable by a public company in a financial year should not exceed 11% of the Net Profit of the company.
  • There is a conditions to this provision which are:

o   If the MD, Whole-Time Director (WTD), or Manager is a single individual then his/her remuneration should not exceed 5% of the net profit.

o   If there is more than one MD, WTD, or Manager then the total remuneration to these KMPs should not exceed 10% of the net profit.

o   While the remuneration to the other directors who are not MD, WTD, or managers, then their salary should not exceed 3% of the net profit. And if it is not the case then the remuneration to these KMPs should not exceed 1% of the net profit.

  • Disclosures regarding the remuneration paid to the KMPs should be disclosed in the Auditor’s report section of the annual report of the company.
  • Also, a company has to look that the salary growth of the KMPs should fall in line with the growth in the median salary of the employee.

What Should Investors Look For?

An Investor needs to observe the trends of the salary growth of these higher authorities personnel. Generally, the higher growth in the salary of KMPs against lower growth in the profit of the company is an indication of a red flag, which is an indication of the green flag, if it is the opposite.

Example: Kotak Mahindra Bank is an ideal example to understand this situation. The bank witnessed revenue growth of 10% on a 5-year CAGR basis, while profit grew by 24% on a 5-year CAGR basis. Interestingly despite the strong double-digit growth in profitability, the company’s managerial remuneration just grew by 2% on a 5-year basis. This is an indel example for the investors of what they should look for in the context of managerial remuneration while reading the annual report of a company.

What Should Investors Do?

Managerial Remuneration is an important Corporate Governance factor and hence investors should have a close eye on the trend of the relation between the managerial personnel's salary and the growth of the company. As discussed, individuals should check that there is not a consistent red flag in terms of managerial remuneration of a company and hence follow due diligence before making any investment decision.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.

Originally Published On:https://blog.investyadnya.in/why-managerial-remuneration-is-an-important-parameter-of-corporate-governance/

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