Company directors normally get paid for their services through a salary, directors’ fees or dividends. Directors only receive payment for services if this is provided by the organisation’s constitution or approved by a resolution of shareholders. Companies have flexibility in determining how to pay directors and can vary the company constitution to reflect alternate arrangements.
Difference between executive directors and non-executive directors?
Directors may be classified as non-executive directors or executive directors. Executive directors are full-time employees of the company with day-to-day responsibilities. Non-executive directors are paid for their role as directors of the company, taking into account their directorial duties, their experience, reputation and other skills they bring to the position.
The directors’ salary and bonuses, also known as executive remuneration, is paid to executives in pursuance of their contract with the organisation. If you are employed in a role other than a director, you can be paid a salary similar to other employees. Companies are also required to pay a superannuation guarantee at the rate of 9.5%.
Directors’ fees are the compensation for the services a company director performs. There are two main reasons for directors being entitled to fees as opposed to salaries. Firstly, they may receive fees if they are also not employees of the company and meet certain procedural requirements. The second reason directors may be paid fees is if shareholders approve a resolution to pay them. The fees generally represent the upper limit approved to remunerate directors. Directors with extra workloads, such as the chairman and directors sitting on board subcommittees, will be paid more in recognition of their additional responsibilities.
The determination of the amount for directors’ fees is normally made by the board, although it can be decided by the shareholders directly. In companies with a number of shareholders it will not be practical for shareholders to determine the amount to be paid to the board, so the board will often recommend the amount of remuneration. However, smaller family-run companies or subsidiaries of another company may allow the owners to set the amount of remuneration directly.
The board or the shareholders will determine fees based on company-specific factors such as the size, nature and profitability of the company, the complexity of operations and the responsibilities of directors. In addition, the director’s qualifications, experience, time commitment, performance, and special duties will also be relevant. External factors such as the business and economic conditions for the company will also impact fees.
It is important to note that there are specific rules that apply to approval of fees for listed companies, non-listed-for profit companies, not-for-profit companies and financial institutions (i.e. banks, building societies and insurance companies). For example, listed companies under s 300A of the Corporations Act 2001 (Cth) must present a remuneration report to shareholders at every annual general meeting. It must include:
- The board’s policies for determining the nature and amount of remuneration paid to key management personnel (which includes any director);
- The link between the policies and company performance, and
- An explanation for performance challenges and actual remuneration paid to key management personnel.
Although a director may not be a company employee, directors’ fees are subject to superannuation and are calculated based on ordinary time earnings. This refers to the services provided during their ordinary hours of work as outlined in the agreement they have with the company, such as the company constitution.
The fees also may cover directors’ travelling expenses and other properly incurred expenses from:
- Attending directors’ meetings or meetings of committees of directors;
- Attending any general meetings of the company;
- In connection with the company’s business.
Payment by Dividends
Dividends are the payments made to shareholders by the company based on the profits the company has made in a certain period. Directors receive dividends if they hold shares that entitle them to a share of the company’s profits. Also, dividend payments are decided by the company’s directors and generally will be distributed if the company has retained profits.
However, s 254T(1) of the Corporations Act 2001 (Cth) outlines that a company must not pay a dividend unless:
- The company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend; and
- The dividend payment must be fair and reasonable to all shareholders; and
- The payment of the dividend does not materially prejudice the company’s ability to pay its creditors.
The above test is intended to allow a company with sufficient cash to pay a dividend, even if its profits were reduced by non-cash expenses.
It is in the shareholders’ interests to adequately remunerate directors to attract the best candidates to lead the company. Remuneration should account for the value directors bring to the company, their duties and the legal liability assumed by directors on behalf of shareholders.
If you need any assistance with determining payment for company directors, contact our lawyers using the form on this page, or call us on 1300 337 997.