Accounting for Director Remuneration
Director’s Remuneration is the amount the company paid for the director in exchange for their service. The company needs to pay the remuneration to the director in exchange for their service. Similar to the employee to require salary in order to work for the company.
The remuneration includes both cash and other compensation which the company provides to the director. Some companies provide various types of remuneration to the directors to motivate them to work for company.
Remuneration is the fee which we pay to someone in exchange for the service. For the company, it refers to the total compensation paid to the employees. It includes the salary, performance bonus, OT, retirement plan, and other financial benefits from the employers.
Board of directors is a group of people who represent the shareholders and they work for the best interest of shareholders. They are divided into executive directors and non-executive directors. Executive directors are the top management of the company that includes CEO, CFO, COO, and so on. They are working for the company and have a direct influence on the company strategy. Nonexecutive directors are not working in the company, they may be the executive in other companies. They play an important role to protect the shareholders’ interest and reduce the principle-agent problem.
Director Remuneration Components
Director remuneration is the package that company provide to the director, it includes many components such as;
- Basic Pay: it is the minimum payment that company paid to the director regardless of the company performance.
- Performance bonus: it is the additional payment that company paid to director with a certain condition.
- Pension contribution: it is the company paid to the director’s retirement plan to save for the future.
- Other benefits such as car, insurance, and so on.
Who Set the Director Remuneration?
As the BoD is the top management of the company, so it is very hard to set the remuneration package for them. It will be a conflict of interest between director and shareholder as they are the approval over the package.
In order to minimize such a problem, BoD will assign the remuneration committee who consists of only the non-executive directors. The remuneration committee is the one that prepares the remuneration policy for the director. The policy is good enough to attract talented people to stay within the company. The policy is also designed to motivate directors to work for long-term interest of shareholders. The remuneration package should consist of the performance bonus, long-term target, share option, and pension fund.
Remuneration policy must be approved by the shareholders during the company’s general meeting. After approval, the remuneration package must follow the policy. If they want to change, it must be going through the shareholder approval again. The remuneration policy must be reviewed every three years to ensure that it is properly aligned with the company business.
Director Remuneration Journal Entry
Director remuneration will include in the income statement as the expense which will deduct the profit.
| Accounts | Debit | Credit |
|---|---|---|
| Director Remuneration Expense | 000 | |
| Cash/AP | 000 |
Director remuneration express will presented on the income statement and decrease the company profit. Cash will be decreased from company balance sheet.
Example
Company ABC has 3 executive directors and 2 non-executive directors. On 01 April, the remuneration committee decide to pay the $ 10,000 to each director. However, due to the payment process and cash flow issue, the payment is delayed.
On 20 April, the company has made a payment of $ 50,000 to all directors. Please prepare the journal entries for the remuneration package.
On 01 April, the company has approved the remuneration package even the payment does not complete yet, but we have to record the expense.
The journal entry should be debiting remuneration expense and credit payable. It is an obligation that company needs to complete in the future.
| Accounts | Debit | Credit |
|---|---|---|
| Director Remuneration Expense | 50,000 | |
| Remuneration Payable | 50,000 |
Director remuneration expense will present on the income statement while the payable will present on balance sheet under the current liability section.
On 20 April, the company makes payment to all directors, so accountant needs to make the journal entry as well. They need to debiti payable and credit cash.
| Accounts | Debit | Credit |
|---|---|---|
| Remuneration Payable | 50,000 | |
| Cash | 000 |
Remuneration payable will be removed as the company settle the obligation to pay the directors.