Business owners in Singapore must understand director’s remuneration. This knowledge ensures good governance and legal compliance. How you pay a director carries significant legal and tax implications. This guide explains the different ways to pay your company directors. We help you stay on the right side of regulations.
A director has no automatic right to payment for their services. A director’s role is a position of trust. The company’s constitution or a service contract must outline any payment. Alternatively, shareholders can approve it through a resolution.
The Different Ways to Pay a Director
Let’s explore the main methods for director’s remuneration in Singapore. Each method has different rules you need to follow.
1. Director’s Fees: For Fulfilling the Director Role
Companies pay director’s fees for a director’s oversight and service. This payment is common for Non-Executive Directors (NEDs). NEDs do not manage the company’s daily operations.
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Approval Process: Shareholders must explicitly approve director’s fees. They do this at a general meeting. This is a critical requirement under Singapore’s Companies Act. The company should present this resolution as a standalone matter. This practice ensures transparency and proper shareholder oversight. Companies typically approve these fees at the Annual General Meeting (AGM).
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Tax and CPF: The director pays income tax on these fees. However, you do not pay CPF contributions on director’s fees. The company must withhold tax on fees it pays to non-resident directors.
2. Salary: For Performing an Executive Role
A director holding an executive position can receive a salary. For example, a Managing Director or CEO earns a salary. The salary compensates them for their hands-on management duties.
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Approval Process: The Board of Directors approves an executive director’s salary. It is a management decision. The company does not usually need shareholder approval under Section 169. A formal employment contract usually outlines these remuneration terms.
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Tax and CPF: The director pays tax on their salary as employment income. Both the director and the company must make CPF contributions. This follows standard employment regulations.
3. Performance-Based Bonuses and Profit Sharing
Companies often link an executive director’s pay to performance. This aligns the director’s interests with those of shareholders. This can include annual bonuses or a share in company profits. The Board of Directors may determine the specific details. However, shareholders may need to approve unusually large bonuses. This ensures the payments are in the company’s best interest. The Remuneration Committee of a listed company sets these performance metrics.
4. Compensation for Loss of Office: The ‘Golden Parachute’
Companies sometimes pay a director upon their retirement or termination. People often call these payments ‘golden parachutes’. The law highly regulates these payments to protect shareholders. Generally, compensation for loss of office is unlawful. Shareholders must first approve the payment’s full details in a general meeting. This rule comes from Section 168 of the Companies Act. Specific exceptions exist, such as payments from a pre-existing contract.
5. Reimbursement of Expenses
Directors can claim reimbursement for proper business expenses. These include travel and accommodation for board meetings. This is a reimbursement, not pay. Therefore, it does not require shareholder approval. However, the company should document and approve it internally.
Disclosure and Transparency: A Pillar of Good Governance
The Singapore Exchange (SGX) mandates high transparency for director pay. Companies must include a detailed pay breakdown in their annual reports. This report covers each director and the CEO. Starting from FY2024, this disclosure must show exact amounts. It must also provide a percentage breakdown of pay components.
This transparency is a cornerstone of good corporate governance. It ensures pay is fair and linked to performance. The company must be able to justify it to shareholders.
Making the Right Choice for Your Company
Navigating director pay is a critical part of corporate management. You must ensure all payments are correctly categorised and approved. Accurate reporting is essential for legal and tax compliance.
If you have questions about structuring director’s remuneration, our team can help. We can ensure your company complies with the Singapore Companies Act. Contact the Raffles Corporate Services team at [email protected] for expert guidance.
Yours sincerely,
The editorial team at Raffles Corporate Services