Median remuneration is one of the ways of corporate governance brought in the Company’s Act of 2013 in India. It is a crucial factor when evaluating income equality in organizations. This provision aims to address the widening pay disparities in organizations and provides a clear overview of the remuneration practices structured within the company for stakeholders.
This blog provides a closer look at median remuneration, its legal framework, and the practical steps involved in calculation, as well as the challenges companies face when implementing these provisions.
Introduction
The underlying aim of the disclosure requirement of ‘median remuneration’ is to justify the average pay earned by the employee as contrasted with the pay given to the Directors. According to section 197 (12) of the Companies Act, 2013, every listed company is bound to disclose in the report of the Board the ratio of the remuneration paid to each director to the median remuneration of the employee.
Moreover, according to Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the median remuneration of the employees of the company shall be included in the financial statement for each listed company under the same, and the ratio of the remuneration for each director.
Understanding the Median remuneration
Usually, the term “median” means “middle value“; its function is to estimate the average wage that an employee can be expected to earn in relation to the director’s pay.
Every listed company shall be required to include, within its Board’s Report for each financial year, the ratio of each director’s remuneration to the median compensation of all employees.
The meaning of the term ‘median’ has been explained under the explanation to Rule No. 5 of the Companies (Appointment & Remuneration of Managerial Personnel) Rules 2014.
The explanation of Rule 5 defines the term ‘median’ as a numerical value that separates the upper half of a group from the lower half. Additionally, the median of a finite list of numbers is defined as the middle value, obtained by listing all the observations from the lowest to the highest value.
Further, if the number of observations is also even, then the median will be the average of the two middle values. By understanding the importance of this requirement, enterprises can adopt effective leadership policies that promote equitable governance and transparency.
Calculation of Median Remuneration of the Employees
As provided in Section 197(12) of the Companies Act, 2013, the following is the simple formula that can be used to calculate the payment relating to the median of employee pay.
Step 1. Find the Median Remuneration
The first step is to determine the median salary of your employees. When you list all of your employees’ pay in ascending order, the median is the middle amount.
- Gather Salary Information- Collect all the salary information, including all the perks and allowances, for every employee.
- Count Your Employees- Calculate how many employees you have (let’s take this as number N).
Calculation of the Median-
1. If the total number of employees is “ODD“, then the median will be calculated as follows: The median is the salary at position-
(Total Number of Employees + l) ÷ 2
Example – If the Number of Employees is ODD
| S.no | Name of Employees | Amount (Rs) ** |
| 1. | Utpal | 400000 |
| 2. | Sakshi | 450000 |
| 3. | Ajay | 650000 |
| 4. | Rajesh | 700000 |
| 5. | Nishi | 750000 |
The data in the table has been arranged in ascending order
Median Remuneration = (Total Number of Employees + l) ÷ 2
(5+1) ÷ 2 = 3, i.e (Rs 650000)
2. If the total number of employees is “EVEN“, then the median will be calculated as follows:
The average of the salaries at positions
X = (Total Number of Employees) ÷ 2 ; Y = ( X+1 )
Median Remuneration = (X + Y) ÷ 2
Example – If the Number of Employees is EVEN
| S.no | Name of Employees | Amount (Rs) |
| 1. | Utkarsh | 450000 |
| 2. | Sakshi | 550000 |
| 3. | Vansh | 650000 |
| 4. | Rishav | 700000 |
| 5. | Nishi | 750000 |
| 6. | Harshit | 850000 |
The data in the table has been arranged in ascending order
X = 6÷ 2 = 3rd ; Y = ( 3+1 ) = 4th
Median Remuneration = (X + Y) ÷ 2
(650000 + 700000) ÷ 2 = Rs. 675000
Step 2. Calculation of the Ratio
After calculating the median pay, divide the director’s remuneration by this median to obtain the ratio.
Suppose if a director earns ₹2500000 and the median pay is ₹500000, the ratio would be 5. This shows that the director earns 5 times more than the median employee salary.
Step 3. Reporting the ratio
Finally, this obtained ratio needs to be disclosed in the company’s board report. This is one element of maintaining the norms of corporate governance and transparency.
Significance of Median Remuneration
- Highlights Pay Equity – It encourages organizations to maintain fair pay practices by closing the remuneration gap between executive and employee compensation.
- Promotes Accountability – It emphasizes the importance of companies disclosing pay disparities and maintaining ethical compensation policies.
- Support global standards – It upholds international standards, such as ESG, that relate to fairness, inclusiveness, and responsible governance.
- It strengthens transparency – it provides a clear insight into a company’s pay structure, thereby fostering trust among employees, investors, and stakeholders.
Challenges in Calculating Median Remuneration
The computation looks intuitive, but companies often encounter obstacles in practice, like-
- Workforce Diversity – Companies with a diverse workforce, comprising part-time and outsourced workers, would struggle to define the dataset to be included clearly.
- Complex Organizational Structures – Multinational corporations or companies consisting of many divisions may face logistical and data gathering difficulties.
- Risk of Misinterpretation – Median pay cannot fully account for regional factors, such as regional income differences or the impact of workforce composition.
- Public Scrutiny- Whereas the most extreme of executive pay and median remuneration can attract much criticism, even if legitimate, given market conditions.
Conclusion
Median remuneration is a crucial measure that ensures transparency and equity in corporate India. While mandating the disclosure of the same under the Companies Act, 2013, it made corporations introspect their pay structure and align it with the fair principles of good governance.
While issues with calculation and interpretation remain, organizations may welcome this requirement as an opportunity to build stakeholder trust and improve their reputation. The median of remunerations will remain an essential aspect of increasing accountability for sustainable development within a scenario of shifting corporate governance in India.
References
The Companies Act, 2013 (Act No. 18 of 2013)
The Companies (Appointment & Remuneration of Managerial Personnel) Rules, 2014.
