Understanding the Median Remuneration under the Companies Act

Median remuneration is one of the ways of corporate governance brought in the Company’s Act of 2013 in India. It is a very important factor when it comes to the evaluation of income equality in organizations. This provision is aimed at addressing the widening pay disparities in organizations and clearly provides an overview of remuneration practices structured in the company for stakeholders.

This blog takes a closer look at median remuneration, its legal backdrop, and practical steps involved in calculation alongside challenges experienced by companies when implementing provisions.

Introduction

The underlining aim of disclosure requirement of ‘median remuneration’ is to justify 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 bound to disclose in the report of the Board the ratio of the remuneration paid of each director to the median remuneration of the employee.

Moreover, according to rule 5 to 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

Normally, the term median means “middle value” ; its function is to estimate the average wages which 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 every financial year, the ratio of each director’s remuneration to the median remuneration of all employees.

The meaning of the term ‘median’ has been explained under explanation to rule no 5 of Companies (Appointment & Remuneration of Managerial Personnel) Rules 2014.

Said explanation of rule 5 defined that term ‘median’ being a numerical value that separates the higher half of a group of people from the lower half. Also, the median of a finite list of numbers is defined as a way that involves listing all the observation from the lowest value to the highest value and taking a middle number.

Further, if the number of observation is also even then median will be an average of the two middle values. Through understanding the importance of this requirement, the enterprises are able to adopt their leadership policies regarding equitable governances and transparency.

Calculation of Median Remuneration of the Employees

As provided in Section 197(12), the Companies Act, 2013, the following is the simple formula that can be used to calculate the payment relating to the median of the employee pay.

Step 1. Find the Median Remuneration

The first step is to determine your employees’ median salary. 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

This 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

This data in the table has been arranged in ascending order

X = 6÷  2 = 3^rd     ;          Y  =   ( 3+1 ) = 4^th         

Median Remuneration     =     (X + Y)  ÷  2 

(650000 + 700000) ÷  2  =   Rs. 675000  

Step 2.  Calculation of the Ratio

After calculating the median pay, divide the remuneration of the director by this median to get 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

1. Highlights Pay Equity- It keeps encouraging the organizations to keep fair pay practices going by closing off the remuneration gap between executive remuneration and employee remuneration.
2. Promotes Accountability- It promotes the need for companies to explain pay disparities and maintain ethical compensation policies.
3. Support the Global standards- It upholds international standards such as ESG that relates fairness, inclusiveness, and responsible governance.
4. It strengthens transparency- It is clear insight into the pay structure of a company, hence it fosters trust from employees, investors, and stakeholders.

Challenges in Calculating Median Remuneration

The computation looks intuitive, but companies often encounter obstacles in practice like-

1. Workforce Diversity- Companies with a diverse workforce, consisting of part-time and outsourced workers, would find it difficult to clearly define the dataset to be included.
2. Complex Organizational Structures- Multinational corporations or companies consisting of many divisions could face logistic and data gathering difficulties.
3. Risk of Misinterpretation- Median pay cannot fully reveal regional factors, for example, regional differences in pay or the impact of workforce composition.
4. Public Scrutiny- Whereas the most extremes of executive pay and median remuneration can attract much criticism, even if legitimate given market conditions.

Conclusion

Median remuneration is an important measure ensuring the transparency and equity towards corporate India. While mandating the disclosure of the same under the Companies Act, 2013 made the corporate introspect their pay structure and align them with fair principles of good governance.

While issues with calculation and interpretation remain, organizations may welcome this requirement as a possibility of building stakeholder trust and improving their reputation. The median of remunerations will remain an important 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.

https://www.icsi.edu/home/

https://www.mca.gov.in/