Guide to Directors’ Remuneration for Small Business Owners

If you’re looking to get a better understanding of the remuneration or compensation options for company directors, whether to ensure compliance or optimise your small business’s financial strategy, this guide will give you a clear and comprehensive overview. 

Defining Director’s Compensation and Decision Authority

Directors’ compensation is the monetary reward directors of a company receive for their leadership and governance roles. So, how do you determine directors’ remuneration?

Essentially, directors’ remuneration is determined by factors like business performance (profits, revenue growth), industry standards, directors’ specific roles and responsibilities, and shareholder expectations.

While directors are generally not entitled to remuneration, if a company chooses to pay directors, this must be approved through a resolution addressing this matter at a general meeting, as mandated by Section 169 of the Companies Act. 

Payment Options for Directors

Salary

To clarify the difference between remuneration vs salary, remuneration covers all forms of compensation, while salary is just one component.

In the case of directors, they may receive a salary through their employment contracts, reflecting their role as employees rather than their directorial duties. According to Section 169 of the Companies Act, this salary does not require shareholder approval at a general meeting, though it must still be approved by the board of directors.

Director’s fees

Director’s fees are another form of payment. But what is the director’s fee exactly? 

Director’s fees are structured payments made to directors in recognition of their oversight and governance responsibilities. These fees are given for fulfilling board-level duties.

Opting for dividends

“Is directors’ remuneration the same as dividends? Many business leaders or board members may ask this as they assess their compensation options or strategies for tax efficiency.

It’s essential to understand that dividends are profit distributions, separate from other forms of remuneration such as salaries or fees. While dividends can be a part of overall compensation, they are different because they are not paid for services rendered but are tied to the business’s profitability and are generally tax-exempt under Singapore’s one-tier corporate tax system. 

However, dividends from co-operatives, foreign-sourced dividends received through a partnership, and income from Real Estate Investment Trusts (REITs), when derived through a partnership, are all subject to tax.

Transparency in Director’s Compensation Reporting

Directors’ salaries are classified as business expenses, meaning they must be disclosed in the company’s annual report. On the other hand, while disclosing directors’ fees isn’t legally required, it is considered good practice for businesses in Singapore to report these payments voluntarily. 

Employer CPF Obligations for Director Fees

While CPF contributions are generally not required for director fees, if a director is also employed under a contract of service, director fee CPF contributions would apply to any wages received in that capacity.

Tax Implications of Director’s Remuneration

Director’s fees in Singapore are taxed only when the director becomes entitled to the payment. This typically occurs at the company’s Annual General Meeting (AGM) or when the board formally approves the fees.

Regulations Governing Final Payouts to Directors

Under Section 168 of the Companies Act, businesses are prohibited from remunerating directors for loss of office unless the specifics of such compensation, including its amount, have been disclosed and approved in a general meeting.

However, under the provisions of Section 168(1A), approval at a general meeting is not required if the remuneration is less than the director’s fees from the previous year and the details have been disclosed before the payment.

Crafting an Effective Remuneration Strategy

To create an effective remuneration strategy for directors that aligns with financial efficiency and compliance, consider the following points:

• Evaluate company performance: Tie remuneration levels to the business’s financial health and growth metrics to ensure that compensation reflects the business’s success and director contributions. 
• Benchmark industry standards: Compare compensation packages with similar roles in your industry to ensure competitiveness and fairness.
• Incorporate flexibility: Use a mix of fixed salaries, performance-based bonuses, and non-cash benefits to cater to different needs and preferences.
• Seek professional advice: Engage tax services or bookkeeping services to ensure that your remuneration practices comply with legal standards and are financially prudent. These professionals can help navigate complex tax regulations and manage payroll efficiently.
• Ensure transparency: Maintain open communication with shareholders about compensation policies and practices to build trust and facilitate approvals when required.

Optimise Directors’ Remuneration with Professional Support

To streamline your directors’ remuneration processes, Singapore Corporate Services (SCS), a leading corporate service provider, offers tailored solutions. These include professional bookkeeping services to help small businesses in Singapore maintain accurate financial records and provide oversight of the business’s financial health, ensuring that directors’ remuneration aligns with the business’s performance. Additionally, our tax services help maximise tax efficiency and ensure compliance with IRAS obligations.

Let us handle the details so you can focus on growing your business confidently.

NOTE: The information provided in this article is accurate as of its publication date. As regulations are subject to change, we recommend contacting us for the latest information specific to your needs.

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