Director remuneration: how much can your SME afford to pay?
Build a director remuneration budget that your SME can sustain: total company cost, payment timing, cash flow scenarios and the checks to complete.
Contents
- What personal income needs to be funded?
- How do you calculate the full cost to the company?
- How do dividends and trademark royalties fit into the decision?
- How should remuneration enter the cash flow forecast?
- What if the budget cannot support the desired income?
- Which documents help support the decision?
Sustainable director remuneration covers personal needs while leaving the company enough cash to operate and invest. To establish an affordable amount, compare the director’s target income with the full cost to the company and the dates on which payments fall due.
Start with a budget. Regular remuneration, dividends and any other arrangements can then be assessed and validated against the circumstances of both the director and the business.
Scope: the legal and tax arrangements discussed in this guide concern a French company. The cash planning method can be used elsewhere, with assumptions adapted to the relevant jurisdiction. This is not a guide to UK remuneration rules.
What personal income needs to be funded?
First, specify the income the director wants to receive and whether the target is before or after personal income tax.
Separate regular monthly needs from an additional annual target. A stable income throughout the year creates different constraints from a one-off payment considered after reviewing the accounts and cash position.
This distinction makes scenarios comparable. It prevents a monthly net salary, an annual gross dividend and an estimated tax saving from being treated as equivalent figures.
How do you calculate the full cost to the company?
The budget should show every cash flow associated with the option being considered, together with its payment date. The amount reaching the director’s personal bank account does not necessarily represent the company’s total cash outflow.
Prepare a short assessment for each scenario:
| Item to establish | Question to answer |
|---|---|
| Director’s income | What amount remains available before and after personal income tax? |
| Company cost | Which payments, social contributions, fees and other costs need funding? |
| Timing | When does each cash outflow occur? |
| Conditions | Which approvals and formalities are required? |
| Consequences | What are the implications for social protection, cash flow and business plans? |
Tax and social contribution assumptions should be prepared or validated by the relevant advisers. The CFO then incorporates those assumptions into the budget and forecast.
How do dividends and trademark royalties fit into the decision?
Dividends need to be assessed against shareholders’ rights, the company’s position and the conditions for a distribution. Their tax treatment also depends on the recipient. The French government’s Service Public guidance on dividends (in French) provides a starting point for that discussion.
A trademark royalty serves a different purpose: it pays for the right to use a trademark. An assessment must consider ownership, economic value, actual use and the terms of the licence. A royalty should not be treated as a remuneration item that can simply replace a salary.
The RemUp guide to trademark royalties (in French) explains this specialist’s approach. The CFO’s next step is to incorporate the project’s assumptions into the forecast accounts and payment schedule. The legal classification and legal, tax and social contribution implications still require validation by the appropriate advisers.
An estimated tax saving alone does not establish that an arrangement suits the company. Its fees, obligations and cash outflows also need to be examined.
How should remuneration enter the cash flow forecast?
The annual budget shows the overall cost. The cash flow forecast shows when the company will actually need the funds.
Payments to the director should appear alongside payroll, supplier payments, taxes, loan repayments and investment. Customer receipts should be scheduled for the dates on which payment is realistically expected.
Our guide to cash flow and forecasting explains the distinction between accounting profit and cash movements.
One approach is to compare a base scenario with a delayed-collection scenario. For each remuneration option, examine the lowest forecast cash balance and the expenditure that could become difficult to fund.
What if the budget cannot support the desired income?
Make the gap visible before taking on commitments.
The director can review the proposed amount, its timing and other business decisions. Some expenditure can be reconsidered; other payments reflect obligations or existing commitments. Any changes must take account of the rules that apply to each type of payment.
The cause of the gap matters too. A delayed customer payment calls for a different response from an operation that remains insufficiently profitable. Repeatedly borrowing to fund remuneration does not resolve an operating imbalance.
Which documents help support the decision?
A useful review can start with:
- The latest annual accounts and recent management accounts.
- A breakdown of current remuneration and payments.
- Customer receivables and supplier payables, including due dates.
- The schedule of taxes, social contributions and loan payments.
- The recruitment and investment budget.
- Advisers’ calculations, with their dates and assumptions.
- The contracts and supporting documents for any arrangements under consideration.
The CFO reconciles this information and prepares the scenarios. The director decides with the relevant advisers, then identifies the events that should trigger a fresh review: a downturn, delayed receipts, recruitment or a change in personal circumstances.
At Iter Advisors, fractional CFO services combine budgeting, cash flow forecasting and decision support. The scope is defined around the available data and the company’s needs.