Executive compensation: how does it work?

A company director is someone who is able to perform acts in the name and on behalf of the company. In some cases, he or she may also be the company's managing director.

In return for the amounts invested in shares, he or she receives a remuneration that differs from a salary. Choosing the optimum amount of remuneration is not easy, and depends on your resources.

However, your generosity can also contribute to the entry of new partners into the capital to help your company grow. The right balance must therefore be struck, and requires careful consideration.

The law strictly regulates the granting of remuneration in a number of texts

In some cases, they can even be deducted from the company's income. Here's how it works.

How are executives remunerated?

Directors may receive various forms of remuneration. The law provides for the payment of a fixed portion, generally determined on the basis of his or her contribution to the company. A variable component may also be added, depending on sales and the company's overall performance.

Some bylaws also allow executives to benefit from other financial products designed to enhance their profit-sharing, such as stock options, bonus shares or BSPCEs (bons de souscription de parts de créateurs d'entreprises).

As a general rule, companies set the conditions and levels of executive remuneration in their articles of association.

However, this method has one major drawback: you will need to amend the Articles of Association if you wish to modify the levels or conditions of executive remuneration (amount of the variable portion, number of free shares granted, etc.).

It is possible to be both a director and a partner in the company. In this case, you can combine remuneration with dividend payments. These different types of income are not taxed in the same way. Their taxation depends on the assets of the partner and/or manager. Carefully examine the consequences of paying each type of income, so as to choose the most tax-efficient option.

Last but not least, it is possible to pay no remuneration at all to the manager.

How can you reduce your company's tax bill by remunerating its manager?

The tax deductibility of executive compensation depends on the company's tax regime.

In the case of a company subject to corporate income tax, executive compensation can be deducted from the taxable profit on which corporate income tax is calculated (currently at a rate of 31%). Thus, the higher the executive's remuneration, the more it contributes to reducing the company's tax burden.

To achieve this, the tax authorities must recognize that the executive has indeed carried out substantial work, and that the remuneration paid is consistent with the tasks performed.

If the tax authorities deem the remuneration to be excessive and inconsistent, it must be added back to the company's taxable profit.

It is important to note that dividends are not subject to this deduction.

However, their tax treatment is generally more attractive. For family-owned SARLs, managers' remuneration cannot be deducted from profits.

For SCIs (Sociétés Civiles Immobilières) subject to income tax, it is forbidden to deduct the remuneration received from the company's profits. However, it is possible toopt for a SCI subject to corporate income tax at the time of its creation, in order to make them deductible. This choice must be made when the articles of association are drawn up.

Executive compensation is therefore a complex subject that deserves careful consideration to ensure that you make the best "win-win" choice.

In fact, the type of remuneration paid depends above all on the work performed by the executive within the company and the structure of his or her personal assets.

On the other hand, the law lays down conditions that are sometimes restrictive and that must be complied with or risk being subject to a tax reassessment.