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A common question we get from clients is, “How do company directors get paid?”
There are actually several ways that directors can be compensated, and the right approach ultimately depends on your business structure and objectives in 2025.
The three most common methods are:
- Paying directors fees as an independent contractor
- Paying the director a salary as an internal employee
- Compensating the director via equity or options
In this article, we’ll explain each of these methods in detail and discuss the implications for your company, so you can determine which arrangement best aligns with your current business goals.
How To Pay A Company Director
Directors Fees via Contract
The first method is to pay directors fees under a service agreement – often referred to as a Director’s Service Agreement. Under this arrangement, the fees are provided in exchange for the director’s expertise and oversight. The fee amount typically correlates with the volume and complexity of work undertaken as well as what the company can reasonably afford.
When drafting a Director’s Service Agreement, it’s essential to consider factors such as:
- The director’s specific duties and responsibilities
- The fee amount and schedule of payment
- Reimbursement of expenses, including travel and meals
- Performance expectations and measurable obligations
- Termination conditions and notice periods
Director as an Internal Employee
If a director plays an ongoing, integral role in the day-to-day operations of the company, they may be engaged as an internal employee rather than as an independent contractor. This is particularly relevant if the director also holds another key position within the company—such as Chief Executive Officer.
When a director is employed, they receive a salary similar to any other employee and are entitled to all statutory employee benefits. This includes entitlements under the National Employment Standards (NES) as administered by the Fair Work Commission. For further details on employee rights in 2025, our recent guide on Employee Share Option Plans offers additional insights into structuring remuneration.
Directors employed on a full-time or permanent part-time basis are typically entitled to:
- Leave entitlements such as long service, public holidays, parental and annual leave
- Limits on weekly working hours
- Minimum wage requirements and penalty rates where applicable
- Flexible work arrangements, including options for permanent, casual, or hybrid roles
- Appropriate notice periods for leave
Share or Options
Many early-stage startups may not have the cash flow to pay directors a regular salary or fee. In these instances, companies often opt to compensate directors through equity or options. This arrangement allows you to reward directors for their commitment and align their interests with the long-term success of the company.
Directors can receive shares or options through various forms of agreements, which might be documented via:
- An Employee Share Option Plan – these plans can permit directors to benefit even if they are not classified as employees
- A FAST Agreement specifically tailored for startup environments; or
- A Sweat Equity Agreement which rewards contribution over time
While these agreements do not provide immediate cash compensation, directors might see significant long-term benefits if the company’s value increases or if dividends are issued. It’s also common practice to include vesting conditions that require directors to remain engaged with the company for a specified period before they can fully benefit from their shares or options.
Other Considerations
Beyond choosing a payment method, it is crucial that the company reviews its existing Shareholders Agreement and Constitution to determine if there are any restrictions or guidelines on director remuneration. These documents may outline caps on fees or necessitate specific approvals before setting director payments.
Additionally, it is best practice for all directors to sign a Director’s Deed of Access & Indemnity. This agreement helps protect directors against potential liabilities and risks associated with their role.
As part of ensuring a robust remuneration structure in 2025, many companies are now also utilising our Legal Health Check service. This assessment reviews your current contractual arrangements, including director compensation, to ensure compliance with updated tax treatments and employment regulations, which have evolved to better balance shareholder and director interests.
Need Help?
There are multiple ways to remunerate a company director, but the best method will depend on the unique needs and goals of your business in today’s climate. Whether you’re a startup or an established company, getting your director arrangements right is key.
It’s always best to consult a legal professional before finalising any remuneration structure, particularly given how complex these arrangements can become. At Sprintlaw, we offer tailored legal advice and can help you navigate everything from drafting a Director’s Service Agreement to reviewing your Shareholders Agreement and Company Set-Up requirements.
If you would like a consultation on your options, please don’t hesitate to reach out to our team of legal consultants at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat. We’re here to ensure that your director remuneration strategy is both compliant and strategically aligned with your business vision for 2025 and beyond.
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