A common question we get from clients is, “How do company directors get paid?”
There are actually a number of ways that directors can get paid, and this is a decision that really comes down to your business structure and your business goals.
The three main ways are:
- Paying directors fees, as an independent contractor
- Paying the director a salary, as an internal employee
- Paying the director via equity or options
In this article, we’ll go through each of these methods in detail and discuss the implications this would have for your company.
How To Pay A Company Director
Directors Fees via Contract
The first way directors fees are paid are via directors fees under a service agreement, also known as a Director’s Service Agreement.
Directors’ fees payable under a Director’s Service Agreement compensate directors for work they do as a director of the company. The amount of the fees will depend on the volume of work the director performs, and the amount the company can afford to pay.
In preparing a Director’s Service Agreement, it’s important to consider the following:
- Duties of the director
- Amount of director fees and timing of payment
- Additional costs (for example, travel and meal expenses)
- Obligations and expectations of the director
- Termination rights
Director As An Internal Employee
If a director is working continuously or substantially with the company, they may be engaged as an internal employee rather than a contractor. This is particularly likely to be the case if the director is also engaged in another role within the company (for example as the CEO).
If the director is an employee, they will be paid a salary like any other employee, and will be entitled to all statutory employee entitlements including under the National Employment Standards (NES) set out by the Fair Work Commission.
If they are employed on a full-time or permanent part-time basis, this may include:
- Leave entitlements, such as long service, public holidays, parental and annual leave
- A ceiling on weekly hours
- Minimum wage requirements
- Options for different work types i.e permanent and casual as well as flexible arrangements
- Notice of leave
Share or Options
Early stage startups often do not have the funds to pay directors a regular salary or fee. As such, they may offer to compensate directors by providing the director with shares or options in the company in exchange for their time and support.
Directors will usually receive shares or options under some form of agreement. This may be documented in numerous ways, depending on your business’ circumstances it may be via:
- an Employee Share Option Plan (which often permits the issue of options to directors even where they are not employees)
- a FAST Agreement; or
- a Sweat Equity Agreement
Under these kinds of agreements, while the director will not get any immediate cash compensation from acting as a director, they may benefit in the long term if the value of their options or shares significantly increases and/or if the company issues dividends to its shareholders.
If shares or options are being provided to directors, it’s common to set ‘vesting conditions’ which may state, for example, that the director must remain engaged by the company for a certain period of time in order to obtain the benefit of their shares or options.
In addition to the above, it’s important to note that when a director is being engaged by a company, the company should always check it’s Shareholders Agreement and Constitution to see if there are any rules or restrictions on the appointment and remuneration of directors. Sometimes these documents set out, for example, caps on director remuneration, or approvals required in order to establish director fees.
Additionally, it’s common to have all directors enter into a DIrector’s Deed of Access & Indemnity with the company, to help protect director’s against the risks associated with their position.
There are multiple ways to pay a director of a company, however, the right way will depend on the unique circumstances of your business and your business goals.
It’s always best to consult a legal professional before doing so, particularly given how complex documenting a director arrangement can be. We offer legal help and can answer your questions around business set up and how to approach paying company directors.
If you would like a consultation on your options, you can reach out to our team of legal consultants at 1800 730 617 or email@example.com for a free, no-obligations chat.
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