The requirement concerns each director and a median
Section 197(12) of the Companies Act, 2013 requires every listed company to disclose in its Board's report the ratio of each director's remuneration to median employee remuneration, with other prescribed details. This guide addresses the calculation evidence for that ratio. Confirm listed-company status under the applicable company-law definition and requirements; do not infer applicability solely from a casual description that the entity has listed instruments. Companies Act, 2013, section 197(12), ICSI e-book.
Establish the remuneration population before sorting
Reconcile the financial year, employee population and remuneration amounts to the applicable disclosure requirements and payroll evidence. Document treatment of joiners, leavers, part-year service, unpaid periods and excluded populations under the governing requirements. The examples expressly assume that this scope and measurement review has already been completed. They do not create a rule that every person on a payroll extract must be included or that every amount should be annualised. Companies Act, 2013, section 197(12), ICSI e-book.
Calculate the median correctly
Sort the supported observations from lowest to highest. For an odd count, select the middle observation. For an even count, average the two middle observations. This differs from the arithmetic mean of the entire population. One unusually high amount can move the mean sharply without changing the median in the same way. Preserve the sorted population and identifiers so another reviewer can reproduce the result. Companies Act, 2013, section 197(12), ICSI e-book.
Use a separate numerator for each director
Divide each properly determined director-remuneration amount by the same supported employee median for that disclosure population and period. A total of all directors' remuneration divided by the median is not the individual ratio requested by the subsection. Confirm the numerator's legal classification and period basis rather than substituting an incomplete salary-only ledger. Companies Act, 2013, section 197(12), ICSI e-book.
Explain denominator effects and exceptional cases
A ratio can fall because median employee remuneration rose even where the director's amount stayed constant. Retain comparative calculations to distinguish those effects. A zero denominator cannot produce a valid finite ratio; do not present it as zero times or silently divide by a small substitute. Review the population and basis and determine an appropriately explained disclosure conclusion. Display rounding should follow an adopted consistent policy without concealing calculation differences. Companies Act, 2013, section 197(12), ICSI e-book.
Keep this working within its scope
The ratio is not a statutory remuneration ceiling, a general test of fairness or a substitute for section 197 limit-and-approval analysis. Section 197(12) also refers to other prescribed details; this focused ratio working is not an exhaustive Board-report disclosure checklist or a replacement for the applicable rules and securities-law review. All example employee amounts are fictional, in lakh rupees for a common supported period. Companies Act, 2013, section 197(12), ICSI e-book.
Applicable primary references
Companies Act, 2013, section 197(12), ICSI e-book
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Odd employee count
The supported employee amounts are ₹2 lakh, ₹3 lakh, ₹4 lakh, ₹5 lakh and ₹6 lakh. The median is the third amount, ₹4 lakh. A director's properly determined remuneration of ₹60 lakh gives 60 ÷ 4 = 15 times. The population's ₹20 lakh total is not the denominator.
Illustrative example 2: Even employee count
The supported sorted amounts are ₹2 lakh, ₹3 lakh, ₹5 lakh and ₹8 lakh. Median is (3 + 5) ÷ 2 = ₹4 lakh. Director remuneration of ₹72 lakh gives 18 times. Selecting only ₹3 lakh or ₹5 lakh would not calculate the median of this even population.
Illustrative example 3: An outlier changes the mean
Supported employee amounts are ₹2 lakh, ₹3 lakh, ₹4 lakh, ₹5 lakh and ₹100 lakh. Their total is ₹114 lakh and arithmetic mean ₹22.8 lakh, but median remains ₹4 lakh. For director remuneration ₹80 lakh, the ratio to the median is 20 times; the mean must not silently replace it.
Illustrative example 4: Two directors need two ratios
With supported employee median ₹4 lakh, director A remuneration ₹60 lakh gives 15 times and director B remuneration ₹100 lakh gives 25 times. Combined director remuneration is ₹160 lakh and its aggregate ratio 40 times. That 40-times aggregate does not replace the separate 15-times and 25-times disclosures.
Illustrative example 5: Median movement explains a ratio change
A director's amount stays at ₹60 lakh. Supported employee median rises from ₹4 lakh to ₹4.4 lakh, a 10% increase. The ratio moves from 15 times to approximately 13.64 times, rounded to two decimals. This diagnostic shows a denominator effect, not a cut in the director's remuneration.
Illustrative example 6: Zero-median diagnostic
Assume the properly reviewed model population legitimately contains amounts ₹0, ₹0, ₹0, ₹3 lakh and ₹4 lakh. Median is ₹0. A director amount of ₹50 lakh cannot be divided by that median to obtain a finite ratio. Flag the undefined calculation and review the appropriate explanation; do not report zero times or invent a non-zero denominator.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm company-law applicability | Listed-company status and relevant disclosure framework. |
| 2 | Fix the reporting period | Financial year and consistent remuneration measurement basis. |
| 3 | Validate the employee population | Payroll reconciliation and supported inclusions/exclusions. |
| 4 | Validate remuneration amounts | Relevant components, part-period treatment and source records. |
| 5 | Sort the observations | Identifier-linked ascending population. |
| 6 | Compute the median | Odd/even count and middle-observation calculation. |
| 7 | Build each director numerator | Director-wise amounts and classification evidence. |
| 8 | Calculate and round consistently | Unrounded ratios, display policy and zero-denominator checks. |
| 9 | Explain comparative movements | Numerator changes versus employee-median effects. |
| 10 | Complete the Board-report review | Ratio working plus separately required other disclosures and approvals. |
Sixteen practitioner FAQs
1. Which section requires the ratio?
Section 197(12) of the Companies Act, 2013.
2. Where does the statutory disclosure appear?
In the listed company's Board's report, subject to the applicable framework.
3. Does one combined director ratio answer the requirement?
No. The subsection refers to each director's remuneration ratio.
4. Is the employee mean the same as the median?
No. They are different statistical measures.
5. How is an odd-count median calculated?
Sort the amounts and select the middle observation.
6. How is an even-count median calculated?
Average the two middle observations in the sorted population.
7. Does an extreme salary always change the median dramatically?
Not necessarily. The location of the middle observations controls the median.
8. Can employee totals be used as the denominator?
Not for this median-remuneration ratio.
9. Does a payroll export alone establish the correct population?
No. Reconcile it to the applicable legal and remuneration-measurement requirements.
10. Does the guide mandate annualisation for every joiner?
No. Determine the governing period and population treatment separately.
11. Can a ratio change while director remuneration is unchanged?
Yes. A change in the employee median changes the ratio.
12. What if the median is zero?
The division is undefined; investigate and explain rather than fabricate a finite number.
13. Are the examples real employee data?
No. They are fictional populations with expressly assumed scope conclusions.
14. Does the ratio itself impose a pay cap?
No. Review remuneration limits and approvals separately.
15. Is this the complete prescribed disclosure list?
No. Other prescribed details and relevant securities-law requirements need separate review.
16. What makes the result reproducible?
The supported period, population, sorted amounts, median, director-wise numerators and rounding record.
Conclusion
Prepare each director’s remuneration-to-employee-median ratio under section 197(12), with a supported population, correct median and clear denominator checks.