Key points
- Executive compensation covers salaries, bonuses, benefits in kind and other compensation linked to executives’ responsibilities.
- It often includes performance bonuses, stock options and benefits such as company housing or a company car.
- It varies with the type of entity, its size, the sector, the complexity of the tasks and whether the set objectives are achieved.
- Market practice and sector benchmarks shape the pay structure, so that the company remains attractive compared with similar organisations.
- The form of compensation has significant tax consequences: for example, the pay of a majority manager (gérant majoritaire) of an SARL (private limited liability company) subject to corporate income tax (IS) is taxed under the rules for wages and salaries (Article 62 of the French Tax Code, CGI).
- Social security contributions depend on status: the president (président) of an SAS (simplified joint-stock company), the chief executive officer (directeur général) of an SA (public limited company, société anonyme) and the minority manager of an SARL fall under the general social security scheme (Article L. 311-3 of the French Social Security Code, Code de la sécurité sociale).
Executive compensation is a subject that sparks much debate, both for its economic stakes and for its tax implications. The concept covers all the financial compensation granted to people holding management positions in a company. This compensation may include salaries, bonuses, benefits in kind or other forms of remuneration. Let us look together at the various factors that shape this complex compensation.
What is executive compensation?
Basically, executive compensation is the amount paid to company heads for their responsibilities and leadership. It can vary according to various factors, such as the type of entity managed, the service provided or the level of skill required. In general, this compensation is made up of several components intended to reward both the work done and the executive’s future commitment.
Unlike ordinary employees, executives often receive financial packages that include elements such as performance-based bonuses, stock options and specific benefits such as company housing or a company car. These elements are intended to attract and retain talent capable of carrying out a company’s overall strategy.
Factors that influence executive pay
Several elements play a significant role in determining the amounts paid to executives. The company’s articles of association, its size and its sector of activity are all relevant parameters. Other criteria include the complexity of the tasks assigned to the executive and their ability to meet or exceed the defined objectives. Regular contact with an employment law lawyer for executives and managers (in French) can be a wise way to navigate these complexities.
In addition, market practice and sector comparisons significantly affect the pay structure. Companies generally take care to align with the terms offered by similar organisations in order to remain attractive in the talent market. A detailed study of sector benchmarks thus helps to adjust executive compensation in the most appropriate way.
Tax and social security context of executive compensation in France
It is crucial to understand how executive compensation fits into the tax and social security system of the country where the company operates. Choices about the form of compensation have significant tax consequences for the company, but also for the executive personally.
How executive pay is taxed
The applicable tax regime directly affects the net compensation an executive receives. Wages and salaries form part of the overall income subject to income tax (Article 79 of the CGI). The remuneration paid to majority managers of an SARL subject to corporate income tax is taxed in the manager’s name under the rules for wages and salaries (Article 62 of the CGI). Every executive should therefore examine their status before making any tax decision.
The interaction between the executive’s personal taxation and corporate income tax leads to choices between different sources of income. This allocation must comply with the rules in force: an act motivated solely by the aim of evading or reducing tax constitutes an abuse of law (abus de droit) (Article L. 64 of the French Tax Procedure Code, Livre des procédures fiscales).
Interaction with social security contributions
Social security contributions are also an important aspect of executive compensation, since they increase the costs borne by the company. The president and other executives (dirigeants) of an SAS, the chairman of the board of directors and the chief executive officer of an SA, and the minority manager of an SARL fall under the general social security scheme (Article L. 311-3 of the Social Security Code). It is essential to understand the status of corporate officers (mandataires sociaux) clearly to see how these contributions affect your situation.
Some structures develop creative approaches to minimise the portion subject to contributions. However, decisions on exemption or tax reduction call for legal caution to avoid any counterproductive consequences.
Differences between types of executives and company forms
It is not only the nature of the business that determines compensation, but also its specific characteristics. For example, the legal distinctions between an SARL manager, an SAS executive and the head of a non-profit association introduce many nuances in terms of financial treatment.
Compensation of SAS executives
In a simplified joint-stock company (SAS), the articles of association set the conditions under which the company is managed (Article L. 227-5 of the French Commercial Code, Code de commerce): they can therefore designate the body competent to set executives’ compensation, which leaves wide organisational freedom. But it is also relevant to consider combining an employment contract with a corporate office (in French) when setting up this flexibility.
Agreements between the SAS and its president or other executives are also subject to the control procedure laid down in Article L. 227-10 of the Commercial Code.
Specific features of SARL managers’ compensation
In a private limited liability company (SARL), management is entrusted to one or more natural persons, who may or may not be shareholders (Article L. 223-18 of the Commercial Code). For social security purposes, the minority manager falls under the general scheme (Article L. 311-3, 11°, of the Social Security Code); for tax purposes, the remuneration of the majority manager of an SARL subject to corporate income tax is taxed under the rules for wages and salaries (Article 62 of the CGI).
In a public limited company (SA), the board of directors sets the compensation of its chairman (Article L. 225-47 of the Commercial Code) and that of the chief executive officer and deputy chief executive officers (directeurs généraux délégués) (Article L. 225-53). In listed companies, the remuneration policy for corporate officers is submitted to the general meeting for approval every year and whenever it is materially amended (Article L. 22-10-8); the general meeting also votes on the remuneration paid or awarded for the past financial year (Article L. 22-10-34). These votes are commonly known as “say on pay”.
How to set an effective executive remuneration policy
Companies succeed when they adopt a carefully considered strategic approach that reflects their overall objectives. Building a balanced remuneration system therefore requires anticipating potential challenges, combined with a thorough understanding of the individual and collective ambitions of the management committee.
Benchmarking and adapting to trends
The first step is to gather data on the compensation paid by comparable companies. This comparison then informs the decisions of the body responsible for setting compensation, for example the board of directors in a public limited company.
Forms of compensation such as deferred bonuses, share-based payment or long-term incentives can supplement fixed pay and align the executive’s interests with those of the company.
- Keep a constant eye on internal and external market fluctuations.
- Set measurable targets linked to achievable bonuses.
- Design a compensation plan that is both flexible and sustainable.
See also: optimising the executive’s tax position.
Considerations for small and medium-sized enterprises (SMEs)
For SMEs, the challenge is to reconcile limited resources with the wish to encourage executives’ commitment. Non-financial incentives can help.
Even when modest, these arrangements can have a real effect on executives’ motivation.
| Criterion | SARL manager | SAS executive |
|---|---|---|
| Management | One or more managers, who must be natural persons (Art. L. 223-18, Commercial Code) | Conditions set by the articles of association (Art. L. 227-5, Commercial Code) |
| Social security regime | General scheme for the minority manager (Art. L. 311-3, 11°, Social Security Code) | General scheme for the president and other executives (Art. L. 311-3, 23°, Social Security Code) |
| Taxation | Majority manager (SARL subject to corporate income tax): rules for wages and salaries (Art. 62 CGI) | Overall income subject to income tax (Art. 79 CGI) |
FAQs on executive compensation in France
What is the main difference between the compensation of an SAS executive and an SARL manager?
How do social security contributions affect compensation?
What is the tax impact of bonuses on total compensation?
Why do executives often prefer the SARL or the SAS?
For assistance: executive remuneration lawyer.
