Median Salary Disclosure procedure

This article is about the calculations involved in the disclosure of section 197(12). Also read on for clarification on the median calculation related to this section, which is commonly found in the Annual Report of Listed Companies. 

This write-up will guide you through the process of calculating and understanding the median disclosure required in the Board Report.

📜 Legal Requirement u/s 197(12)

Every Listed companies must disclose the ratio of each director’s remuneration to the median remuneration of employees in their Board’s Report. 

But how is the median remuneration calculated? Let’s break it down step by step. 👇

The median is the middle salary value when all salaries are arranged in ascending order. Unlike the mean (average), the median is not affected by extreme high or low salaries, making it a more accurate representation of the typical employee salary.

🔹 Step 1: Gather Salary Data

Collect the annual salaries of all permanent employees in the company.

🔹 Step 2: Arrange Salaries in Ascending Order

For example, assume a company has 100 employees with the following salaries (₹):

10,000, 12,000, 15,000, 18,000, 20,000, ……….., 85,000, 90,000, 95,000, 1,00,000

🔹 Step 3: Identify the Median Salary

If the company has an odd number of employees, the median is the salary at the exact middle.

If the company has an even number of employees, the median is the average of the two middle salaries.

➡️ Case 1: Odd Number of Employees (e.g., 101 employees)

If the number of employees (n) is odd, the median salary is at position:

(n+1/2)th employee 

Example: If there are 101 employees, the median salary is at the 51st position in the sorted salary list.

➡️ Case 2: Even Number of Employees (e.g., 100 employees)

If n is even, the median salary is the average of the two middle salaries, at positions: 

(n/2)th and (n/2+1)th employees

Example: If there are 100 employees, the middle salaries are at the 50th and 51st positions.

50th salary = ₹45,000

51st salary = ₹46,000

Median Salary = (₹45,000 + ₹46,000) / 2 = ₹45,500 i.e. median employee

Now let us calculate Ratio by using an example

Suppose X Ltd has 6 directors Mr. X, Y, Z, P, Q, and R with a salary of Rs. 100 Lakh, 80 Lakh, 60 Lakh, 50 Lakh, 30 Lakh and 10 Lakh respectively.

Now the ratio of each director’s remuneration to the median remuneration of employees will be as follows:

For Mr. X – Mr. X ÷ median employee i.e. 100,00,000÷45,500=219.78 i.e. 220:1

For Mr. Y – Mr. Y ÷ median employee i.e. 80,00,000÷45,500=175.82 i.e. 176:1

The same can be calculated for Mr. Z, P, Q and by using the above method.

Note – In the Listed Companies where the numbers of employees is large it can be calculated by using Python or some specific software.