What is the maximum allowed compensation for directors as directors?

• A. 10% of net income after tax of current year
• B. 10% of net income before tax of current year
• C. 10% of net income after tax of immediately preceding year
• D. 10% of net income before tax of immediately preceding year

Answer: (D)

The key idea is that director compensation is capped as a fixed percentage of what the company earned before taxes in the previous year. Using pre-tax income from the immediately preceding year provides a stable, verifiable basis for the cap and ties it to the company’s actual earning capacity, not to tax planning or volatile current-year results. This helps ensure the compensation reflects the company’s ability to pay and avoids distortions from tax strategies or year-to-year swings.

So the maximum is 10% of the pre-tax net income of the immediately preceding year. For example, if last year’s pre-tax net income was 200 million, the maximum compensation would be 20 million.

The other options mix after-tax figures or current-year results, which can be manipulated by tax planning or aren’t yet realized, reducing clarity and stability of the rule.