Director Remuneration In New Zealand: Legal Considerations

If you run a company, you’ll eventually hit the question: how do we pay our directors properly?

Director remuneration can be straightforward when you’re a one-person company, but it can get complicated fast once you add shareholders, investors, co-founders, or family members to the mix.

Getting it right isn’t just about “what’s fair” - it’s about making sure you’re paying people legally, recording it correctly, managing conflicts of interest, and protecting the company from disputes later.

What Is Director Remuneration (And Why Does It Matter For Small Businesses)?

In simple terms, director remuneration is any payment or benefit a company provides to a director in return for their services.

For many small businesses, directors are also founders and key workers in the business. That’s where things can get confusing, because a director can be paid in different “hats”, for example:

• As a director (governance and oversight, attending board meetings, strategic decisions).
• As an employee (day-to-day operational work, like managing staff, sales, delivery, admin).
• As a contractor (project-based work, consulting, specialised services).
• As a shareholder (dividends, if declared).

Why does this matter? Because each type of payment can have different legal and tax consequences, and mixing them up can create real risk - especially if your company has more than one shareholder, or you’re trying to raise capital, sell the business, or exit a co-founder relationship.

Director remuneration often becomes a pressure point when:

• Cashflow is tight and you’re deciding whether to pay wages or take drawings.
• New shareholders come on board and want transparency around payments to directors.
• One director is doing more work than the others.
• You’re negotiating roles, vesting, or founder compensation.
• You’re getting ready for due diligence (investors or buyers will look closely at this).

What Are The Main Ways To Pay Directors In New Zealand?

There isn’t a single “correct” model for director remuneration. The right approach depends on your structure, who is involved, and how the director contributes to the business.

Here are the most common options we see for NZ small businesses.

1. Directors’ Fees

Directors’ fees are payments for acting in the capacity of a director (governance). These are often used where directors are not involved in daily operations, such as independent directors or advisory directors.

Even in small companies, you might use directors’ fees to:

• separate governance from day-to-day work (for clearer accountability); and
• make remuneration more transparent to shareholders.

2. Salary Or Wages (Where The Director Is Also An Employee)

Many working directors are also employees of the company. If a director has an employment role, you’ll usually want an Employment Contract to clearly set out pay, duties, hours, leave, and termination processes.

This separation is especially important if you have multiple directors, because it helps avoid later arguments like:

• “Were they paid for director work, or operational work?”
• “Were they entitled to overtime / leave / bonuses?”
• “Can we remove them from the business role even if they remain a director?”

3. Contractor Payments (Where The Director Provides Services As A Contractor)

Sometimes a director provides services through a separate entity (or as a contractor personally). This can work, but it needs to be structured carefully so it doesn’t create hidden conflicts or tax issues.

As a practical step, you’ll usually want a properly drafted Contractor Agreement or service arrangement that makes it clear:

• what services are being provided;
• the payment terms (hourly, fixed fee, milestone);
• who owns the intellectual property created; and
• confidentiality and restraint expectations (where appropriate).

4. Shareholder Returns (Dividends)

Dividends are not “director remuneration” in the usual sense - they are returns paid to shareholders when the company declares a dividend.

This is a common point of confusion for founders: dividends are tied to shareholding, not work performed. If you’re doing lots of work for the business, dividends usually aren’t the right tool to compensate you for that work (especially if you have investors who also receive dividends).

5. Non-Cash Benefits

Director remuneration can also include non-cash benefits like:

• company vehicle use
• health insurance
• phone/laptop allowances
• reimbursed expenses (where genuine and properly documented)

These can be completely legitimate, but they should be documented, approved properly, and tracked carefully - because they can still create disputes or tax consequences if handled informally.

What Laws And Rules Do You Need To Consider When Setting Director Remuneration?

When you set director remuneration, you’re not only making a financial decision - you’re also making a governance decision. For NZ companies, that means thinking about Companies Act duties, your internal company rules, shareholder expectations, and how you’ll deal with conflicts of interest.

Companies Act 1993 Duties (And Why Pay Decisions Can Create Risk)

Directors in New Zealand generally owe duties to the company under the Companies Act 1993. While the Act contains a range of director duties, the practical takeaway for remuneration is this:

• Decisions about remuneration should be made in the best interests of the company.
• You should avoid situations where a director is effectively approving their own benefits without appropriate checks and transparency.
• Where there’s a conflict of interest (for example, a director being involved in a decision about their own pay or a contract they benefit from), it needs to be managed carefully.

It also helps to be aware that the Companies Act 1993 has specific rules around director remuneration and other benefits. In broad terms, remuneration should be authorised in the way the Act (and your constitution, if you have one) requires - and where shareholder approval is required, it should be obtained before payments are made.

This matters even more where your company has:

• minority shareholders (including family members);
• investors (who expect good governance); or
• creditors relying on the company’s solvency.

Your Company Constitution And Shareholder Rules

Your company’s internal documents may set out how director remuneration can be approved and what procedures you must follow. That’s why it’s important to check your Company Constitution (if you have one) and any shareholder arrangements before changing director pay.

If you don’t have a constitution, your company will generally rely on default rules under the Companies Act - but many growing businesses adopt a constitution so the rules are clearer and better suited to how the founders actually operate.

Interested Director Processes (Conflicts Of Interest)

If a director is “interested” in a transaction or arrangement (for example, they’re voting on their own remuneration, or the company is contracting with a director or a director-controlled entity), the Companies Act 1993 contains procedures that generally require the director’s interest to be disclosed and recorded, and the decision-making to be handled properly.

Exactly what needs to happen can depend on the circumstances and your constitution - so it’s worth getting advice before you document and implement changes, particularly if there are other shareholders who may later question the process.

Shareholder Expectations And Fairness (Especially In Founder Businesses)

Even when the legal paperwork is technically compliant, director remuneration can still create conflict if it feels “hidden” or inconsistent with the value each person brings.

A simple example we often see:

• Two founders own 50/50 shares.
• One founder works full-time in the business and takes a salary.
• The other founder works part-time but expects “equal money” because they own equal shares.

This is where documenting the structure upfront can save a lot of stress later - particularly through a well-structured Shareholders Agreement that addresses roles, decision-making, and remuneration expectations.

How Do You Approve And Document Director Remuneration Properly?

If you want to keep director remuneration low-risk, the big goal is: make the process transparent and properly recorded.

That usually means two things:

• Approvals: the right people approve it, following the right process.
• Records: the decision is documented so it’s clear later what was agreed and why.

Board Resolutions And Director Conflicts

Where you have a board (even an informal one), changes to director remuneration are often recorded via board minutes or a directors’ resolution.

This is particularly important when:

• a director’s remuneration is being increased;
• new benefits are being introduced (car, allowances, etc.);
• a director is being paid for extra services; or
• one director is being paid differently to another.

If a director has a personal interest in the decision (for example, the decision is about their own pay), that interest should be identified, disclosed, and dealt with under the Companies Act 1993 and your company’s constitution (if any). The “right” process can vary depending on your documents and shareholding structure, so it’s worth getting tailored advice before you lock anything in.

Employment Or Service Documents (So Everyone Knows Which “Hat” Is Being Paid)

One of the most practical steps for small businesses is to clearly separate:

• director duties (governance), and
• operational work (employment or contracting services).

That way, if the business relationship changes later (for example, you remove someone from an operational role but they remain a director/shareholder), you’re not relying on vague verbal agreements.

Expense Reimbursements (Don’t Let This Become “Hidden Remuneration”)

It’s normal for directors to be reimbursed for expenses. The risk is when reimbursements become informal or excessive, and shareholders later treat them as undisclosed remuneration.

To keep this clean:

• have an expense policy (even a simple one);
• require receipts and business purpose notes; and
• make sure reimbursements are consistent across directors.

Common Director Remuneration Mistakes (And How To Avoid Them)

Director remuneration disputes rarely happen because a company “forgot to pay someone”. They usually happen because expectations weren’t aligned, or decisions weren’t documented.

Here are common traps we see in NZ small businesses.

Mixing Up Salary, Drawings, And Director Fees

When money is tight, founders sometimes take irregular payments out of the company without clearly documenting what those payments are.

This can create issues later when:

• a co-founder leaves and claims underpayment;
• a buyer or investor does due diligence and flags the payments as unclear; or
• IRD questions how payments have been treated for tax purposes.

If you’re unsure how to structure payments, it’s better to pause and set a clear framework now, rather than “patch it up” later.

Not Having Clear Rules Between Shareholders

If there are multiple shareholders, director remuneration can easily become a flashpoint - especially when one director has control over banking or accounting access.

A good Founders Agreement or Shareholders Agreement can set expectations early, including:

• who is working in the business (and in what role);
• how salaries are set and reviewed;
• whether directors are paid fees;
• what needs shareholder approval; and
• what happens if someone stops working but remains a shareholder.

Paying Above What The Business Can Sustain

It sounds obvious, but it’s still common: directors approve remuneration that the company can’t really afford, hoping revenue will “catch up”.

The issue is that remuneration decisions should be made with the company’s best interests in mind, including cashflow and solvency. If your business is under pressure, it’s worth reviewing your remuneration structure and making sure it still makes sense.

Not Planning For Exit Scenarios

Imagine this: your co-founder steps back from the business operations but stays on as a director and shareholder. Do they still receive director remuneration? Do they still have signing authority? Do they still access financial information?

If you don’t document this, you can end up negotiating under stress - which usually leads to bigger conflict.

This is why it’s helpful to treat remuneration as part of your broader “legal foundations”, alongside governance documents and ownership arrangements.

Key Takeaways

• Director remuneration covers more than just cash payments - it can include directors’ fees, salary, contractor payments, and non-cash benefits.
• Many small business directors wear multiple hats (director, employee, contractor, shareholder), and it’s important to document which “hat” is being paid to avoid confusion and disputes.
• Setting director remuneration isn’t just a financial decision - it’s a governance decision, and you should consider Companies Act duties, conflicts of interest (including “interested director” procedures), and what your internal documents require.
• Your Company Constitution and Shareholders Agreement can affect how remuneration is approved and how transparent it must be to shareholders.
• Proper approvals and records (like board minutes or resolutions) help protect the company if remuneration is ever questioned by shareholders, investors, or buyers.
• The most common remuneration issues come from informal arrangements, unclear documentation, and misaligned expectations between founders.

Tax note: director pay and benefits can trigger different tax treatments (for example PAYE, FBT, GST, withholding and dividend rules). This article is general information only - you should get tailored advice from your accountant or tax adviser on the best approach for your situation.

If you’d like help setting up a director remuneration structure (or documenting it properly through the right governance and shareholder documents), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.