[Company Name] Limited · for board discussion

Both directors at $250,000 — funded by growth, not borrowed from it.

That is the goal. Two executive directors start at $85,000 each and climb a seventeen-rung ladder to $250,000. Nothing moves them up but measured performance: three gates, every quarter, scored the same way every time.

Passing everything, the climb takes four years and adds $330,000 a year to the salary line. At the 10% quarterly Growth Gate that requires brokerage income of roughly 4.6× today's over the same period. This page is the draft with the arithmetic switched on — set the gates yourself and see what the policy does.

What the policy is for — clause 1.1

Reward performance

1.1(a)

Pay rises because the business did something measurable, not because it was time to have the conversation again.

Funded, not borrowed

1.1(b)

Salary growth comes out of business performance rather than out of the business. The gates are what keep those two in step.

Identical terms

1.1(c)

Both directors sit on the same band at every moment, and move together. Salary is for executive work — dividends are a separate question.

Read clauses 1.1–1.2

1.1This policy sets the salary payable to each Executive Director and the mechanism by which that salary changes over time. Its objectives are to (a) reward the directors for operating performance, (b) ensure salary growth is funded from business performance rather than borrowed from it, and (c) keep both Executive Directors on identical terms at all times.

1.2Salary under this policy is remuneration for services as an executive. It is entirely separate from returns on shareholding. Dividends are determined under the company's dividend policy and distributed pro rata to shareholding; nothing in this policy affects dividend entitlements.

These are working drafts to structure the board's discussion. They are not legal, tax or financial advice. Before adoption they should be reviewed by the company's accountant (PAYE, RWT, FBT and solvency treatment) and a commercial lawyer (enforceability, subordination, and interaction with the constitution and any shareholders agreement). Every figure on this page is derived from the draft — nothing has been checked against the company's actual accounts.

Part A · live

The machine

Set three gates. Pull the lever. Watch the ladder step.

Clause 5.4 is the whole design: “The board's role at the review is to verify the calculations. The outcome is determined by this policy, not by board discretion.” So the fastest way to understand the policy is to operate it.

Review Quarter 1

Year 1 · Q1

Growth Gate 6.1(a)

Brokerage Income up at least 10% on the previous quarter

Retention Gate 6.1(b)

Trailing 12-month retention rate at least 90%

Strategic Gate 6.1(c)

The milestone minuted before the quarter began was achieved

Clause 6.5 relief. An event outside the directors' control — a material regulatory change, an insurer leaving the market. By unanimous resolution, minuted with reasons, the board may treat one failing gate as passed. Available.

Waiting Set the three gates for the quarter, then run it.

Band 0 · $85KCeiling · Band 16 · $250K

No quarters run yet. The log will show every step and why it happened.

Salary — each director

$85,000

Band 0 · starting band

Combined pay

$170,000

Two directors, excluding vehicles

Added annual cost

vs today's $170,000 salary line

Brokerage income needed

1.00×

Minimum implied by the gates you set

Part A

The rules behind it

Plain English on top. The clause underneath, always.

Salary under this policy is payment for executive work. It has nothing to do with who owns what. Dividends are decided separately and go out pro rata to shareholding — nothing here touches that.

Identical, always

3.1–3.3

Both executive directors sit on the same band at every moment. A change applies to both, simultaneously and equally. Vehicles are equivalent too. And if one director chooses to defer salary under Part B, that changes nothing about their band or their gross pay.

Read clauses 3.1–3.3

3.1All Executive Directors are paid at the same Salary Band at all times. Any change to a Salary Band applies to all Executive Directors simultaneously and equally.

3.2Each Executive Director retains a company motor vehicle on the terms in effect at the date of this policy. Vehicle provision is to be equivalent between Executive Directors.

3.3An Executive Director's election to defer salary under Part B does not alter that director's Salary Band, gross salary or entitlement under this policy.

The quarterly review

5.1–5.4

Within 30 days of each quarter end. Management accounts and the gate calculations go out at least five business days beforehand. Any band change takes effect from the first of the following month. The board verifies arithmetic — it does not decide the outcome.

Read clauses 5.1–5.4

5.1Within 30 days after the end of each Review Quarter, the board will assess performance for that quarter against the three Performance Gates in clause 6.

5.2Management accounts for the Review Quarter and the trailing twelve months, together with the gate calculations, are to be circulated to all directors at least five business days before the review meeting.

5.3Any change to the Salary Band takes effect from the first day of the month following the review meeting.

5.4The board's role at the review is to verify the calculations. The outcome is determined by this policy, not by board discretion, except as expressly provided in clause 6.5.

How a quarter scores

6.2–6.3

Three gates passed → up one full band. Two passed → up half a band ($5,000 on the $10,000 steps; the midpoint, on the narrower ones near the top). One or none → nothing moves.

The stretch. If brokerage income is up 15% or more and retention holds, both directors move up two full bands — and the Strategic Gate stops mattering for that quarter. This is the fastest path up the ladder and the one worth stress-testing: eight stretch quarters reach the ceiling in two years, on brokerage income roughly 3.1× today's.

Read clauses 6.2–6.3

6.2The Salary Band outcome for the Review Quarter is: (a) three gates passed — move up one full Salary Band; (b) two gates passed — move up one half Salary Band ($5,000); (c) one or no gates passed — Salary Band unchanged.

6.3Stretch outcome: if Brokerage Income for the Review Quarter is at least 15% higher than the preceding quarter and the Retention Gate is passed, the Executive Directors move up two full Salary Bands for that quarter, regardless of the Strategic Gate.

The Strategic Gate has a deadline

6.4

One milestone, agreed and minuted before the quarter starts. Specific, verifiable, and within the directors' control — a branch opened, a branch at break-even, a named senior hire started, a system live. Forget to minute it and it counts as not achieved.

Read clause 6.4

6.4Before the start of each Review Quarter the board will agree and minute one Strategic Milestone for that quarter. A Strategic Milestone must be specific, verifiable and within the directors' control. Examples include: a new branch opened; a branch reaching monthly break-even; a specified senior hire commencing; a specified system or process going live. A milestone not agreed and minuted before the quarter begins is treated as not achieved.

The one discretion left

6.5

If a quarter is wrecked by something genuinely outside the directors' control, the board may — unanimously, minuted with reasons — treat one gate as passed. It cannot be used two quarters running. That's the only judgement call in the policy, and it is deliberately hard to reach for.

Read clause 6.5

6.5Where a Review Quarter is affected by an event genuinely outside the directors' control (for example a material regulatory change or insurer withdrawal from the market), the board may by unanimous resolution, recorded in the minutes with reasons, treat one gate as passed for that quarter. This clause may not be used in consecutive quarters.

Ceiling, and changing the rules

7.1 · 8.1–8.3

Band 16 ($250,000) is the top. On reaching it the board writes a successor framework. The policy itself can only be amended by unanimous resolution of all directors, gets a formal review each financial year, and gives way to the constitution wherever the two conflict.

Read clauses 7.1 and 8.1–8.3

7.1The maximum Salary Band under this policy is Band 16 ($250,000 per annum). On reaching Band 16 the board will review this policy and agree a successor framework.

8.1This policy may be amended only by unanimous resolution of all directors.

8.2The board will formally review this policy at the end of each financial year, including whether the gate thresholds remain appropriate to the business's stage and whether the salary cost of the ladder remains sustainable.

8.3Where this policy conflicts with the company's constitution, the constitution prevails.

Schedule 1

Seventeen rungs

$10,000 steps, narrowing near the top

Bands 0–13 step in flat $10,000 increments. The last three tighten — $215K → $226K → $238K → $250K — so the final year of the ladder costs slightly less per step than the first. A half band is the midpoint between the current band and the next, and two half bands make a full one.

Part B · live

Leaving it in the business

A director's option, quarter by quarter

A director may elect, five business days before a quarter starts, to leave part of their salary in the company as a loan. Salary up to the $85,000 floor is always paid in cash. The deferred part is credited to the director's shareholder current account, earns 7.5%, and is repayable on 90 days' notice.

The election lasts one quarter only. It does not change the director's band, gross salary, or anything else under the policy — and it does not entitle them to any extra shares.

Set the election

Salary band Band 8 · $165,000

Deferred — % of salary above the floor 50%

Effective tax rate on salary 33%

Years of deferring at this level 4 years

Illustrative only. Real PAYE is progressive and is calculated per pay period, not as a flat rate. This uses the flat rate you set so the mechanism is visible. The accountant's numbers govern.

Gross salary for the yearUnchanged by the election — clause 2.4

$165,000

PAYE to Inland RevenueCalculated on the full gross — clause 3.1(b)

$54,450

Paid in cashThe floor, plus whatever wasn't deferred

$83,750

Credited to the loan accountNet of tax — clause 3.1(d)

$26,800

Interest earned in year 17.5% on the daily balance — clause 4.1

$1,005

The thing to be clear about: deferral moves cash, not tax. Crediting salary to a shareholder's current account counts as payment for PAYE purposes, so Inland Revenue is paid the same amount on the same day either way. The director is taxed on the full salary in the year they earn it. Only the after-tax remainder becomes a loan — which is why repaying that principal later is not income and attracts no further tax.

Loan account balance

Deferring for 4 years

Principal deferred Interest credited (after RWT)

What it costs the company

Sch. A

Interest is deductible. At the 28% company rate, a 7.5% coupon costs about 5.4% after tax — cheaper than most bank debt, and it does not need to be arranged.

What the director actually gets

Sch. A

Interest is taxable at their marginal rate. On 39%, a 7.5% gross return is about 4.6% after tax — and RWT comes out whether the interest is taken in cash or rolled into the balance.

Getting it back

5.1–5.4

The director can demand repayment at any time; the company has 90 days. The company can repay early on 30 days' notice. The balance falls due in full if the director stops being an executive director, or if the company resolves to liquidate.

The catch: the company cannot repay if doing so would fail the solvency test in s4 of the Companies Act 1993. It pays what it can, and the rest when it can.

Read clauses 5.1–5.4

5.1The Director may at any time by written notice require repayment of all or part of the Loan Account balance. The Company will repay the amount demanded within 90 days after receiving the notice, subject to clauses 5.2 and 5.3.

5.2The Company is not required to make a repayment if, immediately after making it, the Company would not satisfy the solvency test in section 4 of the Companies Act 1993. In that case the Company will repay the largest amount it can while satisfying the solvency test and will repay the balance as soon as it is able to do so.

5.3The Company may repay all or part of the Loan Account balance at any time on 30 days' written notice to the Director.

5.4The Loan Account balance becomes repayable in full, subject to clause 5.2, on the Director ceasing to be an Executive Director of the Company for any reason, or on the Company resolving to enter liquidation.

The bank goes first

6.1–6.2

If the company has or takes a bank facility, the director agrees to sign a subordination deed if the financier asks — putting the loan account behind the bank's debt — and not to demand repayment in breach of it.

This is the clause that makes the loan real to a lender rather than a liability they have to price around, and it is the one worth having the lawyer look at hardest.

Read clauses 6.1–6.2

6.1If the Company has or obtains a loan facility from a bank or other financier, the Director will, if required by that financier, enter into a subordination or priority deed on reasonable terms under which the Loan Account balance ranks behind the financier's debt.

6.2The Director will not require repayment under clause 5.1 in breach of any such subordination deed.

Schedule A

How the tax lands

Expected treatment — to be confirmed by the accountant

Deferred salary

The full gross salary is a deductible expense to the company in the period it is earned, whether paid in cash or credited to the loan account.
PAYE, KiwiSaver and ESCT are all calculated and paid on the full gross salary in the normal pay cycle. Crediting salary to a shareholder's current account is treated as payment. Deferral does not defer the director's income tax.
Only the net after-tax amount is credited to the loan account. The director has already been taxed on it, so repaying that principal later is not income and attracts no tax.
Because the balance is a loan from the director to the company, no deemed dividend or fringe benefit arises. Those rules apply the other way round — when the current account is overdrawn.

Interest at 7.5%

Deductible to the company. At 28%, the after-tax cost of a 7.5% coupon is about 5.4%.
Taxable to the director at their marginal rate. On 39%, 7.5% gross is about 4.6% after tax.
Interest credited to the loan account rather than paid in cash is still derived on the day it is credited. Tax and RWT arise then — and the company must pay that RWT to Inland Revenue in cash, even though no cash left the business for the interest itself.
Interest above an arm's-length rate risks the excess being treated as a dividend. 7.5% on an unsecured, subordinated, on-demand loan is a defensible commercial rate at the date of the draft. Minute the board's reasoning (clause 4.4) and revisit if market rates move.

Housekeeping that actually matters

Keep a clear ledger of the loan account. Inland Revenue expects shareholder current accounts to be reconciled annually; an unreconciled balance invites reclassification.
If the balance is ever forgiven or written off, the director generally has taxable debt-remission income. That is exactly why the agreement provides for repayment and never for forgiveness.
The loan is a financial arrangement. Most individual directors qualify as cash-basis persons, so no accrual adjustments arise on their side; the company accounts for interest on an accrual basis.

Part C

What the ladder costs

If every gate is passed, every quarter

There is no affordability cap in the policy. The Performance Gates are the only brake on salary growth, and they test growth and retention — not margin. This is the schedule to put in front of the board at every quarterly review.

Combined director pay, on plan

Two directors, excluding vehicles and PAYE-on-cost items

Today's salary line — $170K Added annual cost

The compounding nobody says out loud

Reaching $250,000 each adds $330,000 a year to the salary line by the end of Year 4. The 10% quarter-on-quarter Growth Gate compounds to roughly 46% a year, so brokerage income would need to be about 4.6× today's level over the same period.

Whether that growth actually covers the added cost depends on margin — and margin is the one thing the gates never test.

Three safeguards worth adding

suggested

1. Circulate trailing-12-month EBITDA alongside the gate calculations, so the board sees the salary-to-earnings ratio even though it doesn't bind.

2. Agree in advance a trigger for calling the clause 8.2 review early — say, combined director pay above a stated share of EBITDA for two consecutive quarters.

3. Use the Strategic Gate to set profitability milestones in quarters where growth alone wouldn't fund the step.

Before adoption

What we don't know yet

Four numbers, then the professionals

Everything above is internally consistent. None of it has been checked against the company's actual accounts, and the thresholds were chosen before anyone looked at the trend. These four go first.

Current brokerage income, and the last eight quarters

Sanity-checks the 10% Growth Gate against what the business actually does. If recent quarters average 12%, the ladder is a formality; if they average 4%, it will almost never move and the policy has a morale problem instead of a cost one.
Current EBITDA and margin

So the board can see what the Year 4 cost — $330K of added salary — represents as a share of earnings. This is the number that turns Part C from a schedule into a decision.
Current retention rate, measured the policy's way

By annualised premium, on policies due for renewal, trailing twelve months. Confirms whether 90% is a floor the business already clears or a stretch it has never hit.
Vehicle costs

Clause 3.2 keeps the vehicles, and Part C excludes them. The board should see total cost per director, not just the salary line.
Then: the accountant and the lawyer

Accountant on PAYE, RWT, FBT and solvency treatment. Commercial lawyer on enforceability, the subordination mechanics, and how all of this interacts with the constitution and any shareholders agreement.