Chief executive Chris Parr's pay jumped, but he attributed the rise to the payment of an incentive scheme and said salaries of senior staff had been frozen.
Tullis Russell plunged to a £4 million pre-tax loss for the 12 months to March 31 after being squeezed between falling sales and rising costs.
The company made a near £1m loss in 2010, but had bounced back to a £2.4m pre-tax profit in 2011.
Turnover for the 2012 financial year was down 6.5% at £166m.
Mr Parr said: "The papermaking business is very closely correlated with economic activity.
"It was a paradox, seeing lower levels of global demand but higher input costs."
Finance director Jeff Miller said that Government cuts in the UK and the eurozone had hit volumes.
Meanwhile, prices for wood pulp, chemicals, packaging and energy costs had soared.
Currency hedging contracts meant Tullis Russell did not benefit from movements in the euro-sterling exchange rate.
Mr Parr said: "We have seen these conditions alleviate during the current year.
"We have seen a slight pick-up in demand. We have been successful in passing on some of these increases in costs."
Around 30 people in its papermaking arm were made redundant and others were not been replaced when they left the business.
Employee numbers at the Markinch-based company fell from a monthly average of 763 in 2011 to 744 in the most recent financial year.
Within this, manufacturing and production posts fell from 577 to 530.
The accounts also disclosed that Mr Parr’s pay for the year rose from £236,000 to £332,000.
He said the rise was due to the performance of a long-term incentive package relating to performance two years ago.
He said: "My salary did not increase nor did the salaries of the other senior executives."
Tullis Russell recently signed a £7.5m three-year working capital loan deal with Lloyds Banking Group, which Mr Parr said was intended to provide its finances with more security.
The company had cash of £4.3m on its balance sheet as of the end of March, even after an outflow of £7.2m during the 12 months.
Mr Parr said: "That is the fifth year in a row we have finished with net cash. We are employee owned, we are not listed on the Stock Exchange and we have a very Presbyterian approach to debt. We manage our cash very tightly. That is our primary focus."
The company has signed a 20-year energy supply deal with RWE Npower, which is building a 50MW biomass plant at its Markinch site to replace the existing coal-fired power plant.
It will supply 17MW of electricity to meet all of Tullis Russell's requirements as well as steam for the paper drying process. It will start operating in mid-2013.
Mr Parr said "Things have certainly stabilised and improved quite significantly.
"We are optimistic about the future despite the fact that conditions remain challenging."