Salary structure

Salary plays a pivotal role in the employment relationship, serving as the compensation employees receive from their employers for the services they provide. Employers rely on competitive salary packages to attract and retain skilled professionals, driving the performance and success of their businesses. A well-structured salary system is essential for a company's growth, ensuring it remains attractive to potential talent and motivating existing employees.

However, it is crucial for employers to establish a fair and transparent salary structure. Unfair or poorly managed compensation systems can have detrimental effects on employee morale, job satisfaction, and overall company productivity. In India, understanding the intricacies of the salary structure is vital for accurately calculating payroll, ensuring employees are compensated fairly, and the organization remains compliant with relevant regulations.

Establishing a competitive pay structure

Establishing a pay structure entails the implementation of three key components:

• External benchmarking: This involves creating a structure that remains highly competitive within the industry by comparing it with external salary standards.
• Internal job evaluation: This ensures an impartial and transparent classification of diverse roles spanning various functions, each demanding distinct skill sets and responsibilities.
• Reviewing existing compensation data: Finally, it is essential to analyze your current compensation data to gain insights into the overall cost and financial feasibility.

By thoroughly studying and assessing each of these three elements, you can establish a robust, transparent, and competitive salary structure within the industry.

Components of a salary structure

The salary structure may vary across companies and industries, but some common components include the following:

Cost-to-company (CTC): CTC, or Cost to Company, represents the recurring expenses borne by the organization for the services provided by its employees or workers. It is based on their salaries and various other factors. CTC encompasses the basic salary and supplementary benefits, whether in monetary or non-monetary forms, provided by the company. These additional benefits may include gratuity, contributions to provident funds (EPF), house rent allowances (HRA), travel allowances, and more.

Basic salary: The basic salary constitutes the unchanging segment of an employee's compensation and serves as the cornerstone of the salary structure. Typically, it represents a substantial portion, accounting for about 40-50 percent of the total cost-to-company.

Things to remember while drawing up your employee's basic salary:

• Maintaining a high basic salary component can have drawbacks, as it is entirely subject to taxation. This may raise the tax burden on your employees and result in increased employer contributions to PF and ESI.
• Conversely, keeping the basic salary too low can pose a risk of salaries falling below the minimum wage standards established by the state government.

Gross salary

The gross salary is the total amount calculated by adding various allowances, such as bonuses, overtime, and more, to the basic salary of an employee. This is done before making any necessary deductions and tax payments.

Net salary

This is often referred to as the "take-home salary," representing the amount an employee receives in hand each month. In contrast, the net salary is computed after deducting TDS (tax deducted at source) and other deductions from the gross salary of the employee.

Allowances

An allowance is a predetermined amount provided by the company to cover specific expenses incurred by employees beyond their basic salary. These allowances are added to the basic salary when determining the gross salary within the salary structure.

• Dearness allowance (DA): DA is an allowance provided to employees to offset the impact of inflation on their standard of living. It is calculated as a percentage of the basic salary.
• House rent allowance (HRA): HRA is an allowance provided to employees to cover their rental charges for accommodation. The amount of HRA varies depending on the city or locality in which the employee resides. It makes over 40-50 percent of the Basic Salary in general.
• Conveyance allowance: Conveyance allowance is given to employees to cover their transportation expenses for commuting to and from work.
• Children education allowance: A certain amount is given to the employees to educate their children in India. In general, this will be allowed to maximum of two children of the employee.
• Special allowance: Special allowance is a flexible element that can be used to accommodate various other allowances or perks, depending on the company's policy.
• Leave travel allowance (LTA): LTA is a benefit provided to employees to cover the cost of trip when they take leave for vacations or travel with their family.
• Uniform allowance: Any allowance given to employees to meet the expenditure on purchase of formal wear during the performance of employment.

Perquisites

Perquisites or fringe benefits are the benefits (substantially non-monetary) provided by the organization based on an employee's sanctioned position. These benefits include the provision of a car for personal use, rent-free accommodation, internet services, and so on.

Perquisites are taxable for the monetary value of the benefit availed by the employee in addition to the salary.

Other allowances

Performance-based incentives: Many companies provide performance-based incentives or bonuses to employees, contingent on their individual or team performance. These incentives are designed to inspire and reward employees for outstanding contributions.

Provident Fund (PF): This regulation is applicable to companies with a workforce exceeding 20 employees and employees whose monthly basic salary, dearness allowance (DA), and special allowance collectively amount to less than INR 15,000. Both employers and employees are obligated to contribute 12 percent of the employee's basic salary, DA, and special allowance directly into the employee's EPF account on a monthly basis.

Gratuity: Gratuity is a statutory benefit provided to employees as a lump sum payment at the time of retirement, resignation, or upon completing a certain number of years of service.

Other perks and benefits: Some companies offer additional perks and benefits, such as meal allowances, mobile allowances, accommodation, performance-based stock options, or other customized benefits.

Computing the take-home pay

In Indian payroll processing, deductions when reduced from the cost-to-company gives you the actual take-home salary that an employee gets. Below mentioned are some of the most common deductions and tax deduction details:

• Provident Fund: Employee Provident Fund (EPF) is a benefit scheme to an employee, where the amount is deducted each month by both the employer and the employee.
• Employees' State Insurance (ESI): ESI is the amount paid fully during the medical leave (depending on the job profile and company policy).
• Professional tax: The government imposes a professional tax on salaried employees and professionals.
• Tax deducted at source: After receiving the other income details and tax savings investment details from employee, the employer is required to calculate their tax obligations in accordance with the regulations outlined in the Income Tax Act of 1961. Subsequently, the employer must deduct the applicable taxes on a monthly basis from the gross salary.

Net pay to the employee is arrived at after adjusting the deductions and required taxes.

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Types of salary structure in India

There are two primary approaches to designing salary structures that determine how the salary is structured and establish the cost-to-company:

• Top-Down: In this approach, you set specific amounts for various salary components and then combine them to calculate the gross salary. For instance, you can add the basic salary and various allowances to determine the gross salary.
• Bottom-Up: In this method, you establish the total gross salary first and then allocate this amount among different components. For example, if your gross salary is Rs. P and the basic salary is set at 50 percent of the gross salary, and allowances account for 25 percent of the gross salary, your basic salary would be calculated as P x 50 percent, and your allowances as P x 25 percent.