Devising a Simple Compensation Structure

The objective of this article is to explain the basic Compensation structure in its simplest form. Information about Statutory compliance with Labor Laws and Tax requirements will also be explained in brief.

Every organization aspires to devise a compensation structure that is easily understood, while taking into account all the aspects of statutory compliance. At the same time, the organization also needs to look into increasing the Take Home salary of the employee.

Salary Components

A Salary or Cost to Company (CTC) is made up of 5 different components Salary componentsEach component can be further broken down as follows:

Fixed component

Basic 40 -50 % of CTC
House Rent Allowance (HRA) 
  • 50% of Basic for Metro Cities
  • 40% of Basic for other Cities
  • 800 Per month
  • 1600 per month (For handicapped people)
Education Rs. 100 Per month per child
Other There are other allowances that are defined under Sec 10 (14) of the Income tax Act. The company may provide a special allowance that is listed under the Other category.

Reimbursements: These are claims made by the employees against some specific expenditure incurred by them. They usually need to produce bills to claim the amount.

Non-Monetary/ Perks – The value of the benefit is included in the CTC. The amount is fixed at the discretion of the company. Some of the benefits that the companies usually provide are listed below.

Car Usually for Senior Management officials
Accommodation The benefit is fixed based on whether the property is Company owned or it is under a Lease agreement.
Fixed Assets A nominal amount for the usage of fixed assets like furniture.
ESOP Employee stock options are a popular benefit provided by most companies
Others Food coupons, Gas, Electricity, Water etc.
Medical Rs.15000 (for self, spouse and dependents)
LTA (Leave and Travel Allowance)
  • No limit. But, general practice is to reimburse up to 1 month of Basic salary.
  • 2 claims are allowed to be made in a period of 4 years.
  • Current block of 4 years (2014 – 2017)
  • The company has the discretion to fix the amount.
  • General practice is Rs. 2000 to Rs. 4000 per month
  • Employer owned car and expenses paid by Employer , then there is no specific limit
  • Employee owned car and expenses paid by employee –
    • 1800 per month for small car (up to 1.6cc)
    • 2400 per month for big car (above 1.6 cc)
  • Company policy
  • The general practice is this allowance is given for senior management.

Retirement benefits: Some components that the company may contribute towards the retirement benefits of the employee are as follows:

Provident Fund Contribution can be upto 12% of Basic salary
Gratuity 4.81 % of Basic Salary per month
Super annuation As per company policy. Not compulsory for each company to contribute.
Pension fund As per company policy
Insurance Life/ Medical Insurance
Employer contribution to ESI Currently it is 4.75 of ESI wages. It is advisable that the company reviews this from time to time)

Some Useful pointers

  • Always check impact of allowances with the Income tax rules and other Labor Laws from time to time.
  • Minimum wages Act – This act is very important for reference purposes especially if the employees of the company work in different states. The minimum wages in each state is different.
  • If there is a Union, the salary will be based on the union agreement or settlement.
  • Always ascertain that the Basic Salary is more than any other allowance.

(The author, Stella Lauren has contributed this post, who writes on organization growth and sustained development in the competitive business environment. Please note that the above information constitutes a General guideline. This weblog does not represent the thoughts, intentions, plans or strategies of my employer. It is solely my opinion.)

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October 2021