Designing a Fair and Competitive Salary Structure: What Factors Should You Consider?

How to Design a Salary Structure for an Employee

In designing a salary structure for an employee, several key components need to be taken into consideration. These components typically include the base salary, bonuses or incentives, benefits such as health insurance and retirement plans, and any additional perks or allowances.

Factors to Consider

When determining the salary structure, it is important to factor in the industry standards, the employee's qualifications and experience, the company's budget constraints, and the overall compensation philosophy of the organization.

Additionally, it is crucial to conduct market research to ensure that the salary structure remains competitive and aligns with the current market trends. By carefully analyzing these factors, you can create a salary structure that not only attracts top talent but also retains and motivates existing employees.

When designing a salary structure, you first need to conduct a salary survey. Based on the questions provided to you, you can manage your data. However, this is not a short process; it requires a long and meticulous approach.

Please let me know if I can assist you.

Thank you.

I am enclosing one format of the salary structure, and you can also calculate TDS from the format.

Regards.

The design of the salary structure is entirely up to the company; there are no laws or rules laid down. Most companies base their structure so that the employee benefits with respect to income tax. Thus, you must know the income tax rules and exemptions before you start defining the salary structure.

Starting Point: CTC (Cost to Company)

Basic is calculated based on a percentage of the CTC. If the company has a contributory Provident Fund, then it must be kept in mind that the company has to contribute the same amount of PF as the employee. The best way is to try out a few combinations to protect both the company and the employee.

Basic can be between 25 to 30 percent of CTC. HRA is normally between 15 to 25 percent of basic. Medical should not be more than 15,000 per year. Travel/conveyance allowance exempt by IT is 9,600 per year, so stay within this limit.

PF contribution is between 8.33 to 10 percent of basic. If you plan to include DA (Dearness Allowance) in the salary, then it should be around 20 percent of basic. This DA is added to basic when calculating the PF contribution.

You can then add a component of one month's basic as leave travel allowance. Add about one to two months' basic as a bonus. The balance of CTC can then be shown as other allowances.

I hope this helps.

Regards, Ronald

Generally, the basic salary is set at 40-50% of CTC, and HRA at 50% for metro cities and 40% for other cities. Medical allowance is set at 1250 per month, PF at 25.61% (EE/ER share), and conveyance at 800 per month. The remaining amount can be split into other components such as SA, LTA, and Bonus.

I hope this information is correct.

Regards,
Sanjeev Chauhan
Sr. Executive - Labour Compliance

Dear Sanjeev, there is no right or wrong percentage for basic, etc. It all depends on the organization. As I have said, a lot of other benefits are derived from basic; as such, many companies keep this low by raising other components. Gratuity is also computed on basic; therefore, a higher basic would mean a higher gratuity payout. I was not aware that PF contribution is as high as 25.61%. As per the rules, both the employee and employer will contribute 12% of basic. DA is normally paid in government or public sector companies.

Regards, Ronald

Understanding Salary Structure Components

There is no right or wrong percentage for basic salary components; it all depends on the organization. As I have mentioned, many other benefits are derived from the basic salary. Therefore, many companies keep this low by raising other components. Gratuity is also computed based on the basic salary, so a higher basic would result in a higher gratuity payout.

I was not aware that the PF contribution is as high as 25.61%. According to the rules, both the employee and employer contribute 12% of the basic salary. In the above example, the 25.61% PF contribution includes both employee (12%) and employer (13.61%) contributions, as mentioned clearly.

Moving on to the basic salary, it can be defined as per your calculation. However, HRA is typically 50% for metro cities and 40% for non-metro areas.

Regards,
Ronald

Below is one salary structure you may consider:

Salary Structure Components

A: CTC = XYZ
B: Basic = 30% of CTC
C: HRA = 40% of Basic (non-metros) & 50% of Basic (metros)
D: Conveyance = 800 PM
E: Medical = 1250 PM
F: Others = A - B - C - D - E - G
G: Company Contribution PF = 12% of Basic

Bonus and Gratuity are optional to show in CTC. If included in CTC, they may be reduced from the Others component.

H: Gross = B + C + D + E + F
I: Net = H - Statutory Deductions - TDS (As applicable)

You will receive many from the group. Choose the appropriate one for your company to follow and consider.

All the best.

Regards,

Thank you, Mr. Ronald, for this informative reply. I am grateful for your help. As you have said, Basic can be 25 - 30% of CTC. So, if my CTC is around 2,50,000 for an employee, does it mean that 2,50,000 * 25% gives a value of 62,500 as basic?

Why should medical not be more than 15,000 per year?

Can you share with me any combinations as you have mentioned?

Regards,
Pavan

Please clarify my doubt on this content:

Can Conveyance be crossed Rs. 800 PM, or should it be shown as 800 PM only? Similarly, with medical and leave allowance, can it be crossed 1250 PM, or should it be shown as 1250 PM only?