Compensation Structure Components
Compensation structure for any organization usually has three components: the base salary, which is fixed and regular for all employees; incentives designed to reward employees for good performance; and benefits, which are usually non-monetary in nature. A perquisite, also known as perks, is a special kind of benefit for a limited set of employees.
Determining Compensation Strategy
The conventional notion has been that the compensation strategy of an organization is determined by job/role evaluation, market competitiveness, and the budget. Keeping the long-term financial impact in mind (as all long-term benefits like gratuity, PF, pension, leave encashment, etc., are linked to the basic salary), organizations should make an attempt to keep the basic salary hovering around 30% to 50% of the gross. Care needs to be taken that the basic salary for every employee is higher than the minimum wages applicable to the respective industry (usually minimum wages are revised twice a year, whereas annual rewards happen on a yearly basis, so keeping in mind the historical data of rise in minimum wages, the basic salary should be fixed).
Other Components and Tax Efficiency
Regarding other components of the structure, one needs to keep in mind the prevalent industry practice and the applicable non-taxable limits for certain components like LTA, medical reimbursement, conveyance, canteen subsidy, food vouchers, HRA (50% for Metro and 40% for other cities) as set in The Income Tax Act. These non-taxable limits are subject to review every year, and one needs to keep reworking the CTC structure every year, keeping in mind giving maximum benefit to employees for a tax-efficient salary. Thus, the compensation structure should be dynamic in nature.