Understanding Pay Fixation and Salary Components
The entire process of pay fixation by the new generation HR is fundamentally flawed. You should visit the Personnel Department of some established companies to see how it is structured. First of all, the basic salary is not a percentage of CTC (Cost to Company) or Gross Salary. It is the foundation that should be laid first when structuring pay. For that, there should be a pay scale for a particular grade of employees. The amount of basic salary should be decided based on the salary scales in similar industries, or you can take the basic salary as per the minimum wages notification. Then decide on how much the annual increment should be. It may be around Rs 50 or 100, depending upon the grade. Accordingly, you will have to prepare an accelerated scale of pay for each grade of employees.
If you employ a fresher in the unskilled category, say, grade 1, they shall be given the lowest of the basic in the respective scale of pay. On the other hand, for a person with 2 years' experience, you can give four or six increments, add these to the basic salary, and fix their basic salary.
You can have a scale for semi-skilled workers, say grade 2. Here also, you can take the minimum wages as per notification as the lowest level and put increments (higher than that of grade 1) and construct a pay scale for grade 2. If a semi-skilled person (say, a person from ITI may be semi-skilled, whereas a person who does not possess any basic qualification is unskilled) joins you, you can put them at the lowest level in grade 2. If, on the other hand, the person joining has experience, depending upon the experience, you can add increments and fix a basic pay for them.
In a similar way, you have to fix basic scales of pay for all categories of employees. This will enable you to fix the salary of an employee based on their qualification, experience, and responsibilities that they have held in the past. Also, when an existing employee is promoted, they are given a higher grade and pay.
Components of Salary
Now, coming to other components of salary, the most important is Dearness Allowance (DA). There can be two types of DA: Variable Dearness Allowance and Fixed Dearness Allowance. Variable Dearness Allowance is based on the consumer price index of the respective locality where the establishment functions. It varies based on changes in the consumer price index. In some states, it is published every year considering the average of consumer price indices throughout the year, whereas in some states, it is adjusted every month based on the monthly CPI. Normally, VDA is given as part of the salary of employees below the grade of Managers.
For Managers and higher salary employees, it can be Fixed Dearness Allowance, which will be a fixed percentage of the Basic Salary. It can be 30% or 40% of the Basic Salary. The percentage may change depending upon the category of employees.
It will be the Basic Salary and the DA that will be considered as statutory salary for most purposes, like the calculation of Bonus, Gratuity, leave encashment, and other benefits.
Other Salary Components
Now, there can be another component of salary, viz., House Rent Allowance (HRA). This can again be a percentage of Basic Salary. The percentage may change depending upon the category of employees and may be around 15% to 20% of the basic salary. HRA can be a fixed amount also. The amount may also vary for different categories of employees.
There can be other components, like Conveyance allowance, telephone allowance, medical allowance, fuel allowance, etc. The amount may be fixed for each category/grade of employees. For persons who are subjected to income tax, it is better to make these as reimbursements so that they get the full benefit of tax exemption.
Special allowance is something that is paid to persons who perform special tasks. This can also be an amount paid to adjust the salary demanded by the employee against the scales on which we are operating. That means, when there is a difference in the salary fixed as per above and the salary the candidate is demanding, then we have to take this component and adjust the salary as per their demand.
The sum total of the above will be called Gross Salary. Now we take the perks, annual components like performance-linked incentives/variable pay, bonus, and the contributions that the employer will make for the employee, like ESI, EPF, and a provision for Gratuity also. This will be equal to the cost that the employer will incur by employing a person. This is called CTC or Cost To Company.
Now the practice is to decide first how much should be the cost to company and work backward and bifurcate into small components. Years back, I had posted an article on this site titled CTC Vs BTC (which is also available in the blog - link:
Madhu.T.K: CTC Vs BTC). Please read that also along with these comments.
As already pointed out in the beginning, it will be better to spend some time in the Personnel Department of a good organization to get more detailed information about pay fixation.
Regards,
Madhu.T.K