The entire process of pay fixation by the new generation HR is basically wrong. You should go and visit the Personnel Department of some old companies and see how it is structured. First of all, basic salary is not any percentage of CTC (Not in the dictionary of Personnel Management) nor Gross Salary. It is the foundation which should be laid first while pay is structured. 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 industry or you can take the basic salary as per minimum wages notification. Then decide on how much should be annual increment on it. It may be some 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 unskilled category, say, grade 1, he 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 his 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 a semi skilled person whereas a person who does not possess any basic qualification is an unskilled) joins you, you can put him in 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 him.
In the 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 his qualification, experience and responsibilities that he had held in the past. Also when an existing employee is promoted, he is given a higher grade and pay.
Now, coming to other components of salary, the most important is Dearness Allowance. 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 is variable 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 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 which will be considered as statutory salary for most of the purposes, like, calculation of Bonus, Gratuity, leave encashment and other benefits.
Now, there can be another component of salary, viz, House Rent Allowance. 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 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 person 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 which is paid to persons who perform some special tasks. This can also be an amount which is paid so as to adjust the salary demanded by the employee as 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 his 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 in to small components. Years back I had posted an article in 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 this comments.
As already pointed out in the beginning it will be better to spend some time in the Personnel Department of a good organisation to get more detailed information about pay fixation.
Madhu.T.K