Is It Fair to Offer Allowance Increases Instead of Basic Salary Hikes for Higher Earners?

Discussion on Annual Increments

We are having a discussion about annual increments, and the plan is to increase the basic salary only if the basic salary of the concerned employee is below Rs 15,000/-. For the rest of the employees, the management is considering starting a new conveyance allowance and paying incremental salary in conveyance allowance.

The question before management is: Is it necessary to give an increment in the basic salary for those whose basic is more than Rs 15,000/-, or can the company give an increment for those having a basic salary more than Rs 15,000/- by introducing a conveyance allowance?

Regards, Rajendra

Increments are based on performance and cannot be divided into two parts of below Rs. 15,000/- and above Rs. 15,000/-. The increment will affect the gross salary, whether you increase in basic, all the components, or add a new component called Conveyance Allowance, depending on the management. Conveyance allowance up to Rs. 1600/- is tax-free.

As per statutory norms, it is important to maintain a minimum amount of basic salary structure, which has already been done in the above case. Thus, it is the choice of management to increase the basic or not.

Also, if you are not increasing the basic just to avoid PF contribution, then the employer is not required to make any PF contribution above Rs. 15,000/-.

Yes, only the other components of the CTC can be changed without making changes to the basic salary, but make sure they are within the income tax bracket. As conveyance allowance more than 1600 INR per month is taxable. You may even add a medical allowance of INR 15,000 per annum, for which bills have to be produced by the employee at the end of the financial year to make it tax-free, and the rest of the amount may be added to their special allowance component.

By resorting to this (not increasing Basic), employee gratuity will remain "stagnant." How do you justify a "uniform Basic" for all categories of employees? PF contribution can be restricted to Rs15,000 even for those employees whose Basic+DA+VDA is above the ceiling.

The real question: Should this be done or not?

By not increasing the basic salary, you are effectively denying employees certain perks and income tax exemptions.

How?

1. HRA exemption is strongly determined by the basic salary. Say you keep the basic salary at 15k, and the actual rent paid by the employee is greater than that, which is quite realistic in Mumbai. For this case, let's take 20k. The HRA exemption will work as follows:

- Actual HRA received (assuming you have given 50% of basic) = 7500 * 12 = 90,000/-
- Actual rent paid less 10% of basic = (Rs. 20,000 x 12) – Rs. 18,000 = Rs. 2,22,000/-
- 50% of basic salary since he lives in a metro = Rs. 90,000/-

Looking at the calculation above, would it not be fair to increase the basic salary? Even if you decided to pay a higher HRA, it would eventually come back to 50%.

2. From a PF standpoint, the employer can decide to cap the contribution at 15k, so it really does not affect the company's costs. This is a little unfair from an employee's point of view, as higher PF contributions lead to better retirement benefits. This needs to be looked at on an industry-to-industry basis. In industries where attrition is high, like retail and media, cap it at 15%. Where attrition is low, like manufacturing, keep it as per actual.

3. With the outburst of the startup culture in India, recruiters have become quite strict (obviously, to sustain their own jobs and keep costs low - I call this "Penny Wise and Pound Foolish") with the way of structuring salaries for new joiners. Someone who joins at a low basic and is kept at that through their tenure, when moving to a new company, falls into the same cycle. This is assuming they don't join MNCs where structures are controlled by systems. These individuals take so much time to get their structures right, it's not even funny. For example, in one of the organizations I worked for, an employee with a 1.5 lac gross salary was being paid 20k as basic. It does not even make sense sometimes.

To conclude, I would like to say it is the most elementary job of HR to build a culture of employee satisfaction and encourage candor. Getting the salary structure right is one of the most basic things that form part of this. It is the job of HR personnel to not only inform management of wrong decisions but, in some cases, take a strong stand on implementing only what is correct.

Salary Structure and Employee Retention

Increase in basic salary and the consequent increase in indirect benefits is a different issue. The basic issue is the 'Salary Structure.' When we start an industry or business, do we not plan for human resources and their compensation? How to attract and retain manpower is the topmost consideration. Playing with the basic salary is a mathematical exercise.

Considerations for Employee Satisfaction

Friends, consider what employees want. You may adjust the basic salary, but then you take the risk of losing some employees. After all, it is the CTC, i.e., the total cost to the company. Maintain uniformity in grades and allowances. Give raises where there will be the least grievances. Compensation can be a source of dissatisfaction. It is not easy to whimsically raise salaries and allowances. A detailed study is necessary to satisfy employees while taking care of the employer.

Regards, Vibhakar Ramtirthkar

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