There are some principles in structuring salary.
1. The salary should be less than the one notified as statutory or what is called minimum wages.
2. If the salary is as per minimum wages notified, ensure that it changes according to changes in consumer price indices. Therefore, it should be adjustable according to changes in CPI.
3. The basic objectives of salary hike, ie, to reward the employee for his performance and compensate the cost of living, should be adhered. These two objectives should be reflected in basic salary and dearness allowance respectively. Therefore, the practice of many private establishments that increase will be reflected only in "other allowance" portion/ component of salary will lead to problems in future.
4. Other than the Basic pay and Dearness allowance, any amount that you pay to your employee as demanded by the employee or according to the market requirements, elasticity of labour etc, shall be put in components linked to performance/ skill.
5. For salaries attracting income tax, it is advisable to have a few components like house rent allowance, conveyance allowance, education allowance, telephone allowance etc as 'reimbursements' rather than simply an allowance. An allowance is taxable but reimbursement is not taxable.