How to Design Employee Compensation Structure in India




While there are many factors that drive an employee’s decision to stay with a company, fair pay or compensation is something that can’t be overlooked. Employees deserve a fair amount of compensation for the work they perform for the organization. If employees feel that they are not getting paid enough then they start looking for better opportunities. However, it is important to keep employees satisfied and think about their needs, but you should also analyze the amount of budget you can spend on employee compensation.


Therefore, you need to design an employee compensation structure that is a perfect balance between competitiveness and affordability. Having a well-defined employee compensation structure makes it easy to manage payroll and more effectively manage the budget for labor costs. The employee compensation structure in India depends on various factors including employment type (contractual, full-time, temporary, etc.), employee job role, key skills, seniority level, and working conditions.


Designing an employee compensation structure in India could be a tricky task, therefore, today, we will discuss some of the major tips that can help you with the same.


But before that, let’s first discuss the salary structure in detail.


Components of employee compensation:


The salary structure of an employee comprises a variety of factors including basic salary, HRA, allowances, benefits, statutory deductions, etc.


Basic Salary- It refers to the base income of employees before any additions or deductions are applied to their total salary.


Allowances- It is the amount payable to employees over and above the basic salary which can either be partially or fully taxable depending on its type. There are several types of allowances such as Dearness Allowance, House Rent Allowance (HRA), Conveyance Allowance, Leave Travel Allowance, Medical Allowance, etc.


Gratuity- It is the amount that is payable to only those employees who have completed 5 or more years with an organization under the Payment of Gratuity Act 1972.


Employee Provident Fund (EPF)- EPF is a retirement benefits scheme in which both the employees and employers make contributions towards the scheme. It allows employees to save a portion of their salary each month which can be withdrawn following a month from the date of cessation of service or upon retirement.


Professional Tax- It is a tax payable to the state government which applies to every type of profession, trade, and employment. The amount to be deducted depends on the income of such profession, trade, and employment.


Perquisites- Also known as fringe benefits that are given in addition to cash. For example, rent-free accommodation, vacation pay, company-paid life, health, and unemployment insurance programs, etc.


Employees’ State Insurance Scheme (ESIC)- An organization that has 10 or more employees whose gross salary is below INR 21,000/- per month is required to avail of this scheme. This scheme is beneficial when an employee faces contingencies such as permanent or temporary disability, sickness, death due to employment injury, etc.


So, these are some of the basic components of salary, now let’s have a look at some of the tips that can help you design the ideal employee compensation structure.


Tips to design employee compensation structure:


Establish overall pay range


Establishing an overall pay range will help you define the amount of salary an employee will receive. For each pay grade, you need to create a minimum, midpoint, and maximum pay range. The pay grade usually depends on several factors including the job description of the position, the level of responsibilities performed by the employee, the authority exercised by the position, and the expertise and the years of experience of the employee.


Review job descriptions


This might not be a task that you would like to perform, but it’s necessary to survey your company’s job positions to determine what job responsibilities are performed by every employee in the organization. You can then compare positions within your organizations against similar job positions in the market. This will help in ensuring that every employee is paid accurately and fairly.


Survey the job market


The job market is evolving with lightning speed. In such a fast-paced environment, it is important to survey the job market regularly. It can help you determine the current average salary for each job position and keep your salary packages relevant and lucrative. You can conduct your own research or you can resort to various online platforms such as the US Bureau of Labor Statistics (BLS) that provide useful salary information for a wide variety of jobs.


Know your place in the job market


Agree or not, there is cut-throat competition in the job market and you surely don’t want to lose the top talents to your competitors because of differences in the pay. So if you can’t exceed your competition, you can try to match market salary rates. However, it is also important to analyze your budget to know if you can match current market salaries or you can offer more than your competition.


Consider pay raise margins


While designing the employee compensation structure it is important to consider pay raise margins. This means you need to define an amount or let’s say a percentage of the salary you are open to increase each year. This will help you remain competitive and attract and retain A-players in the organization. After all, growth is all that an employee needs today.


The Bottomline


Employee compensation structure in India can vary from organization to organization. You need to analyze all the factors before finalizing the compensation package for your organization. Besides offering a competitive salary, it is also important to offer great employee benefits to your employees. Some of the benefits you can offer to your employees include health or life insurance cover, paid time off, tuition fees, etc.


Author: Ansh Aggrawal, Marketing Manager at Zimyo

Ansh Aggarwal has 6+ years of experience in the B2B Marketing space in India and International markets. Currently associated with Zimyo, Ansh is taking care of the entire gamut of marketing activities for the onboarding of Enterprise clients. He communicates directly/indirectly with Industry leader CXOs, CHROs, IT Heads to understand their challenges and come up with solutions that are enabling them to transform their company into an employee-centric organization.