Compensation and Benefit in India

Compensation and Benefits in Human Resource Management

The salary and financial and non-financial benefits the company offers its employees in the workplace are referred to as compensation and benefits in human resource management. It is a crucial tool used by human resource managers to maximize people’s potential at work. Employees often evaluate and compare the C&B plans that companies offer and prefer to work for organizations with better C&B plans. Therefore, compensation and benefits are essential tools to attract quality talent.

The remuneration structure is the reflection of an organization’s culture. Employee contribution-based remuneration reflects a performance-driven culture, while skills-based remuneration reflects a knowledge-driven culture.

To improve the overall performance and efficacy of the personnel working for the firm, compensation is

crucial in human resource management. It is one of the primary motivators for employees to drive them to give their best performance.

A good compensation plan should be able to take care of employees’ extra monthly expenses, contribute to their savings and allow them to cope with inflation rates.

Compensation and benefits (commonly referred to as Comp & Ben or C&B in India) come under the purview of the Human Resources department. Generally, in small set-ups with up to 150 employees, HR generalists, in collaboration with the finance team, manage all aspects of C&B, whereas, in large organizations, dedicated C&B specialists manage the function.

HR will find this toolkit helpful and will be able to use this as a reference to device compensation and benefits policy for their establishments.

Objectives of Compensation and Benefits Management

There can be a contrast in the views of employees and employers concerning C&B. While employees would negotiate to get a higher pay package, employers would like to save big on their allocated budget for a particular position. Therefore, compensation management should aim to address and fulfil the needs of the employees and employers to come to a consensus. The objectives of an excellent C&B plan are:

1. Compensation must satisfy the employees' general requirements and expectations for the work performed.
2. To create a competent and fair compensation strategy to assist in recruiting qualified talent and reward achievement.
3. To help prevent talent drain from the organization.
4. To aid in improving a company’s ranking on digital platforms in terms of employee satisfaction and motivation
5. To design the compensation and benefits according to India’s legal provisions, labor laws, and the Minimum Wages Act of 1948. As per the Wages Act 2019, workers from all industries are entitled to receive minimum wages fixed by their respective state governments.
6. To control the overall cost to the company (CTC).

Types of Compensation

Typically, employees take compensation as synonymous with salary. Compensation is far more than just the paycheck. Compensation can be monetary or non-monetary, known as direct or indirect benefits.

1. Direct Compensation

This involves direct monetary benefits given to the employees. This mainly includes employee salary and variable pay for work. Other direct components include monetary forms of compensation given below.

Monetary forms of compensation include:

1. Salary
2. Bonus
3. Profit share
4. Sales incentives
5. Monetary rewards
6. Overtime payment
7. Retirement pay
8. Allowances

2. Indirect Compensation

Indirect compensation does not involve direct and fixed money transfers to employees. Apart from a fixed salary, employees are given various types of allowances, reimbursements, and benefits that are not fixed. Examples of indirect compensation are given below.

1. Medical reimbursement
2. Mobile phone usage reimbursement
3. Internet Reimbursement
4. Fuel reimbursement
5. Health Insurance
6. Life Insurance
7. Stock options
8. Company-paid accommodation
9. Company vehicle for office use
10. Scholarships for courses
11. Promotion opportunity
12. Shifting to a desired role or location
13. Other forms of public recognition
14. Overtime pay
15. Passes, tickets, or coupons to movies, matches, or shopping
16. Retirement benefits such as pension plans
17. Gratuity
18. Flexitime
19. Transportation or shuttle service

All the reimbursements are to be claimed by the employees and approved by their supervisor. Other components, such as compensatory off, paid holidays, free lunch, etc., can also be a part of the compensation and benefits package. One employment may be a better financial proposition than the other even when two occupations offer the same salary due to differences in the indirect compensation or benefits package.

Mandatory Benefits in India

The employment benefits that are considered a must-offer to keep employees motivated at the workplace are given below.

1. Health Insurance – As a part of the health insurance benefits policy, employers are mandated to provide medical insurance to their employees. Generally, this policy covers the employee, spouse, and kids. Employers can also offer extensive plans to cover an employee’s parents as well.

2. Gratuity – As per the payment of the Gratuity Act 1972, every employee is entitled to gratuity. Gratuity is a sum of money paid by an employer to an employee for services rendered in the company. The gratuity amount is equal to one-fourth of the last-drawn basic salary of an employee for each completed six-month period.

See. Gratuity Rules & Calculation

1. Completion of a minimum of five years of service – In case an employee resigns after working for a minimum of five years with a company.
2. Employee retirement - If an employee retires, the gratuity is factored into the retirement plans given by the company
3. Employee death - In the event of the death of an employee.
4. Employee disability – In case of an employee suffering any disability due to prolonged illness or accident.

3. Employee's Provident Fund (EPF) - The employee’s provident fund in India is governed by the Employees' Provident Fund and Miscellaneous Provision Act, 1952.

1. Employee contribution: As per the Act, employers should determine 12% of employees’ Basic pay + Dearness allowance to EPF. Employees may also choose to contribute 24% of the EPF.
2. Employer contribution: Employer contribution is designated as 12% of the employee’s Basic pay + Dearness allowance, out of which 8.33% goes to the employee pensions scheme (EPS), and the remaining 3.67% goes to the employee provident fund (EPF) account.

The contributions are made on the wage ceiling, i.e., Basic Salary + DA or a new salary threshold of ₹15,000. However, there are two standard methods for calculating EPF contribution amount if the income exceeds the wage threshold of ₹15,000. Additionally, the employer is free to apply any of the methods.

See. EPF & EPS Rules & Calculation

4. Leaves and holidays – Leaves and holidays include benefits of paid time off for employees for annual holidays, maternity leaves, and sick leaves.

See. Leave Encashment Rules & Calculation

5. Workplace security – The service laws of organizations must provide a healthy workplace for employees. Companies must ensure the protection of employees from all kinds of harassment, such as sexual harassment of women (covered under the Sexual Harassment of Women at Workplace Act 2013).

In India, sexual harassment is punishable under the IPC organizations must create a policy to prevent it.

It is mandatory for the companies to set up an internal complaint committee in all offices to deal with such acts.

Salary and its Components

The regular payment (usually monthly in India) made by the employer to the worker for the work done is termed a salary. The terms and components of the salary structure are mentioned in the employment agreement or the appointment. The components of the salary structure are:

Basic Salary: Basic salary is the remuneration given to employees for their services to the company. This is generally offered hourly, weekly, or monthly. The employee’s basic pay is the main part of the salary, usually comprising 40% to 50% of the total salary. The basic pay is a fixed component of the Cost to Company (CTC) package.

Dearness Allowance: This is a cost-of-living adjustment allowance mainly paid to government employees, including pensioners in the public sector. However, companies in the private sector are free to include dearness allowance as a salary component. It is calculated as a fixed percentage of an employee’s basic salary and is adjusted per the inflationary trends to mitigate the impact of inflation on the employees.

House Rent Allowance (HRA): This salary component is offered to employees with rented accommodation. The HRA is partially or fully exempt from taxes under Section 10(13A) of the Income Tax Act. It is fully taxable if an employee does not live in rented accommodation.

See. House Rent Allowance Rules & Calculation

Leave Travel Allowance (LTA): LTA is the allowance given to employees for travel expenses. Workers must submit proof of travel to claim the allowance. A salaried person can claim the LTA exemption under Section 10(5) of the Income Tax Act.

Special Allowance: Special allowance component is fully taxable in the salary structure. Special allowance usually comprises the remaining part of the salary after allocating it to other major components such as basic pay and HRA.

Bonus: Some employers agree to pay a quarterly, biannual, or annual performance incentive to the employees, called bonus. The bonus is a part of the gross salary and is fully taxable at the employee’s end.

Employee contribution to the PF: The employee provident fund (EPF), receives monthly contributions of 12% of the employee’s Basic pay + Dearness allowance from both the employer and the employee. A deduction for the employee's contribution to the EPF is allowed under section 80C of the Income Tax Act, 1961.

Professional Tax: It is levied by the state as the tax on employment. The state can charge a maximum of ₹ 2,500 as a professional tax in a financial year. A professional tax of ₹ 2400 yearly is applicable in Karnataka.

Net Salary Calculation

Net or take-home salary calculation can be understood by the following illustration.

Illustration:

Your Cost to Company (CTC) = ₹ 10 lakh

Bonus in a financial year = of ₹ 100,000

Then your total Gross salary will be calculated by subtracting the Bonus from the Cost to Company (CTC).

Gross salary =₹10,00,000 – ₹100,000 = ₹ 9,00,000

Following the simple method of EPF calculation, the EPF contribution will be computed on a minimum salary threshold of ₹15,000 per month. 12% of ₹15000 as the employee contribution will be = ₹1,800 a month or ₹21,600 per year.

Now, the employer will make the exact contribution of ₹21,600 towards the EPF (8.33% of the employer’s contribution gets diverted to the employee pension scheme).

Total Deductions = Employee Contribution + Employer Contribution

Total Deductions = ₹ 21,600 + ₹ 21,600 = ₹ 43,200.

Take Home Salary = Gross Pay – Total Deductions

Net Salary = ₹ 9,00,000 – ₹ 43,200 = ₹ 8,56,800

Other Deductions

In addition to the above standard deductions, some companies also deduct a yearly amount of ₹ 3,000 towards employee insurance. Please factor this in total deductions in case your company makes this deduction.

In Karnataka, the professional tax of ₹ 2,400 per year is deducted from the gross salary. Please factor in this deduction if your employer deducts professional tax.

So, the Total Deductions after factoring in the other deductions will be = ₹21,600 + ₹21,600 + ₹3,000 + ₹2,400 = ₹48,600

Take Home Salary = Gross Pay – Total Deductions

Take Home Salary = ₹ 9,00,000 – ₹ 48,600 = ₹ 8,51,400

Some companies also deduct the amount towards Medical Insurance in which the annual premium payable is equally borne and paid by employer and employee. In some cases, the entire premium amount is borne and paid by the employer. This should also be factored in accordingly while calculating net salary.

See. Pay Calculator with Basic+DA taken as Actual for EPF Calculation

See. Pay Calculator with the Threshold of 15k for EPF Calculation

Components of Compensation Planning

1. Market Information Based – Keep an eye on the employment markets and what the competitors offer. This helps create a competitive compensation and benefits plan. Compensation should be commensurate with the broader job market to keep employees motivated.

2. Performance Based – Salary alone might not be sufficient to keep employees enthusiastic about delivering their best performance. Building a system of incentivizing performance and allocating rewards can be a game changer in accelerating performance.

3. Skills, Position, and Job-Based – Keeping employees’ compensation commensurate with their skills and role in the company is vital in keeping them engaged and retained.

4. Individual career development – Take ownership of the employees’ career growth by providing them opportunities to upskill themselves and strengthen their existing skills. Businesses prosper where the knowledge & skills of employees prosper.

5. Consistent and Fair – Build an environment of fairness in the procedure and distribution of payments and deliver on the promises to earn employees’ trust. Automating the payments helps achieve this objective. There is a strong correlation between fairness in pay distribution and engagement. Employees tend to increase their engagement when they understand that their compensation is fair and consistent.

Determining Compensation and Benefits

Organizations are free to fix salaries and set salary structures for each role and level, keeping in mind the minimum wages set by the Government of India as per the Minimum Wages Act, 1948. However, employers must be cognizant of the fact that accessing a quality talent pool will be challenging if they are unwilling to pay the market rate.

Each position has a market rate or, let’s say, the rate at which employees are willing to offer their services. However, it isn’t easy to ascertain it as people are hardly transparent about their salaries.

To invite compensation data from various organizations, salary surveys can be conducted by the compensation specialist to determine the market rate for a specific position in a particular sector. Survey results can then be used to determine the average rate for each position in a business.

Since all candidates differ in experience and skill, their compensation is also ideally different. Hence, the compensation specialists determine each position's ideal salary and salary range. Each range has a mid-point known as compa-ratio. Compa-ratio of 100 percent means the exact midpoint of the salary range.

The other method is fixing the salary at an agreed percentile in the salary band. Salary bands differ from company to company. Percentiles are established based on existing pay ranges or what competitors are offering in a certain industry.

Determining an individual’s fitment within the salary range is a complex procedure. To determine a fair salary for a position, the following variables are considered –

• Highest degree earned and specialization
• Total years of experience
• Relevant experience

• Current salary
• Tenure with the company
• Full-time or part-time role

• Individual’s location
• Salary bands or grades followed by the company
• Performance rank or rating

Total Rewards Model

Total Rewards is a scientific approach that considers all the work-life aspects impacting the satisfaction and motivation of an employee. Following are the elements the model considers while determining an employee’s compensation.

1.1. Transactional Rewards – These are tangible rewards comprising direct and indirect compensation and benefits. Transactional rewards and benefits include the following components.

1.1.1. Salary – Fixed base pay and dearness allowance in some cases

1.1.2. Benefits – Other indirect monetary benefits, including allowances, reimbursements, retirement pay, and health care benefits

1.1.3. Rewards – Bonus, performance incentives, and commissions

1.2. Relational Rewards – These are intangible rewards and benefits, which include the following.

1.2.1. Organizational culture - Culture should be inclusive, supportive of new ideas, free from bias, and allow for making mistakes and learning.

1.2.2. Recognition – Employee recognition programs include various category awards for performance, achievements, etc. Promotion and verbal appreciation in peer presence are also examples of employee recognition.

1.2.3. Total Wellbeing – It includes employee assistance programs to assist them in overcoming financial, physical, relationship, or mental challenges. Giving employees the opportunity to volunteer for social causes also foster their well-being. Further, total well-being includes company-sponsored events for employees and their families to allow employees to socialize, forge peer relations, and foster belonging to the organization.

1.2.4. Flexibility – After the pandemic, flexibility has become essential for employees when selecting a job or deciding to stay in an organization. Hybrid work arrangements and offering flexitime go a long way in reducing employee turnover.

1.2.5. Career and personal development – These initiatives include company-sponsored training, educational programs, and mentorship programs to empower employees by enhancing their competence at work. These initiatives also serve as the foundation for employees to develop within the company and realize their full potential.

The basis of this model is the fact that pay alone is not a sufficient factor to keep employees happy and engaged at the workplace. Other factors, such as culture and management practices, are significant hooks for employees to be glued to the organization.

i. Evaluate the current system and what is already in place.

ii. Invite employee feedback to determine the missing factor and to take their views on the existing practices.

iii. Involve leadership in identifying goals and priorities of the C&B strategy.

iv. Align the C&B strategy with organizational objectives and values.

v. Keep the total rewards plan inclusive, flexible, and fair.

vi. Communicate total rewards to employees and how they will help achieve the desired results.

Pay Model of Compensation

The pay model of compensation developed by G.T. Milkovich and J.M. Nemwan in 2002 defines compensation as financial gain and tangible benefits given to employees for work. The model comprises three components:

1. Compensation Objectives
2. Compensation Policy
3. Compensation Techniques

1. Compensation Objectives

As per the pay model of compensation, the objective of remuneration systems is to achieve organizational objectives, including fairness, efficiency, and conformity to regulations.

i. Fairness – Fairness refers to having a reward system that rewards performance, not people. It should be competitive to employee roles, experience, and industry standards. Rewards can be automated to achieve consistency in payouts.

ii. Efficiency – The effectiveness of compensation systems translates to improved performance, satisfied customers, and cost reduction.

iii. Compliance with legislations and regulations – For an organization to abide by the law, its compensation model must conform to the national/ central regulations and legislations. It must be updated from time to time as per the revised regulations.

2. Compensation System Policies

As per the Pay Model of Compensation, the remuneration system must relate to business objectives, competitive performance, and the contribution of employees. The policy of compensation structure is based on the following four pillars.

1. Internal Alignment – Internal alignment means rewarding different sorts of jobs while also matching remuneration for similar work. Positions are evaluated according to how much they contribute to the organization’s goals. If employees believe that the compensation structure is just, they will be more likely to develop and accept training.

2. Competitiveness - The compensation plan must be sufficiently competitive in comparison to what competitors offer.

3. Contributions – Employee contribution is crucial in keeping their performances competitive to deserve/attract the best remuneration in a system. Incentives and rewards must be based on what employees contribute.

4. Adaptable – The remuneration system must be efficient to adapt to new requirements. New requirements can result from new regulations or new objectives for the business.

3. Compensation Techniques

As per the pay model of compensation, the techniques of the compensation model close the gap between policy and objectives. Techniques such as skills analysis, work analysis, or market analysis can be adopted to develop a compensation structure. Tools such as surveys, assessing employee contribution based on performance guidelines, open communications, etc., are an essential aid to the compensation techniques.

Types of Compensation as Per Pay Model of Compensation

An employer has the freedom to select and put together a basket of benefits that best suit the company’s objectives and employee needs. The popular forms of compensation, as listed by the pay model, are listed below.

1. Basic Salary - see above under the section ‘salary and its components.

2. Commission – Commission is generally offered apart from the basic salary for target-oriented roles such as meeting sales targets, etc.

3. Overtime Pay – As per the pay model, employees should be compensated for the extra hour they work for a company. Overtime pay is the remuneration given to compensate workers for hours exceeding the regular work hour mentioned in an employee's employment agreement.

4. Bonus or Profit Sharing – Bonus is given over and above the basic salary. Employers may determine a bonus pool, of which a certain percentage can be set aside for each role type. A larger bonus share should be designated for the employees in positions with greater responsibility.

5. Stock Options – A stock option is a benefit wherein employees are awarded company stocks annually. Employee motivation is increased since they receive a portion of the company's profits and are involved in its expansion in this way.

6. Reimbursement, such as travel, meal, housing expenses, etc., helps cover employees’ mandatory expenses.

7. Health Insurance – It is mandatory to provide health benefits to employees.

8. Employee Provident Fund and Employee Provident Schemes - see above under the section ‘Mandatory Benefits in India’.

9. Other benefits that employers can choose from are:

• a. Dental Insurance – Dental treatment is expensive and hence an important consideration in some countries. In India, this is not much popular or mandatory to provide dental insurance.
• b. Life Insurance
• c. Pension and Retirement Benefits
• d. Tax Benefit Schemes
• e. Accidental Cover
• f. Mutual Funds

The Pay Model Compensation provides a structured way of organizing remuneration systems. The three components of the model – objectives, policies, and techniques are its three backbones. The compensation system must be competitive and aligned with the company’s goals.

Tools and Samples

• EPF & EPS Rules and Calculation
• Gratuity Rules & Calculation
• Leave Encashment Rules & Calculation
• House Rent Allowance (HRA) Rules & Calculation
• Pay Calculator with Threshold of 15k for EPF Calculation
• Pay Calculator with Basic+DA taken as Actual for EPF Calculation