How to Design an Ideal Salary Structure

What is Salary Structure and How to Develop it

Paying employees a competitive compensation package can give companies a key advantage when it comes to attracting and retaining top talent. This becomes especially important with the millennial workforce who are driven to find both, a professionally and a financially fulfilling career path. That’s why it is important to understand what a salary structure is and how to create a competitively positioned one.

A survey found that employees who are satisfied with their pay would be 13% more likely to stay with their present employer for over 3 years.

What is Salary Structure?

A salary structure refers to a company-wide framework that is used to determine and pay the salaries of employees holding different positions in the company. The pay range depends on an employee’s position in the organizational chain, their qualifications, work experience and salary ranges for similar positions across the market. Salary structure also determines the non-financial parts of an employee’s compensation packages, like bonuses and perks.

Types of Salary Structure

Depending upon an organization’s size, industry and market trends, companies can design a structure that optimizes their salary expenditure. Here are the most common types that companies consider while structuring salary frameworks:

1. Traditional Salary Structure

This salary structure implements pay ranges that have relatively smaller differences between them. Employees can move up the hierarchy and pay range with each subsequent promotion. Most companies opt for this salary structure as it provides stability, and employees have visibility to a clear path of upward mobility. This structure also incentivises employees to stay with a company for longer.

2. Market-based Salary Structure

A market-based salary structure is beneficial for companies operating in a highly specialized and niche industry where competition for candidates is more intense. This structure considers the demand for the role along with the market rates for compensation for that role. This allows companies to offer a competitive salary package which can help them attract and retain top talent.

3. Broadband Salary Structure

This is a relatively more flexible structure as opposed to traditional ones. It encompasses grouping a wide number of salary ranges within each pay grade. One employee rank can have a wide salary range. So, if an employee performs well and is invested in self-development, they can receive a higher salary according to their performance and professional development without having to depend on a promotion.

4. Step Salary Structure

A step salary structure doesn’t consider increased responsibility or skill development to provide pay increments. Rather, there’s a pre-defined schedule according to which pay increases. For instance, if an employee has worked in the company for two years, they are liable to receive a pay increase. This can help companies foresee future salary expenditure costs while employees stay loyal as they see a clear path of upward mobility.

5. Flat Salary Structure

A flat salary structure refers to a system where all employees, regardless of their role, expertise and experience receive the same base pay. There may be changes or increments in terms of incentives like bonuses, but the basic salary will remain the same for everyone.

Common Components of Salary Structure

When creating a salary structure, companies must include some compulsory components. Some of these components are government mandated while others can be included according to company policy.

Combined, these elements add up to an employee’s annual CTC (cost to company). They include:

• Basic Salary: This amount usually ranges between 40 – 60% of an employee’s CTC. This is a fixed amount and is determined as per government standards, individual qualifications and experience. Other components of the salary are calculated as percentages based on this number.
• HRA: HRA or House Rent Allowance is calculated as of 10 – 30% of basic salary and is given by employers so that employees can meet the cost of living in a rented accommodation. HRA is considered taxable unless employees seek HRA exemption.
• DA: DA stands for Dearness Allowance. This amount can range up to 50% of basic salary. It is given to employees as a relief to combat inflation rates. This also a taxable allowance.
• Conveyance Allowance: This amount is offered to employees to meet the costs of commuting to and from the workplace. This component may or may not be exempt from taxes.
• LTA: Leave Travel Allowance can be availed by employees or their dependent family for domestic travel expenses. Employees can file for reimbursement claims to avail this after taking the trip by showing expense proofs. This allowance is exempt from taxes.
• Medical Allowance: Medical Allowance is given to employees to meet expenditure incurred due to health reasons. It is exempt from taxes, but only up to a certain limit.
• Other Allowances: There are miscellaneous other allowances that aren’t directly counted as a salary component, but still add up in an employee’s CTC. These include incentives like reference bonuses, retention bonuses and performance bonuses. It can also include salary arrears, business expense reimbursements, overtime payments and leave encashments. These can also be taxable.

Along with allowances, taxes and deductions are also considered important components of a salary break-up. Some of the most commonly imposed ones include:

• TDS: TDS or Tax Deducted at Source is deducted by the employer from the employee’s salary. The rate is determined by which income tax slab they fall under.
• PF: Provident Fund deductions, aimed at financing pensions and providing financial security during retirement years, become compulsory if an employee earns above a certain amount (INR 15,000). The deductions are made at 12% of INR 15,000 per month and both the employee and employer are required to pay it.
• Professional Tax: All earning individuals are liable to pay professional tax. Employers are tasked with deducting and submitting these on behalf of their employees. The calculation differs from state to state but the maximum deductions limit is INR 2500 per year.
• Income Tax: Charged annually on an earning individual’s entire annual income, this tax rate is determined by tax slabs. In India, these tax rates range from 5 – 30%.

How to Create a Salary Structure?

Designing a salary structure that works for your business can be overwhelming, especially if you are starting from scratch. But it is also one of your most powerful tools for building a loyal and motivated workforce. That’s why it is essential to simplify the process in several steps. Here’s how you can get started:

1. Begin with Your Compensation Philosophy

Every company has different compensation ideologies to determine a salary structure. Some companies can offer a more competitive package but with less benefits like a non-flexible work mode, or no profit sharing. Other companies can offer more in terms of benefits and allowances but a lower salary range. So, consider the requirements and responsibilities for job roles and design a salary structure accordingly.

2. Evaluate Job Roles

Understanding the skills and requirements for every single role plays a big part in determining its compensation, especially in financial terms. Salary ranges can be framed by considering preferred educational qualifications, years of experience and even additional certifications. Besides this, companies also need to determine how valuable the role is to their organizations. This can help them settle on a salary range that is ideal.

3. Conduct Market Research

Market research is essential when a company is aiming to offer a competitive package. Understanding demand and salaries offered by other companies can help you in benchmarking your pay structures. It can also help in gaining insights about your position in the market as a prospective employer.

4. Settle upon a Raise Margin

Regular raises are a great way to keep your employees motivated. That’s why, when creating a salary structure, companies must also keep in mind how they’d compensate their employees in the long term. Understanding the margin for similar roles can help you set a range for a salary increment structure. However, companies must also consider their revenue and salary expenditure before deciding upon this metric.

5. Pay Attention to Legalities

Legal compliance is a no-brainer when it comes to running a business. From operational requirements to salary, companies must meet requirements set forth by the government. Companies must strive to meet minimum wage requirements, adjust dearness allowance components, reduce pay grade differences, and ensure equitable pay according to government regulations.

6. Creating a Salary Structure

Once a company has evaluated role requirements, understood market yardsticks and met legal requirements, it’s time to put the pay structure on paper. It is not necessary that one must opt for a singular type of structure. Every company’s ideal salary structure differs, owing to several factors like resources, revenue, number of employees and industry. So, companies must exercise the liberty to opt for a structure that suits their needs the best.

Factors to Consider While Creating Salary Structure

When designing a salary structure, companies must account for both external and internal elements that can affect the numbers. Some factors companies must consider, such as:

1. Revenue vs. Salary Expenditure

A company’s ability to pay its employees properly and on time plays a big part in determining by salary structure and payment cycle. For instance, if a company receives payments for the goods/ services it provides, then 30-60 days after it has generated an invoice, they must keep the gap in consideration when designing the pay cycle. This is especially important if the company is depending on generated revenue to pay its employees.

2. Labor Market

The available labor market can differ from area to area, and so can its costs. If the demand for skilled labor is high but the number of candidates with relevant skills and qualifications is low then, companies must offer a competitive salary range to meet its labor requirements.

3. Cost of Living

The cost of living in tier 1 cities would be significantly higher than a tier 3 city. So, if a company needs to fill an in-office role in a tier 1 city, they’d need to pay the potential employee a lot more than hiring a remote employee living in a tier 2 or tier 3 city.

4. Administrative Attitude

Administrative levels can have a very significant impact on determining wages. From determining the value of the role to the organization to deciding pay structures, all these factors need to be run by senior executives before being put in motion.

Summing Up

Having a proper salary structure in place can allow organizations to effectively forecast expenditure. The efficiency also adds on to employee engagement, while ensuring a transparent and fair compensation practice. This way, companies can maintain a motivated and productivity driven workforce, while also effectively controlling labor costs.

How would you create the ideal salary structure for your employees? Let us know in the comments.