How to develop a Pay Structure?

A clear pay structure is one of the first important things that any company should have on its to-do list, which requires a lot of scouting and analysing. Proper market research on the different kinds of job roles, the kind of responsibilities that it entails, required skills of the employees helps in creating a pay structure template. A good remuneration plays a central role in employee satisfaction, which can be enhanced by providing them benefits of various kinds, which is a very tough goal. Post-retirement benefits in the form of EPF are included in every company’s payment structure which is mandated. ESI works to provide health insurance benefits for the employees, but it suffers from its own limitations. Let us have an elaborate look at these topics.

What are some of the steps that the company must go through to develop a pay structure?

  • Establishing value for each job position: Through market research of competitive firms, what other firms are paying for similar job roles, establish a value for each job role in your company by benchmarking other similar jobs and analysing their data.
  • Measuring the market position of the company: Comparing the company’s salary level with the average of the market’s pay level to understand some of the basic questions in terms of affordability, attracting and retaining of employees.
  • Have a clear budget for the salary payout: A defined budget is a very critical step that every company must have from the very beginning. Internal budget constraints and external market factors will pose as opposing forces in reaching a satisfactory pay structure.
  • Define compensable leverage for the employees: This is the increase in salary rate when the employees are promoted compared to the market rates of promotion in similar positions.
  • Start allocating and final adjustments: A series of hit and trial methods to reach the appropriate salary ranges for different job profiles based on the market data collected and analysed to reach a final pay structure.
  • Management approval and Communicate: After getting the management’s final approval for the salary ranges of different profiles, the pay structure is then communicated to all the staff.

What are the different kinds of pay structures?

  • Individual pay rates/ranges: The most common form of pay structure, where the employees are told about their fixed salaries beforehand, and thus the company also has an exact estimate of their payout, their hiring potential. This is a rigid structure where the employees can have the only progression of their salaries if they are promoted. Contrary to this, the individual pay range provides a band of salary range that different employees in different job profiles can expect.
  •  Broadbanding: Dividing the employees according to their pay grades. There are different pay grades for different managerial job roles and executive job roles. This system includes maximum and minimum pay, with incremental stages between them, where the employees start at the minimum and then, based on her/his performance, get the increment.
  • Pay Spine: A simplified pay structure, where the spine is made up of pay points from the lowest entry-level salary to the executive level salary, and each pay point is defined with the fixed predefined salary and incremental levels in a particular position.
  • Job Families: A versatile pay structure, where the transition is based on the employee’s knowledge, skill, loyalty, experience. Here, similar roles are grouped, and each role is separated based on knowledge and seniority.

Do you know the most important components of a salary structure in India are?

  • CTC or the Cost to Company: It includes all the components such as HR, bonus, basic salary, PF, etc.
  • Basic salary: It constitutes 35-50% of the total wage, based on the designation of the employee and the fixed amount that is paid before any deduction or increase.
  • Gross salary: The salary just before any deduction like taxes.
  • Net salary: The final takeaway salary after deducting the TDS, also called the in-hand salary.
  • Allowances: Different remuneration that is paid to the employees over a year, where these allowances can be taxed partially, completely, or not taxed at all. Some of these are Dearness allowance, House Rent Allowance, Medical Allowance, Leave Travel Allowance, and many more.
  • Gratuity: A lump sum amount paid by the company to the employee that is retiring.
  • Employee provident fund: An employee-benefit scheme where both the employer and the employee puts a certain fixed amount of money, from where a fixed amount of deductions can be made after retirement mostly.
  • Professional tax: The tax levied on employee’s salary by the state government, which is a maximum of Rs. 2500.
  • Perquisites: Generally non-monetary, these are certain benefits that the employees enjoy over and above their salary based on their position within the company.

What is an Employee provident fund, and how is PF calculated?

This focuses on post-retirement schemes and benefits. EPF is compulsory for Indian organisations under the “The Employees’ Provident Fund and Miscellaneous Provisions Act 1952”. A minimum of 10%-12% of the basic salary of the employee is deducted and deposited in the employee provident fund. In case the employee is a woman, she needs to pay only 8% of her salary to the provident fund for the first 3 years thereafter, which becomes 10%-12%, whereas the employer still needs to contribute 12%.

The employee can voluntarily contribute more than 12%, but the employer is under no obligation to match it. Here, the employer’s contribution is limited to a maximum of Rs. 1800, i.e., 12% of 15000, so even if the employee’s salary is more than 15000, the maximum that the employer can contribute is Rs. 1800.

The statutory compliances associated with PF contribution are that the contribution made by the employer is divided into two parts. Employee provident fund (EPF), which is 3.67% of the 12% contribution, and Employee Pension Scheme (EPS), which is 8.33% of the 12% contribution.

For example, if the employee’s salary is Rs. 10000

Employer’s contribution (in Rs.)

Employee’s contribution (in Rs.)


367 (3.67% of 10000)

1200 (12% of 10000)


833 (8.33% of 10000)



What is Employee State Insurance(ESI)?

A contributory fund, where both the employee and the employer contribute to form a healthcare insurance fund for the employee. Employees’ State Insurance Corporation manages them as per the rules mentioned in the Indian ESI Act of 1948. This scheme provides both cash benefits and healthcare benefits to the employees. Anywhere 10 or more people are employed eligible for ESI.

Eligibility: All the employees who have a monthly income of less than Rs. 21000 are eligible for ESIC contribution. Employees having a daily average earning of up to Rs. 176 are also exempted. ESI is calculated on gross salary.

The employee contributes 0.75% of his/her gross salary, whereas the employer contributes 3.25% of the gross salary, and the employer submits the total contribution within 15 days of the last day of the month.  

For example, let the gross pay of the employee be Rs. 10000.

Percentage of gross salary


Employer’s contribution (in Rs.)


0.0325*10000 = 325

Employee’s contribution (in Rs.)


0.0075*10000 = 75

                                                         Total contribution:                                                                     400

Now, the contribution periods are divided into two groups of 6 months each.

  • 1st April to 30th September, for which the cash benefit period is 1st January to 30th June of the following year.
  • 1st October to 31st March, for which the cash benefit period is 1st July to 31st December.

Now, if the salary of any employee increases beyond the maximum limit of Rs. 21000 in between the ongoing contribution period, then the contribution for the remaining months are calculated on the new amount, till the end of the contribution period, and after that if the salary still surpasses the maximum limit, the employee is not eligible for ESI.

Pay Structure Template

The most basic salary structure of any company encompasses:

Employee’s name


Total gross salary



Basic salary






Conveyance allowance


Medical allowance


Special allowance






Total deductions

Contribution to employee pf


Professional tax






Net payable salary


So, pay structures are of utmost importance to any organisation and serve to attract, nurture and retain good employees in the long run. It shows that the company values the employee’s hard work and rewards the employees handsomely.  

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