Salary is one of the most important components of an employee’s compensation package. It is the money paid to an employee in exchange for the work they perform. One of the major reasons why employees sit through those long meetings and dodge the traffic signals is to get their salary credited message at the end of the month. There are various types of salary structures that companies can use, depending on their business needs, employee expectations, and market trends. In this blog, we will discuss the different types of salary structures in HRM.
- Fixed Salary: A fixed salary, as the name suggests, is a set amount that an employee is paid each month. This is the most common type of salary structure used by companies. It provides employees with a stable income and allows employers to budget their payroll expenses.
- Hourly Wages: Hourly wages are paid based on the number of hours an employee works. This type of salary structure is typically used for hourly or part-time employees. The hourly rate may vary based on the employee’s experience, job role, and market trends.
- Commission-based Salary: Commission-based salary is a type of variable pay that is paid based on an employee’s sales performance. This type of salary structure is commonly used in sales jobs. It motivates employees to perform better by rewarding them for their sales efforts.
- Performance-based Salary: Performance-based salary is a type of variable pay that is paid based on an employee’s performance. This type of salary structure is used to motivate employees to perform better and achieve certain performance goals. The performance goals may be based on individual, team, or company-wide objectives.
- Profit-sharing Salary: Profit-sharing is a type of variable pay that is paid based on the company’s profits. This type of salary structure is used to motivate employees to work towards the company’s financial goals. It also provides employees with a sense of ownership in the company’s success.
- Stock-based Salary: Stock-based salary is a type of variable pay that is paid in the form of company stocks or options. This type of salary structure is typically used in startups or high-growth companies. It motivates employees to work towards the company’s long-term goals by providing them with an opportunity to benefit from the company’s success.
- Benefits-based Salary: Benefits-based salary is a type of salary structure that includes non-cash benefits, such as health insurance, retirement plans, and paid time off. This type of salary structure is used to attract and retain employees by providing them with valuable benefits.
Each type of salary structure has its own advantages and disadvantages. The choice of salary structure depends on the company’s goals, budget, and culture. It is important for companies to choose a salary structure that aligns with their business needs and employee expectations.
Now that we have looked at the different types of salary, let’s look at the components of salary.
CTC, basic pay, and gross pay are important components of salary structures in HRM. Employers must consider the relationship between these components when designing a compensation package that is attractive to employees and financially sustainable for the company. They must also comply with applicable laws and regulationsnetwork errorv
What is CTC
Cost to the company is the amount spent by an organization to hire an employee. It includes multiple elements such as HRA (House Rent Allowance, Provident Fund (PF), Medical insurance, etc.) added to the basic salary. These allowances include free meals, cab service, etc. All these elements, when combined, form the cost to the company. In short, CTC covers everything from hiring and sustaining an employee in the company. CTC is variable pay, and when CTC varies, the take-home or net salary varies.
The different salary components are the basic salary, gross salary, and the net or in-hand salary. These components add to the total cost of the firm spent on hiring an employee.
Basic salary is the base income of an individual paid for their contribution to the company, and it remains constant as a fixed part of an employee’s compensation package. It differs from employee to employee based on their position in the company. Apart from differing designation, it may vary from one industry to another. It does not include bonuses, allowances, or any other benefits.
Gross salary is paid to the employee after deduction of the EPF and gratuity from the CTC. In simple terms, gross salary is the amount given to the employees before tax deductions or other deductions are made and includes bonuses, overtime pay, holiday pay, and other credentials. EPF or Employee Provident Fund is the employee-benefit scheme that every organization is bound to give to its employees. An employer has to contribute a certain percent of an employee’s salary toward their EPF. The employee can withdraw this amount at the time of their retirement or under any of these three circumstances:
- Termination of services
- Retirement due to disability
- Migration for taking employees abroad
Net Salary or In-hand Salary
Net or take-home salary is the amount an employee receives after making tax and other deductions. It refers to the in-hand salary calculated after deducting income tax, professional tax, and other business policy deductions. It may differ according to the different company policies.
Net salary = Basic salary + HRA + Allowances – Income Tax – EPF – Professional Tax.
The Difference between CTC and In-hand Salary
An employee may notice a difference between the salary offered at the time of joining, i.e., the CTC, and the in-hand salary. Employees often believe that the CTC offered and the in-hand salary will be the same. However, there is a difference between the two. Deductions from the gross salary result in the difference between the initially offered CTC and the actual in-hand salary. CTC is the amount an organization spends on an employee, and the net salary is what an employee receives after every deduction.
How to Calculate In-hand Salary
In-hand or take-home salary is calculated using a calculator, which uses various factors such as CTC, bonus, and other details. In-hand salary is the take-home pay after all the deductions.
To calculate in-hand salary:
- Calculate the gross salary by subtracting the EPF and Gratuity from the CTC
- After this, calculate the taxable income by making required deductions from the total income
- Income tax is calculated by adding the slab rate on calculated taxable income
- In-Hand Salary = Monthly Gross Income – Income Tax – Employee PF – Other Deductions if any.
Frequently Asked Questions(FAQ)
Cost to the company is the amount spent by an organization to hire an employee.
It includes multiple elements such as HRA (House Rent Allowance, Provident Fund (PF), Medical insurance, etc.) added to the basic salary.
These allowances include free meals, cab service, etc.
Gross salary is the amount paid to the employee after the EPF and gratuity are subtracted from the CTC.
In simpler terms, gross salary is the amount given to the employees before tax deductions or other deductions are made and is inclusive of bonuses, overtime pay, holiday pay, and other credentials.
Net salary or take-home salary is the amount received by an employee after tax and other deductions are made.
Net salary = Basic salary + HRA + Allowances – Income Tax – EPF – Professional Tax