The first and the most important aspect before you start paying your employee paycheck is to determine how much to pay them. Besides complying with wage and hour laws it is a good idea to find out how much other employers are paying them in comparable roles. For startups, it is normally a good idea to calculate the whole amount being paid into the employee paycheck. The allowances and other benefits constitute up to 30% of an employees’ salary, so taking into account only one’s CTC, at least for a startup might not be the best strategy. In order to understand how much to pay your employees, it is very important to first understand the various components in the whole salary amount.
Basic Salary: As the name suggests, this is the core of salary, and many other components may be calculated based on this amount. It usually depends on one’s grade within the company’s salary structure. It is a fixed part of one’s compensation structure.
Allowances: Generally allowances are calculated as percentage on the basic salary such as Dearness Allowance (DA), House Rent Allowance (HRA), Leave Travel Assistance (LTA), Lunch Allowance, Conveyance Allowance, Children’s Education Allowance and City compensatory Allowance etc. Allowances can either be fully taxable, partly taxable or not taxable at all.
Perquisite: Any benefit or amenity granted or provided free of cost or at concessional rate such as rent free unfurnished house, rent free furnished house, motor car facility, reimbursement of gas, electricity & water, club facility etc are termed as perquisites. Since perquisites are non-cash components, no taxes are applicable on them. As a startup it might be a little tedious to organize perquisites but they go a long way in attracting and sustaining good talent which will add to the energy and robustness of your workplace.
Provident fund: Usually 12 per cent of the basic salary, provident fund contribution is one tricky aspect of calculating an employee’s salary. It has two sides – the employer’s contribution and employee’s contribution. Depending on the size of a company, it is mandatory for any organisation to register with the Provident Fund Commissioner. It is important to understand that this contribution is not paid out to the employee but directly deposited in Provident Fund (PF) account. There is also employee’s contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. These are the major break ups for your employee paycheck. Always remember, although it is very important to hire and retain good talent for your organisation, never overpay. As a startup, you cannot afford it. Every penny you save, you can utilise to hire new talent or invest in expanding your business.