Internal equity means that jobs of similar size and value to the organisation are paid similarly, and larger jobs are paid more than smaller ones. It answers the question: is this job paid fairly relative to other jobs in the same organisation? It is achieved mainly through job analysis, job evaluation and grading (Sections 2.2 to 2.4).

External competitiveness means that pay is set at a deliberate level relative to what other employers pay for comparable jobs. It answers the question: can we attract and retain people for this job at this pay? It is achieved through salary benchmarking and a chosen pay positioning (Section 2.5).

A third principle, individual equity, concerns people in the same job: differences in their pay should be explained by legitimate factors such as performance, experience and time in role, rather than by negotiation skill, bias or the timing of hiring. It is managed through pay ranges, compa-ratios and the merit matrix (Sections 2.6 to 2.8).

Why these principles matter: the first-principles view. Employees judge pay mainly by comparison. J. Stacy Adams’s equity theory (1965) describes how people compare the ratio of what they contribute to what they receive with the same ratio for others. When they perceive inequity, they act to restore balance: they reduce effort, ask for more, or leave. This is why a pay system’s credibility depends less on how much it pays and more on whether its decisions can be explained.

Factors that determine pay

Pay for a given person is the result of four groups of factors, which act at different levels.

The table explains a common confusion. Two people can be paid differently for valid reasons operating at different levels: their jobs are in different grades (job), their jobs are benchmarked to different markets (market), or they sit in different parts of the same range (person).

Definition. Job analysis is the systematic collection and recording of information about a job: its purpose, responsibilities, decisions, relationships, working conditions, and the knowledge, skills and experience required to perform it.

Principle: analyse the job, not the person. A pay structure is built around jobs because jobs are relatively stable, whereas jobholders change. If pay is set around individuals, the structure reflects past negotiations rather than the work, and becomes impossible to explain or maintain.

Outputs.

Methods. Most organisations combine several methods, because each has blind spots.

Common problems and best practice. Job analysis often reveals title inflation and title proliferation: one title used for very different jobs, or many titles for the same job. In a company of 1,400 employees it is not unusual to find over 200 titles. Best practice is to standardise titles against a defined set of job families and levels (Chapter 6, job architecture), write JDs in a common template focused on outcomes rather than task lists, and have them validated by both jobholders and managers.

Definition. Job evaluation is a systematic process for determining the relative worth of jobs within an organisation, so that jobs can be placed in a hierarchy and grouped into grades.

Why it is needed. Market data alone cannot produce a coherent structure. Many jobs have no reliable market match, survey data fluctuates, and pricing each job separately from the market produces anomalies such as a job being paid more than the job that supervises it. Job evaluation provides a stable internal order to which market data is later attached.

Two things job evaluation does not do. It does not assess the performance of the jobholder, and it does not set salaries directly. It produces an order of jobs and, in analytical methods, a measure of the distance between them.

Methods

Definition. A grade is a group of jobs of broadly similar size, defined by a band of job-evaluation scores, that share the same pay range and often the same benefits eligibility.

How grades are formed. Jobs are listed in order of evaluation scores and grouped where natural breaks occur, or into bands of equal width. For example, all jobs scoring between 340 and 400 points might form grade M1; the shift engineer (380) falls in M1 and the purchase executive (260) two grades lower.

Grades, titles and levels are different things. A title describes the work (“Shift Engineer”). A level describes progression within a job family (associate, senior, lead). A grade describes job size for pay purposes. Organisations align the three in a job architecture so that each can be read from the others (Chapter 6).

Number and width of grades.

Definition. Salary benchmarking is the comparison of an organisation’s pay for specific jobs with pay for comparable jobs in a defined external market.

Data sources

Three rules for using survey data correctly

1. Match jobs on content, not title. A job is matched to a survey position when its core responsibilities substantially correspond to the survey’s description. Titles vary too much between companies to be reliable. This is why accurate JDs (Section 2.2) are a precondition for benchmarking.

2. Read the distribution, not one number. Surveys report percentiles. The 25th percentile (P25) is the pay level below which a quarter of the market falls; the median (P50) divides the market in half; the 75th percentile (P75) is exceeded by only a quarter of the market.

3. Use a common date and the right market. Survey data is collected at a fixed date, so it is “aged” forward to the date of use by the expected market movement. The comparison market should be the employers you actually compete with for that talent, which may differ by job family: a cement company competes with other manufacturers for plant engineers, but with all employers in the city for finance and IT staff.

Pay positioning

Best practice: segment. Most organisations do not apply one position to every job. A segmented strategy matches the market for most roles and leads it for a small number of scarce or critical skills. In an Indian cement company, for example, that could mean matching for most plant and corporate roles while leading for process engineers, safety specialists and digital roles, and compensating for remote locations through housing, township and education benefits.

Definition. A pay range is the band of pay an organisation is willing to pay for jobs in a grade, from a minimum to a maximum, around a midpoint.

Why a range rather than a single rate. People in the same job differ in experience and proficiency. A newly promoted person is still learning the role; an experienced person contributes more. The range allows pay to progress with proficiency while keeping a ceiling linked to the size of the job.

Design parameters

Worked example. A grade’s market median is ₹8.4 lakh, the organisation matches the median, and the chosen spread is 50%.

Compa-ratio

Definition. Compa-ratio = employee’s salary ÷ midpoint of the employee’s pay range × 100.

Group compa-ratio (total actual pay ÷ total midpoints for a team or function) shows whether a whole population is drifting above or below the structure.

Range penetration

Definition. Range penetration = (salary − range minimum) ÷ (range maximum − range minimum) × 100. It expresses how far through the range a salary sits, from 0% at the minimum to 100% at the maximum. It is more intuitive than compa-ratio when ranges differ in width.

Worked example: three employees in one grade

Range: minimum ₹6.72 lakh, midpoint ₹8.40 lakh, maximum ₹10.08 lakh.

Increment budget. Each year the organisation sets an overall budget for salary increases, as a percentage of the salary bill, based on market movement, inflation, business performance and ability to pay. In India, Aon’s survey reported an average actual increase of 8.9% in 2025 and a projected 9.1% for 2026, with real estate, infrastructure and non-banking financial companies above the average and technology services below it.

The merit matrix. The budget is distributed using a matrix of performance rating and compa-ratio. Illustrative matrix for a budget of about 9%:

The logic. For the same rating, a person low in the range receives a larger increase than a person high in the range. Over several years this moves strong performers towards the midpoint and slows the growth of salaries already above it. In the worked example, employees B and C with the same “exceeds” rating would receive about 10% and 7% respectively.

Related practices.

Cost to Company (CTC) is the total amount an employer expects to spend on an employee in a year. It is an employer’s budgeting figure that has become the standard way Indian offers are expressed.

Gross salary is the total of the salary components paid to the employee before any employee-side deductions: basic pay, dearness allowance, house rent allowance, special allowance and other allowances.

Net salary (take-home or in-hand pay) is gross salary minus employee-side deductions: the employee’s provident fund contribution, ESI contribution where applicable, professional tax, income tax deducted at source (TDS), and any voluntary deductions such as loan repayments.

The relationships can be written as:

• CTC = Gross salary + employer’s statutory contributions (PF, ESI where applicable, gratuity provision) + target variable pay + other employer-paid costs included in the offer (insurance premiums, meal cards, car lease, etc.).
• Net pay = Gross salary − employee PF − employee ESI (if applicable) − professional tax − TDS − other deductions.

Illustrative CTC structure

The structure below shows a typical offer of about ₹18 lakh for a management graduate. It is illustrative; actual structures vary by company and are covered by Sections 2.11 and 2.12.

Approximate monthly take-home for this structure under the new tax regime: gross ₹15,00,000, less the ₹75,000 standard deduction, gives taxable income of ₹14,25,000 and tax of about ₹97,500 including cess. Deducting employee PF of ₹36,000 and tax leaves about ₹13.66 lakh a year, or roughly ₹1.14 lakh a month, before any bonus. The CTC figure of ₹18 lakh therefore corresponds to about ₹1.14 lakh a month in hand.

Why CTC can mislead, and how to compare offers

CTC combines guaranteed pay, contingent pay and employer costs the employee never receives in cash. Two offers with the same CTC can differ in take-home pay by ₹1.5–2 lakh a year, depending on:

• the share of variable pay and how reliably it pays out;
• whether PF is calculated on the full basic or on the statutory ceiling;
• whether insurance premiums and gratuity are counted inside the CTC;
• one-time items such as joining bonuses that inflate first-year CTC.

The correct comparison is guaranteed annual cash + realistic expected variable + value of benefits, followed by take-home pay after tax.

Why salaries have components. Different laws and benefits use different bases. PF, gratuity and bonus are calculated on “wages” (mainly basic and DA). Income tax treats some allowances differently from others under the old regime. Leave encashment and some benefits are linked to basic pay. Splitting pay into components lets an employer manage each of these.

Income tax: what HR needs to know

• The new tax regime is the default for individuals; employees can opt for the old regime if they prefer its exemptions and deductions.
• New regime slabs: nil up to ₹4 lakh; 5% for ₹4–8 lakh; 10% for ₹8–12 lakh; 15% for ₹12–16 lakh; 20% for ₹16–20 lakh; 25% for ₹20–24 lakh; 30% above ₹24 lakh. A rebate makes taxable income up to ₹12 lakh tax-free, and salaried employees also get a ₹75,000 standard deduction, so salary up to about ₹12.75 lakh attracts no tax. A 4% health and education cess applies to the tax.
• The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026. Section numbers changed (for example, the familiar “Section 80C” and “Section 87A” now sit under new numbers); rates and slabs carried over. In interviews, refer to provisions by name rather than old section numbers.
• Consequence for pay design: because most employees now choose the new regime, flexible benefit plans built around HRA, LTA and meal-voucher exemptions have lost much of their tax value. Employers are shifting from tax-driven structures towards simpler ones, with employer NPS contributions remaining one of the few tax-efficient tools under the new regime.

Before the Codes. Each labour law had its own definition of wages. Many employers kept basic pay at 25–40% of gross and paid the rest as allowances, which reduced PF contributions, gratuity and bonus, all calculated on basic and DA.

The uniform definition. The Code on Wages, 2019, in force with the other Labour Codes from 21 November 2025, defines wages as all remuneration expressed in money, including basic pay, dearness allowance and retaining allowance, and then lists exclusions such as HRA, conveyance allowance, statutory bonus, overtime allowance, commission, employer contributions to PF and pension, and gratuity.

The 50% rule. If the excluded items together exceed 50% of total remuneration, the amount by which they exceed 50% is added back to wages. The purpose is to stop employers from artificially splitting pay into allowances to reduce statutory dues.

Worked example. Monthly remuneration ₹1,00,000: basic ₹30,000, HRA ₹25,000, special allowance ₹45,000.

PF (where calculated on actual wages), gratuity and bonus are then computed on ₹50,000 rather than ₹30,000. The Labour Ministry’s FAQs (March 2026) clarified that overtime counts among the excluded items for this test.

Effects on organisations.

What it is. The Employees’ Provident Fund scheme, administered by the Employees’ Provident Fund Organisation (EPFO) and now governed by the Code on Social Security, 2020, has three parts:

Coverage. The scheme applies to establishments employing 20 or more persons. Membership is mandatory for employees whose PF wages are within the wage ceiling, which was raised from ₹15,000 to ₹25,000 a month with effect from 17 September 2026 (notification S.O. 5109(E)), the first increase since 2014. Employees above the ceiling can be covered voluntarily.

Contributions (on PF wages, i.e., basic + DA plus any wage-code add-back).

Worked example. PF wages ₹25,000 a month. Employee contribution ₹3,000. Employer contribution ₹3,000, of which ₹2,083 goes to EPS and ₹917 to EPF, plus ₹125 for EDLI and ₹125 administration charges.

A common design choice. For employees earning above the ceiling, employers choose between contributing 12% of the ceiling (₹3,000 a month) or 12% of actual PF wages. The first keeps take-home pay higher and costs less; the second builds a larger retirement corpus. Many organisations offer employees the choice where the scheme rules allow it.

Effect of the ceiling increase. Employees with PF wages between ₹15,000 and ₹25,000 who were previously outside mandatory coverage, or contributing on ₹15,000, now contribute on their actual wages up to ₹25,000. For PF wages of ₹20,000, the monthly employee deduction rises from ₹1,800 to ₹2,400. The employer’s own contribution cannot be recovered from the employee’s salary.

What it is. The Employees’ State Insurance scheme, administered by the Employees’ State Insurance Corporation (ESIC), provides medical care and cash benefits to covered employees and their families.

Coverage. Establishments with 10 or more employees in notified areas. Employees with gross wages of up to ₹21,000 a month (₹25,000 for persons with disabilities) are covered.

Contributions. Employee 0.75% and employer 3.25% of gross wages. Unlike PF, ESI is calculated on gross wages, so payroll must keep the two bases separate.

When ESI does not apply, employers remain liable under the employee compensation provisions for workplace injury and must fund maternity benefit themselves; this is one reason group medical and personal-accident insurance is standard for employees above the ESI ceiling.

What it is. Gratuity is a terminal benefit that recognises long service. It is not linked to performance. It was governed by the Payment of Gratuity Act, 1972, and is now part of the Code on Social Security, 2020.

Applicability and eligibility.

Formula (for employees paid monthly): Gratuity = 15 × last drawn wages × completed years of service ÷ 26. Here “wages” means basic + DA (now including any wage-code add-back), 15 represents fifteen days’ wages per year, and 26 the working days in a month.

Worked example. Last drawn basic + DA ₹60,000 a month; service of 7 years and 8 months, which rounds to 8 years. Gratuity = 15 × 60,000 × 8 ÷ 26 = ₹2,76,923.

Funding. Employers either set aside a provision each year (about 4.81% of basic, since 15/26 ÷ 12 ≈ 4.81%) based on an actuarial valuation, or buy a group gratuity policy from an insurer such as LIC. The wider wage definition (Section 2.12) and fixed-term eligibility both increased gratuity liabilities after November 2025.

What it is. The statutory bonus, previously under the Payment of Bonus Act, 1965, is now part of the Code on Wages. It is distinct from the performance bonuses employers pay voluntarily (Part 3).

Example. An eligible employee with a minimum wage of ₹12,000 a month: bonus base is ₹12,000 (higher than ₹7,000). Minimum annual bonus = 12,000 × 12 × 8.33% = ₹11,995; maximum = 12,000 × 12 × 20% = ₹28,800.

Definition. A compensation philosophy is a short statement, approved by leadership, that sets the principles for pay decisions: what the organisation rewards, how it compares with the market, how much pay varies with performance, and how openly pay is communicated. It guides structure design, offers, increments and incentive plans, so that individual decisions are consistent.

The design questions a philosophy answers

Pay mix varies with level. The share of pay at risk usually rises with seniority, because senior roles have more influence over results.

These ranges are indicative of common practice; actual mixes vary widely by sector.

Examples of distinct philosophies

Definition. Short-term incentives (STIs) are variable payments linked to performance over a period of one year or less. They are re-earned each period and do not add to fixed salary.

Types

Design elements of an annual bonus plan

Worked example. A manager with fixed pay of ₹20 lakh has a target bonus of 12% (₹2.4 lakh). Company performance funds the pool at 90%; the manager’s rating carries a 1.2× multiplier. Payout = 2.4 × 0.9 × 1.2 = ₹2.59 lakh.

When variable pay motivates, and when it does not

Variable pay changes behaviour when the conditions of Vroom’s expectancy theory hold. Expectancy: the employee believes effort can achieve the target. Instrumentality: payout reliably follows achievement. Valence: the amount matters to the employee, usually at least 10–15% of pay. It fails when employees cannot influence the metric, when targets are changed mid-year, or when payouts become routine and are treated as part of fixed pay.

Purpose. LTIs align employees with long-term value and encourage retention, because unvested awards are forfeited on leaving. They are standard for senior roles in listed companies and are widely used at all levels in start-ups.

Instruments

Key terms. The grant is the award made today. Vesting is when the employee gains the right to the award, typically over 3–4 years. A cliff is a minimum period before any vesting, often one year. Exercise is buying the shares at the exercise price (for options).

Worked example. An employee receives 4,000 ESOPs at an exercise price of ₹100, vesting 25% a year after a one-year cliff. After four years the share is valued at ₹400. Gain before tax = 4,000 × (400 − 100) = ₹12 lakh. If the share were ₹90, the options would be worthless; RSUs in the same situation would still be worth ₹90 each.

Tax in India. For ESOPs, the difference between fair market value and exercise price is taxed as a perquisite (salary income) at exercise, and any further gain is taxed as capital gains on sale. Employees of eligible start-ups can defer the perquisite tax. RSUs are taxed as a perquisite on vesting.

Regulation. Share-based schemes of listed Indian companies are governed by the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which require shareholder approval and disclosure. Unlisted start-ups have used ESOP buybacks (Flipkart, Swiggy, Zepto, Meesho and others) to let employees realise value before listing.

One-time and retention payments

Definition. Benefits are non-cash or deferred forms of reward that protect employees against risks (illness, death, old age) and support their well-being and life outside work.

Flexible benefits. A flexible plan gives employees a budget to choose from a menu (for example, higher health cover for parents, more NPS, or wellness spending). It increases perceived value at the same cost. Since most employees moved to the new tax regime, the purpose of flexible plans has shifted from tax saving to choice.

Cost versus perceived value. Employees often underestimate the cost of benefits. Total reward statements, which show each employee the full value of pay and benefits, address this gap.

Definition. A total rewards approach treats pay, benefits, well-being, recognition and development as one integrated offer, designed to attract, motivate and retain the workforce the strategy needs.

Use cases. Total rewards thinking is most useful when cash is constrained or not the deciding factor. ITC, for example, attracts campus talent with cross-business exposure (FMCG, hotels, agri-business, paperboards), structured careers and stability alongside competitive pay. A remote cement plant competes for engineers through housing, schools and safety culture as much as salary. In interviews, use the framework to show that reward is broader than pay.

Measuring a gender pay gap

Method. Regress the logarithm of salary on grade, job family, experience, performance rating and location, plus a gender variable. The coefficient on gender estimates the adjusted gap. A significant adjusted gap needs correction through a dedicated budget; a large raw gap with a small adjusted gap points to problems in hiring and promotion rather than pay setting.

Where unexplained gaps usually come from. Starting salaries anchored on previous pay, which carries forward past inequities; differences in negotiation; slower increases after career breaks and maternity leave; and job evaluation schemes that undervalue some types of work.

Law, disclosure and transparency

• Code on Wages: prohibits discrimination on grounds of gender, including transgender identity, in wages and recruitment for the same or similar work.
• SEBI’s Business Responsibility and Sustainability Report (BRSR): the largest listed companies disclose workforce diversity and gross wages paid to women as a share of total wages.
• Companies Act, 2013: listed companies disclose the ratio of each director’s remuneration to the median employee’s remuneration.
• EU Pay Transparency Directive: member states were required to implement it by June 2026; it requires pay ranges in job advertisements and gender pay-gap reporting. It affects Indian multinationals with EU operations and is shaping global practice.
• Transparency options: disclose nothing beyond an employee’s own pay; publish ranges by grade; or full individual transparency (rare). Publishing ranges is the common middle path: it improves trust and reduces negotiation-driven gaps without disclosing individual salaries.

Governance of executive pay in India

• The Nomination and Remuneration Committee (NRC) of the board, required for listed and certain large companies under Section 178 of the Companies Act, recommends remuneration policy for directors and senior management.
• Total managerial remuneration in a public company is limited to 11% of net profits, with approval required to exceed it.
• Clawback and malus provisions, allowing recovery or cancellation of incentive pay for misconduct or restated results, are increasingly common in variable pay and LTI plans.