• How-to

A startup requires a lot of motivation during the early stages. During this time, a correct pay structure is of utmost importance.

Salary grades enable an organization to determine where jobs can be placed in a hierarchy. They help define pay levels, provide scope for pay progression and offer a basis for managing relativeness. Grades, in effect, communicate the career and pay opportunities available to employees.

Your organization could choose to adopt one of the following grade structures.

Types of Grade Structure
* Narrow Graded Structure
This is a sequence of job grades (>10) with narrow pay ranges (20-40 percent) between two consecutive grades. It is generally recommended for a large bureaucratic organization with well-defined hierarchies. Pay hikes do not depend much on performance.

* Broad Band Structure
This structure was formulated to match the reward with the contribution. Here, typically 4-6 bands exist with a bandwidth ranging from 50-75 percent—or more. Band boundaries are usually defined by a combination of job evaluation and market rates. A reference point is created for each band, around which payment ranges are built.

The bands have an overall description of the jobs allocated to them (for example, senior management, technical support, etc.). It introduces a lot of flexibility, as lateral career development can be awarded. On the flip side, it is largely dependent on market rates, which could lead to inequalities of labor markets within the workforce. This structure can flourish in companies where the focus is on improvement and lateral development. For startups with a similar vision, it can create a good start.

* Career Families
A career family consists of jobs within a cluster of similar activities—marketing, finance, IT, etc. It could be perceived as a narrow graded structure for each family. The number of levels may vary from family to family, but pay ranges would be the same across all the levels. They typically have 6-8 levels with narrow pay ranges. Startups that have a vision of making a massive start in terms of manpower and revenue can adopt this structure—upcoming telecom or banking institutions, for example.

* Job Families

In this approach, there are typically 3-5 separate families—such as Business Support, which includes IT, finance, HR and admin. Each job family is further divided into around 5-7 levels. This structure is used when there are different market groups that need to be rewarded differentially. It can be utilized for startups that plan to increase revenue first. It can reward the sales family more than the support function.

Components of Compensation
The components of compensation should be tax-friendly. Different types of compensation include:
1. Base pay, decided on the grade
2. Variable compensation, based on performance
3. Special allowances: HRA (tax exemption can be claimed), Convey­ance, Medical claims (tax exemption can be claimed), LTA (tax exemption can be claimed), Coupons (tax exemption can be claimed), Overtime, Contingent pay (skill-based pay, competence-related pay, service / contribution-related pay)
4. Bonuses, profit sharing, merit pay
5. Retirals (PF, gratuity, super annuation), based on the base pay
6. Benefits like dental, insurance, vacation, earned leaves, etc.

RUCHI PANDEY is Resource Management Lead-BFS at Tata Consultancy Services.

©Entrepreneur December 2009

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compensation, employees provident fund, grade, minimum wages act, miscellaneous provision act, pay, salary, structure