The evolving landscape of wage structures
India’s new Labour Reforms are changing the way an employee’s compensation will be determined. The 50% Basic Pay Ratio is one of these major changes impacting the way you will be compensated as an employee under the new Labour Codes. For example, an employee’s basic pay must constitute 50% or more of that employee’s total compensation in conjunction with any Dearness Allowance or Retaining Allowance that the employee may receive. Traditionally, many organisations have used a Basic Pay ratio of about 25-40% of CTC and provided the majority of the compensation through allowances to allow for flexibility and provide for a better take-home pay.
The new Basic Pay ratio policy provides organisations with a standardised method of documenting how they compensate employees and provides standardisation for Statutory Benefits across all industries. The new Basic Pay ratio policy will also limit the way organisations have traditionally designed the compensation structure for their employees. The purpose of the new Basic Pay ratio policy is to provide for an equitable salary structure and to enhance employees’ social security. Organisations must implement a redesigned compensation structure effectively and communicate with sensitivity to help employees understand the changes associated with the new Basic Pay Ratio policy and what those changes mean for them.
Impact on take-home salary
The impact felt most acutely by employees due to the 50% Rule is a decrease in their take-home pay. The PF contribution amount is linked directly to the Basic Pay amount; therefore, an increase in the wage base results in higher PF deductions, causing employees to receive less monthly disposable income. In addition to increased deductions, the total amount of the allowances in employees’ pay will be required to remain consistent with the necessary ratio of Basic Pay. Thus, allowances such as HRA, Special Allowances and Flexible Components all decrease accordingly to keep within the minimum acceptable ratio to the Basic Pay amount.
Total CTC amounts remain equal; however, the perception of having decreased monthly income can create strain, particularly for younger employees and those with significant monthly cash flow expenditures (rent, EMIs). Communication from HR to employees is crucial during this period of transition. HR teams need to assure employees that although their take-home pay may decrease now, they are building substantial assets for retirement through their respective PFs and Gratuity accounts. Without this context, the adjustments to wages could be seen as a decrease in pay rather than as an adjustment of the structure used to calculate how much each employee earns based on their Basic Pay.
3. Strengthening long-term financial security
The innovative wage scheme not only yields immediate, short-term benefits but it also provides the potential for long-term income stability. By providing greater levels of PF contributions, employees can accumulate a larger retirement fund, which will offer them more financial stability in their later years, as well as provide additional benefits through increased Gratuity payouts to employees who remain valuable employees to an organisation for a longer period of time. As a result, the enhancements made to the PF&Gratuity schemes reflect a broader policy focus by many organisations on promoting financial resilience and predictable retirement outcomes.
This provides an opportunity for mid-career &senior employees to benefit from the changes, while younger employees may find it difficult to see the benefits of the longer-term enhancements to their own employment status without the resources of an experienced advisor. Thus, by taking this approach, organisations have an opportunity to enhance the financial wellness programmes that currently exist and assist employees in understanding how increased statutory benefits create a secure financial future. When an employee understands that the greater purpose of these changes is to promote their long-term financial stability, the likelihood that the employee will accept and trust the organisation increases.
4. Employee morale and perception
Pay influences how an employee feels about their worth and is related to their perspective of fairness. Most people will likely be more impacted by a reduction in pay than by the opportunity to earn a higher salary over time. Therefore, managing how an employee perceives their financial future as a result of salary changes is extremely important.
When organisations present the changes to employees as a means to improve financial security and provide tools for employees to assist them in managing their finances (such as salary projections), they are generally able to retain their employees’ morale better than those organisations that do not. By addressing the issues that arise from employees’ reduction in pay directly and in a manner that is understanding and sensitive to their feelings, organisations build trust with employees and create an environment in which employees feel informed and appreciated.
5. Implications for talent retention
A competitive labour market influences job movement decisions not only through structural changes but also through changes to salary levels. Job-seekers negotiate to find out what their total paycheck will be from each Employer before making their decision to accept or reject a job offer. With this in mind, organisations must provide clarity in how they compensate their employees. The organisations that best communicate their complete value proposition (which includes benefits, growth opportunities, wellness programs) are ultimately those that retain the best talent and can attract top talent.
Although there are limitations imposed on some of the compensation levers available with the implementation of the 50% Basic Pay Rule, the organisation’s ability to differentiate itself from competing employers through its culture, employee experience, and non-financial benefits will benefit significantly in the long term. Corporate compliance with Wage Restructuring is not only the law; it is also a demonstration of organisational leadership, communication, and strategic management of talent.