By Protima Sharma

At least once a year, clients ask me about how to determine pay levels. The most common query is what are my competitors paying and what is the estimated salary increase in my sector.

Though its good to know what you are up against in terms of market pull, but letting the market dictate your compensation is not a sustainable approach. So how do you decide on how much to pay?

Here are a few pointers to help you make the right decision.

Objective of your compensation plan

Compensation encompasses the complete employee cost which can include fixed salary, bonus, rewards, benefits, mandatory retiral contributions and expense on facilities and amenities.

It is a foregone conclusion that compensation philosophy should align with business strategy. Depending on whether your business model is based on by cost cutting, being an innovator or focusing on customer, your pay levels and components will change.

An important objective should be to align compensation philosophy with the organizational culture. Your compensation components and mechanisms convey the most important message on what the company values. Do you reward individual achievement or team achievement? Do you encourage employee ownership through profit sharing? Do you focus on creating a highly skilled workforce by introducing skill-based allowances? Does you benefit scheme enhance a work life balance?

These are crucial questions to answer while defining the overall objective.

Internal parity

The issue of internal parity or making sure that there is equal pay for equal contribution is another important consideration.

Traditionally, internal alignment was guided by number of levels of work or grades, pay differentials between levels and other criteria like years of industry experience. With the changing work environment, relevance of quality of experience and skills has gained more importance than merely seniority by years.

It is important to judge the impact of the role on the overall business objective and align the pay levels accordingly.

Market and regulatory environment

Being a competitive paymaster probably solves most of your retention issues but in reality a very small section of companies can achieve this.

A good approach could be to identify the core roles or high impact jobs in your organizations and pay them competitively. Take a pay decision based on the cost of making a new hire operational if you lose the incumbent role holder.

Most companies rely on market compensation surveys but that can consume a lot of resources. A quick way also could be to look at data made available by recruitment portals. provides a free service where in you can get salary data across industries and roles. Other sources are Monster Salary index and

It is also advisable to keep an eye on the regulatory environment around mandatory retiral benefits. In recent times, there have been changes to Provident Fund applicability and minimum wage levels. All these employee cost and need to be factored in pay rise.

Performance vs potential

Linking pay to performance keeps the high performers motivated. However, it is always good to remember that everyone cannot be high performer. A performance management system that is perceived as fair by the employees should be instituted before linking compensation to performance.

It is a good idea to have different approach to reward short-term performance as separate from a consistent high performance showing good potential for larger role. Incentive payout can be linked to results achieved within a year. Whereas to determine permanent salary raise, additional criteria like consistent performance, criticality to operations, retainability (against market pull), potential and attitude towards work should be considered.

Pay Channels

How you pay matters as much as how much you pay. A right mix of salary, incentive, benefits and amenities can have an impact on employee retention. To create this you can mirror the employee needs as they grow in their personal lives. For example, having a two-wheeler loan facility or gym membership can appeal to youngsters but subsidies on child’s education can become more important as the years pass.

Instead of only looking at the best compensation practices in the industry, it makes more sense to develop a compensation philosophy that best fits your organizational realities. The most important requirement when it comes to compensation decision is to be fair as an employer. A bigger question is how to ensure that your employees who will be at the receiving end also perceive you fair.

About the Author

Protima Sharma is Managing Partner at PeopleWiz Consulting. She has notched up over 12 years of valuable industry experience in Thermax, Citigroup, Tata Consultancy Services (TCS) as OD & Change Management consultant. She writes on various aspects of People Management and Organization Development for Entrepreneurs as well as the HR community.