Startup Employment Benefits: A primer

Question: For a startup, what benefits does the management have to give its employees from day 1? What all will have to be included in their CTC?

Let us 1st solve the Personnel problems:

Q: I need to hire three employees to help get my business started, but I don’t have enough financing to pay the salaries for all three. Should I try to raise more money before hiring anyone or should I hire just one employee and hope that I can make it work with limited resources?

A: You’ll be able to determine the right answer to your question by understanding the nature of your business and your appetite for risk. If your business growth is best executed in small steps, your staffing strategy should be very different than if your business needs financing in large portions. For example, if your business is a restaurant, it would be foolish to try to launch it without adequate staff and equipment. Alternatively, a one-man army could be the best way to start an import-export business or consulting practice.

If you’re convinced your business needs three employees to get off the ground, you shouldn’t launch it until you can hire all three. This is a surefire way to increase the possibility that your business will fail due to poor execution. If you don’t have enough money to pay for three employees, there still might be a way to make it work. Here are some creative ways to compensate your employees during the startup stage:

  • Offer them stock

Of course, the most obvious approach is to supplement salaries with company equity. If employees feel confident the business will take off—and those who don’t shouldn’t be working for you—then they’ll probably be willing to accept lower-than-market wages, as long as they’re getting stock.

Trouble is, the tack is only useful for certain types of businesses—the kind backed by outside investors that are likely to go public or be bought by a company with deep pockets. As a result, it’s not a strategy many small businesses can employ.

Another tack for companies that intend to remain private is to offer so-called phantom stock. In this type of plan, you provide employees with shares in the company. But, value increases only as the company’s value grows. More important, you can structure it so that vesting takes place over, say, a five year period, giving your firm time to grow.

 

  • Tie salary to meeting milestones, defer compensation

One of the most common ways that cash-strapped entrepreneurs hire employees is by convincing them to accept deferred or delayed compensation. One can promise employees a salary that is 60 percent of the market rate for compensation in the 1st year. But, also agree to raise compensation substantially and at regular intervals, as long as the company meets such milestones as alpha and beta test completion and successful fund-raising. After about a year, employees’ salaries can be raised to 80 percent of market rates and, six months later, to 100 percent.

 

  • Hire interns & volunteers

It’s a good way to grow your own talent at a low cost. Colleges and universities are teeming with bright young workers willing to work part time or full time during vacations to gain experience. By hiring promising employees who are still in college or are recent graduates, you can bring on board talented people with a lot of potential—at a price you can afford.

 

  • Look for people with a cash cushion

In these times of high unemployment, a company with enough growth potential might be able to hire a few qualified employees willing to work for a very small salary temporarily, because they believe in the company’s potential. But, you need to be sure they’ll be happy with the arrangement—and able to afford it. In some cases, you might want to protect yourself by hiring people with sufficient financial wherewithal.

 

  • Forget about hiring full-time staff

If you just don’t have the cash to pay a regular staffer, you should consider using independent contractors. Part-time employees are a secret weapon for startups. For less than half the cost of full-time staff, it’s possible to attract experienced employees to your company.

Eg. A Children’s Camp Company can use mothers who are re-entering the job market as salespeople rather than regulars and pay them entirely on commission. Not only do they know the local camp industry well, since they’ve sent their own children to camp, but it’s also a way for them to get back into the workforce.

 

 

Understanding Salary

Our salary structures are created from two sources – tax provisions and laws governing the area.

Now a day’s CTC (Cost To Company) is new term used by Corporates while offering salary to its employees. It is nothing but total cost which an organization end up paying on an employee for the period under consideration. Main salary is broken down into various components for availing tax benefits & for some compliance. In addition to the wages paid to salary it also includes employer liability towards the employee.

Some of the CTC components:

Fixed Salary: Basic, DA, HRA, Conveyance, Special Allowances, etc.

Variable Salary: Performance based incentive, Sale based incentive and Profit based bonus, etc.

Reimbursements: Reimbursement of conveyance, medical, telephone, Books and Periodicals, Leave Travel Allowance, etc.

Contributions: Benefits offered like Provident Fund, ESI, Gratuity, Medical Insurance, Accident Insurance, Leave encashment etc.

Stock Options: Stock Options

 

Applicability:

  • HRA (House Rent Allowance): It’s not compulsory to pay, unless your business is in the state where its mandatory. Maharashtra Workmen’s Minimum House Rent Allowance Act, 1983 governs in this state, where this law is applicable if there are 50 or more person’s working under a business. Rates vary as per the location.

 

  • PF (Provident Fund): The PF Act becomes applicable to the establishments having 20 or more (Proposed to reduce the number to 10 in the Parliament recently) ‘persons’ on any day of the year.

 

  • ESI (Employee’s State Insurance): Applicable to all establishments excluding seasonal factories employing 10 or more persons and working with power. And all establishments excluding seasonal factories employing 20 or more persons and working without power.

 

  • TDS (Tax deducted at Source on salary): It is Income Tax on Salary applicable as per the rule in that year. For arriving at this figure, computation of income has to be done by adding all the other sources also & deductions by way of investments. Calculating net taxable income & getting tax amount from the current tax slabs.

 

  • PT (Profession Tax): Every person (an Individual, Hindu Undivided Family, Partnership firm, LLP, company, corporation or other corporate body, any society, club or association) engaged actively or otherwise in any profession, trade, callings or employment and who is paying salary or wages to one or more employee, wherein this salary or wages paid to anyone or more employees exceeds Rs. 7500/- per month, is liable for registration under Maharashtra’s Profession Tax Act. It specifically excludes any person who earns wages on a casual basis.

 

Hence, it’s suggested avoiding employee strength of 20 or more (or 10 as per the business) in the initial years of startup for fewer regulations. Like small CA firms normally do not have more than 20 employees at any point of time.

A lumpsum figure including the Basic & DA (Dearness Allowance) should be at least covered in the CTC for adhering Minimum Wages Act. Other components can be given as Benefits as per the Company’s policies from time to time.

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