BT Explainer | The Great salary reset: How labour codes are quietly rewriting India Inc's paychecks 

For years, compensation design in India Inc followed a familiar formula: keep the basic salary component relatively low, load up allowances and reimbursements, maximise take-home pay, and keep statutory payouts such as provident fund (PF), gratuity and other social security-linked costs under control. 

That equation is now changing. 

At the heart of the shift is the Code on Wages, 2019, which introduces a uniform definition of wages. If allowances and excluded components exceed 50% of total remuneration, the excess is added back to wages for statutory calculations. This limits allowance-heavy salary structures and increases the base for PF, gratuity and other benefits. 

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While much of the public conversation has focused on whether employees will see lower take-home salaries and higher PF deductions, compensation experts say the bigger story is unfolding inside corporate boardrooms, where organisations are reassessing the very architecture of rewards. 

A transition is happening at different speeds 

India's corporate sector is far from uniform in its preparedness, according to Amit Kumar Otwani, Associate Partner, Talent Solutions, India, Aon. 

"Readiness for labour-code implementation remains mixed and uneven, with companies at different stages of transition. Early movers, including multinational corporations, listed firms and mature GCCs, have already aligned wage definitions, increased basic pay ratios and upgraded payroll systems. However, most organisations are partial adopters, gradually redesigning compensation structures, often for new hires or select employee groups. Meanwhile, many mid-sized and smaller companies continue to adopt a wait-and-watch approach, awaiting greater clarity on implementation and enforcement,” Otwani said. 

Yet, even among companies that have started preparing, there remains confusion around what labour-code compliance actually requires. One of the most persistent misconceptions is that organisations must simply increase basic pay to 50% of total compensation. 

Contradicting this widely held belief, Malathi KS, Director, Rewards Consulting, Products and Global Mobility at Mercer, says there remains considerable misunderstanding around the wage definition itself. 

"In our view it's not just merely recalibrating basic pay to meet compliance requirements, there is a wrong notion that basic needs to be 50% while the code on wages states 50% rule includes other allowance which falls back in wages. If companies only look at aligning basic to 50%, they will have to pay additional social security with other components likely to be classified under inclusion,” Malathi said. 

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“Companies are actually looking at reviewing the overall structure to align with the New Labour code. With that said, the salary structure would still remain the same or similar except that the composition of wages or allowances will be different from labour code perspective,” Malathi added. 

Having worked with multiple clients on wage code alignment, Malathi says, it is clear that companies are looking to protect the cash in hand while still compliant with labour laws.  

Beyond PF: A broader shift in compensation philosophy 

While provident fund and gratuity implications grab the headlines, experts believe labour codes are triggering a much deeper evolution in rewards strategy. "Beyond the expected impact on basic pay and statutory contributions, labour codes are driving a broader shift in compensation philosophy," says Otwani. 

"Organisations are moving away from allowance-heavy structures toward simpler, more balanced pay frameworks, often redistributing components to protect employee take-home pay. Over time, this could accelerate the adoption of more transparent compensation structures, alongside a stronger emphasis on social security, retirement adequacy and formalisation of benefits,” says Otwani.  

“The shift is expected to move organisations away from maximising short-term take-home pay toward building long-term financial resilience for employees,” adds Otwani. 

Many organisations are viewing this as an opportunity to redesign their compensation structures and extend a broader suite of benefits and perquisites that help preserve employee value without compromising compliance. 

“Some of the benefits gaining greater prominence include car lease programmes, fuel and driver reimbursements for larger segments of employees, NPS framework, work from home and communication benefits especially for hybrid work environments. However, it is important to note that these benefits should not be viewed solely through the lens of labour codes. It is equally important to consider the evolving income tax framework while offering these components,” he notes. 

Which industries face the biggest shake-up? 

Not every sector will experience the same level of disruption.  

According to Otwani, the impact of the new wage definition will be most significant in sectors with historically allowance-heavy compensation structures. Industries such as technology, IT/ITES, consulting, startups, financial services, retail, GCCs and professional services are expected to experience greater disruption, as their salary structures have traditionally had a lower proportion of basic pay. In contrast, sectors such as manufacturing, where compensation structures are already more compliance-oriented, are likely to see relatively limited disruption under the labour codes. 

The compensation landscape five years from now 

Perhaps the most interesting question is what Indian compensation will look like once the labour codes are fully absorbed into corporate practice. 

Malathi believes the changes will go far beyond payroll compliance. 

"CTC architecture becomes intentional, not accidental: The era of compensation structures built around statutory arbitrage is ending. The deemed wages provision ensures that heavily allowance-loaded CTCs can no longer passively shield PF, gratuity and leave encashment of liabilities. Five years out, CTC design will be a deliberate strategic act, not a payroll optimisation exercise inherited from the previous decade," Malathi says. 

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She expects pay structures themselves to become far simpler. 

"The 10-component pay slip compresses: Fragmented allowances that exist primarily to keep the excluded component below the deemed wages threshold will consolidate. Employees will finally see cleaner, more comprehensible pay structures closer to global compensation norms," she says. 

One of the biggest beneficiaries could be gratuity. 

"Gratuity transforms from an exit formality into a wealth instrument. With an expanded statutory base, terminal gratuity values for mid-to-senior employees will be materially larger. Forward-looking employers will start quantifying and communicating this as part of total rewards value, not a footnote on the separation letter," Malathi adds. 

What companies may be missing 

According to Mercer, several risks remain underestimated. 

“The actuarial liability gap: Most organisations have updated payroll inputs. Very few have commissioned fresh actuarial valuations of gratuity provisions under the revised deemed wages base. For workforces with significant long-tenure cohorts, this is a quiet Ind AS 19 (Indian Accounting Standard) balance sheet exposure and it will surface during audits or M&A due diligence at the worst possible moment," Mercer says. 

But perhaps the biggest missed opportunity, Malathi argues, is strategic rather than financial. 

"The EVP (Employee Value Proposition) opportunity being left on the table. This is the most underestimated point. Organisations treating the Labour Codes purely as a compliance cost are missing a genuine talent differentiation moment. Employers who proactively restructure, protecting take-home, contributing on full deemed wages, and translating that into a clear retirement wealth narrative for employees will win retention conversations that salary increments alone cannot. Almost no compensation team is building that story today," Malathi says. 

She also cautions against assuming enforcement will remain weak indefinitely. 

"Enforcement is closer than the 'wait and see' crowd thinks. India's labour law history has conditioned many employers to discount enforcement risk. What is different at this time is the digital compliance backbone being built alongside the Codes unified portals, linked EPFO and ESIC databases and digital inspection frameworks. The structural conditions for meaningful enforcement are being assembled. The window for passive non-compliance is narrowing, even if the exact timeline remains uncertain," Malathi adds. 

More than a compliance exercise 

While labour codes are being implemented as a regulatory compliance requirement, they are increasingly serving as a catalyst for a broader reset in compensation strategy. 

"The reforms fundamentally shift the focus from optimising take-home pay to strengthening social security coverage, retirement outcomes and transparency in pay structures. Over time, this is expected to drive a more formalised, structured and transparent rewards environment across India Inc, although the pace of transition will remain uneven across sectors and organisation sizes," says Otwani.