17 Terms every HR should know
Payroll might seem like a tricky topic, understanding it doesn’t have to be complicated. Whether you’re an employer managing your team’s pay or an employee trying to understand your paycheck, getting familiar with the key payroll terms can make a huge difference. It’s not just about numbers—it’s about knowing what goes into your pay, how taxes and deductions work, and ensuring everything is done correctly.
In this blog, we’ll walk you through 17 essential terms which are crucial for both employers and employees to understand. With this knowledge, you’ll not only feel more confident about how payroll works, but you’ll also be able to ensure everything runs smoothly and accurately. Let’s get started and make payroll simpler for everyone! Here are 17 Terms every HR should know.
1. Fixed Pay
Fixed pay refers to the portion of an employee’s salary that remains constant & is not influenced by performance, company profitability, or other variables. It’s typically the base salary or hourly wage that an employee earns regularly, regardless of the number of hours worked, the department’s performance, or any incentives tied to their role.
Fixed pay often serves as a baseline for other compensation elements like bonuses, overtime pay, retirement contributions, and health benefits. For instance, bonuses may be calculated as a percentage of base salary.
2. Variable Pay
This is a flexible component of an employee’s compensation. It is often used to motivate employees, align their interests with company goals, and reward outstanding performance. Variable pay can take various forms, such as bonuses, commissions, profit sharing, stock options, or incentive pay. Variable pay is a highly effective way to reward and motivate employees by linking compensation to performance.
3. Cost to Company (CTC)
Cost to company, also called CTC, is a term widely used in human resources and employee compensation to represent the total amount of money a company spends on an employee in a given year. It encompasses not just the basic salary or wages but all additional benefits, allowances, bonuses, and perks that the company provides to the employee as part of the employment contract.
CTC is the comprehensive cost that an employer incurs to hire and retain an employee, and it is often the figure used in job offers and employment contracts.
4. Basic Salary
The basic salary is the core component of an employee’s remuneration. It forms the basis for various other allowances and deductions (like Provident Fund, taxes, etc.). It’s important to note that the basic salary is usually not subject to bonuses or commissions, which are calculated separately.
5. Incentive Pay
Incentive pay refers to any additional compensation offered to employees based on their performance, achievements, or the company’s success. It can include annual bonuses, commissions, profit-sharing plans, or specific project incentives. Incentives motivate employees to exceed targets and contribute positively to the company.
6. Leave Year
A leave year refers to the period during which an employee is entitled to paid or unpaid leave. HR policies are often tied to the company’s financial year, calendar year, or any specific period defined by HR policies. Employees typically accrue leave over the course of a leave year, which can then be used for time off.
7. Direct Deposit
Direct deposit refers to the electronic transfer of an employee’s salary or wages directly into their bank account. It is a widely used method for paying employees due to its convenience and efficiency, eliminating the need for physical checks.
8. Professional Tax
Professional tax is a state-level tax levied on individuals earning income from salaries or professional practices. The amount varies by state and is deducted from an employee’s salary, typically by the employer, on a monthly basis.
9. Tax Deducted at Source (TDS)
TDS is the income tax that an employer deducts from an employee’s salary and remits it to the tax authorities. The amount is based on the income and tax slabs. TDS ensures that tax is collected at the source rather than at the end of the year. TDS is applicable to various types of income. Some of the common income sources subject to TDS include salaries, Interest, Professional Fees, Rental income, Dividends, etc
10. Bonus
A bonus is a financial reward given to an employee by their employer in addition to their regular salary or wages. It’s typically awarded for meeting certain performance goals, contributing to company success, or as a seasonal incentive. Employers can offer Bonus ad discretionary, which means the employer chooses whether to give them, or non-discretionary, where certain conditions or targets must be met. Bonus can be in any form, such as performance bonus, annual bonus, festive bonus, referral bonus, etc. There are many ways to compute bonus, such as – Percentage on Salary, Based on Company’s profit, Flat rate, etc
11. House Rent Allowance (HRA)
Your employer provides HRA as a portion of your salary to help you pay for your rented accommodation. It is usually calculated based on your basic salary and, in some cases, other factors like your location and whether you live in a metro city or a non-metro city. In addition to being a part of your salary, HRA comes with significant tax benefits. If you pay rent, you may be able to claim tax exemption on a portion of the HRA you receive. This helps to reduce your taxable income and, as a result, lower the amount of tax you pay.
Formula to calculate HRA:
The HRA exemption is the least of the following three:
- Actual HRA received
- Rent paid in excess of 10% of salary
- 50% (for metro cities) or 40% (for non-metro cities) of the basic salary
12. Notice Period
A notice period is the duration of time an employee is required to work after resigning from their job before they leave. This period is typically mentioned in the employee’s employment contract and varies depending on the company policy or the level of the position. During this time, the employee is expected to continue their regular duties, assist in handing over responsibilities, and ensure a smooth transition.
13. Compensatory Off
Compensatory off is a form of leave given to employees when they work overtime or on a holiday that would typically be a day off. In simple terms, if you work extra hours or during a public holiday, you may be eligible for compensatory off to take a break later without losing out on paid time off. For example, if you work on a national holiday (like Independence Day), the company may grant you an extra day off at a later date as compensation for working that holiday.
14. Probation Period
A probation period is a designated trial period that an employee goes through after being hired, during which both the employer and the employee assess if the employment is a good fit. It’s a common practice in many organizations, especially for new employees, to ensure that they meet the job’s expectations before becoming a permanent part of the team. The probation period is typically the first 3 to 6 months of employment. The probation period is an important phase for both employers and employees, offering a trial period to evaluate job fit, skills, and performance.
15. Cut-off date
A cut-off date is a specific deadline established by an organization for processing certain HR-related tasks, such as payroll, benefits, leave requests, or reimbursements. It is the last day or time by which data must be submitted or transactions must be completed to be included in the current cycle, whether it’s for payroll processing, the calculation of bonuses, or the approval of employee expenses. For HR professionals, understanding and managing cut-off dates is essential for running efficient operations and maintaining financial accuracy.
16. Paid Leave
Paid leave is time off from work during which employees continue to receive their regular wages. This type of leave can be used for a variety of personal or family reasons, such as illness, vacation, or other approved absences. Paid leave can be a mandatory benefit as per labor laws, or it can be offered voluntarily by employers as part of an employee benefits package. Regardless of whether it’s legally required or not, paid leave is an important factor in attracting and retaining talent.
17. Sandwich Leave
Sandwich leave is when an employee takes one or more days of leave that are placed between two non-working days. The non-working days could be weekends, public holidays, or even company-specific off days. Sandwich leave is a flexible and efficient way for employees to maximize their time off while minimizing the number of leave days they use.
Conclusion
As an HR professional, mastering key terminology is crucial for navigating the complex landscape of human resources. By staying informed about HR-related terminology, you not only enhance your own professional growth but also ensure that your decisions are well-informed, strategic, and in alignment with best practices. Incorporating these terms into your everyday HR practices will allow you to communicate more effectively with both leadership and employees, address challenges proactively, and implement HR initiatives that drive organizational success.
So, continue to expand your HR vocabulary and stay up-to-date with industry trends—doing so, will ultimately empower you to become a more strategic and impactful HR leader.
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