Q&A: The Complex World of HR Compliance and Finance with Karthik Tabjul

Q: Could you share with us your journey into the finance sector?

Regarding my background and journey into finance, it all began during my graduation. At that time, I was deeply exploring career options that would offer long-term growth and sustainability. I discovered that becoming a Chartered Accountant (CA) was one of the most challenging yet rewarding paths in the country, especially for those aspiring to hold key positions in large, listed companies.

My affinity for numbers and mathematics, which had been strong since my school days, guided me towards pursuing CA. Post-qualification, I started my career in finance, where I found joy in working with numbers, deriving insights, and forming financial strategies.

In my role, I've collaborated closely with founders, HR, engineering, and sales teams. This experience has been crucial in understanding how finance intertwines with these different functions, especially in setting and achieving growth targets.

Over the past five years, my focus has been on establishing and scaling finance functions within companies, ensuring efficiency and effectiveness in financial operations. This journey has been my calling in finance, leveraging my strengths and interests to contribute significantly to my field.

Q. What are the main compliance challenges for HR professionals?

HR professionals, often coming from a people-focused background, may have limited knowledge in specific compliance areas, such as income tax, employee provident fund, or state insurance. This is largely because their academic training focuses more on people management than on intricate compliance details.

In contrast, as a Chartered Accountant, my training included real-life compliance situations, providing insights into employee and labor laws and tax rules. HR often collaborates with finance professionals who handle the technicalities of compliance, highlighting a divide between the theoretical knowledge taught in college and the practical aspects of financial functions.

Over time, there has been some improvement, with HR roles evolving to include more compliance-related responsibilities, but ensuring timely compliance and understanding its nuances remains a challenge for many in HR.

Q. What financial challenges do HR professionals face in setting incentives?

For HR professionals, especially in startups, establishing incentive structures is a complex challenge. Unlike larger, established companies with predefined systems, startups often require HR to develop incentive frameworks from the ground up. This task involves a delicate balance of aligning incentives with the company's growth trajectory and its cultural ethos.

For example, during the transition to remote work amid COVID-19, HR had to innovate with engagement and rewards practices to maintain motivation and productivity. Choosing the right technology and policies to support these initiatives is crucial, taking into account the company's evolving scale and desired organizational culture.

Q. What basic financial knowledge should HR professionals have?

HR professionals need a foundational understanding of various financial processes and compliances. This includes comprehending the intricacies of the payroll process, like managing employee salaries, tax deductions, and handling departures.

Additionally, they should be familiar with statutory compliances such as the Employee Provident Fund (EPF) and Employee State Insurance (ESI), as well as understanding the nuances of Employee Stock Option Plans (ESOPs).

This knowledge is vital not just for operational efficiency but also for effectively addressing employee queries and concerns, thus playing a critical role in building trust and clarity within the organization.

Q. How do you identify the required knowledge level at different stages of a company?

The knowledge required for an HR professional varies significantly depending on the company's stage. In an early-stage startup, an HR leader may be tasked with setting up the entire HR function. This responsibility demands a broad knowledge base to handle diverse employee queries effectively, ranging from basic compliance to detailed labor laws.

As the company grows and begins hiring senior management, the complexity of queries increases. HR leaders need to be adept at dealing with advanced topics like CTC structuring and ESOPs. This requires not only foundational knowledge but also the ability to engage with complex, strategic HR issues. Continuous learning and seeking expert advice become crucial as HR professionals navigate the unique challenges of each growth stage.

In smaller teams, a strong grasp of practical, real-world issues gives HR professionals an advantage, enabling them to provide comprehensive support and solutions within the organization.

Q. How should startups manage the transition from hiring freelancers to regular employees for tax purposes?

In startups, there's a common trend of hiring key team members as freelancers to save on taxes. However, this practice can lead to significant compliance issues. For instance, if the Income Tax Department scrutinizes and finds that the nature of work aligns more with an employer-employee relationship, it could reclassify these freelancers as employees.

This has happened in cases where tax notices were issued for additional taxes. Such situations often arise when the department reviews communication trails and payment details. To avoid these complications, it's crucial to correctly define the working relationship from the outset.

Ensuring that the freelancers are genuinely independent and not representing the company as employees is vital. Misclassification can lead to confusion for the individual regarding their career trajectory and how future employers might perceive their freelancer status.

I'll advise for startups to transition to a formal employer-employee setup as early as possible, to prevent legal and tax complications.

Q. What are your thoughts on effectively balancing monetary wage incentive programs for employees?

I think setting the right incentive programs in startups is a nuanced task. Not all employees are driven solely by financial incentives; many are motivated by the company's vision or the desire to solve complex problems. As a startup matures, compensation strategies evolve.

For example, in early stages, employees might accept lower salaries for shared vision. After funding rounds, companies often increase salaries to market standards.

The key is for founders, HR, and finance leaders to collaboratively assess and adjust incentives according to the company's growth stage. This process is dynamic, without a one-size-fits-all approach. My experience shows that at different stages, varying incentives are needed, from offering above-market rates for top talent in the early stages to optimizing costs as the company stabilizes.

The goal is to balance employee motivation and shareholder interests, evolving the incentive structure as the company progresses.

Q. Beyond compensation, what are your personal views on incentives for motivating employees in a corporate environment?

In my experience in the corporate world, incentives are much more than just financial rewards. It's crucial to acknowledge and reward employees who consistently deliver results. This should be based on objective data and actual performance, rather than subjective perceptions or biases.

From my perspective, every employee, regardless of their work style - be it introverted, extroverted, team-oriented, or individually driven - deserves fair recognition.

Even in large organizations, where standardized performance models like bell curves are common, it's important to assess each individual fairly. Identifying and utilizing each employee's unique strengths is key to creating a productive and motivating environment. This approach ensures that incentives truly reflect an employee's contribution to the team and the organization.

Q. What are your thoughts on advertising CTCs that differ significantly from in-hand salary?

The practice of advertising inflated CTCs leads to unnecessary pressure among candidates and their families, often fueled by sensational media articles. This issue is particularly prevalent among college graduates from premier institutes who may not fully understand the breakdown of CTC and its real-world implications.

Transparency in communicating salary structures is essential. Companies should clearly explain the components of CTC, including the variable portion and the actual take-home pay. Such transparency can prevent the disillusionment and confusion often seen on Quora & LinkedIn, where candidates express dissatisfaction with receiving less than promised.

Moreover, companies should educate young professionals about salary structures, deductions, and the real value of perks. I once hired an intern who, upon being offered a full-time role, was initially concerned about his CTC due to the vesting period of his ESOPs. However, when our company was later acquired, the value of his ESOPs tripled compared to his initial calculations.

This just highlights the importance of explaining the potential future value of compensation components, especially in dynamic environments like startups. There should be process of HR leadership providing comprehensive explanations of salary structures, enabling candidates to make informed decisions.

Q. Has compliance become easier or harder for HR professionals in the last 10 years?

From my experience, the landscape of HR compliance has undergone significant changes in the last decade, influenced heavily by digital advancements. While automation in areas like income tax and provident fund payments has simplified some processes, the overall complexity of compliance has increased. This is due to evolving tax rules and new state regulations.

HR professionals now need to be more agile and knowledgeable, often requiring a mix of in-house expertise and external support to navigate this complex environment.

Q. What does the future hold for HR compliance – will it be easier or more challenging?

The future of HR compliance seems to be leaning towards increased complexity. With tax rules continuously evolving and new regulations being introduced by state governments, compliance will likely become more nuanced.

Digitization in government departments means more data and stricter scrutiny of companies. HR professionals will need to collaborate closely with finance teams and external experts to ensure that they are compliant with all new laws and regulations from the outset and avoid potential legal challenges.