Compensation benchmarking is a routine HR tool to keep pay competitive, but in India it is first and foremost a legal exercise. Employers must test their internal pay structures against three overlapping legal pillars: labour-standards law, which sets floors, components and registers, competition law, which forbids information exchanges that facilitate coordination between rivals and data-protection law, which constrains how employee pay data may be collected, shared, and processed. Each pillar imposes independent duties; compliance requires a single protocol that satisfies all three simultaneously so that benchmarking enhances talent strategy without creating regulatory exposure.
Compensation Benchmarking Under Indian Legislation
- Foundational Compliance Under The Code on Wages, 2019
The starting point for compensation benchmarking is the legal obligation to comply with the remuneration standards laid down under The Code on Wages, 2019. This Code consolidated four major enactments: The Minimum Wages Act, 1948; The Payment of Wages Act, 1936; The Equal Remuneration Act, 1976; and The Payment of Bonus Act, 1965. It extends to all employees, whether in organized or unorganized sectors, thereby ensuring that all wage benchmarking exercises adhere to national labour standards.
The Code establishes two mandatory compensation thresholds: minimum wages and floor wages. Employers cannot pay below these thresholds, regardless of market benchmarking data. Section 9 empowers the Central Government to fix a national floor wage based on workers’ living standards, and no State Government can prescribe a minimum wage lower than this threshold. This ensures that market comparisons cannot justify compensation below statutory limits. The Code’s definition of “wages” includes salary, allowances, and any other cash benefits, mandating that benchmarking calculations cover all monetary components.
- Competition Law Compliance: Avoiding Anti-Competitive Benchmarking
While compensation benchmarking enables market alignment, its execution can cross into anti-competitive behaviour when carried out through direct data sharing between competitors. Under The Competition Act, 2002, Section 3(3) prohibits agreements that cause or are likely to cause an Appreciable Adverse Effect on Competition. Salary and wage data, being cost-determinant inputs, are considered commercially sensitive information. The Competition Commission of India (CCI) has clarified that coordinated exchanges of current or future wage data between enterprises may amount to wage-fixing cartels, which are treated at par with price-fixing cartels.
To stay compliant, compensation benchmarking must follow anti-trust safe harbor principles. Data must be collected, processed, and anonymized exclusively through an independent third-party aggregator. The data must be sufficiently aggregated and historical, avoiding any reference to current or forward-looking salary figures. Additionally, directors and officers may face personal liability, including disqualification under Section 164(2) of the Companies Act, 2013.
- Data Privacy and the Digital Personal Data Protection Act, 2023
The advent of the Digital Personal Data Protection Act, 2023 (DPDP Act) adds a critical compliance layer to compensation benchmarking. Employee remuneration data constitutes “personal data” under Section 2(t) of the Act, and employers function as “Data Fiduciaries.” Every processing activity involving compensation data, whether collection, storage, or transfer to third-party benchmarking consultants must have a lawful basis.
Under Section 7(i), the Act provides a limited exemption for processing without explicit consent when done “for the purposes of employment,” which includes compensation administration, payroll, and performance management. Processing must satisfy purpose-limitation, data-minimisation and security obligations, and significant data fiduciaries must adopt governance measures such as periodic Data Protection Impact Assessments (DPIA) and independent audits to demonstrate compliance. Therefore, when employee pay data is shared externally for benchmarking, employers must confirm that the transfer is either within the scope of a legitimate use or is supported by informed consent and that technical and contractual safeguards are in place.
Penalties and Enforcement Risks
Non-compliance in compensation benchmarking can trigger parallel legal exposure under three statutes. Under The Code on Wages, 2019, breaches of minimum wage or record-keeping obligations attract prosecution under Sections 53 to 55, with fines up to ₹1,00,000 and imprisonment up to three months for repeat violations. Inspectors empowered under Section 51 can initiate inquiries, issue restoration orders, and direct back payments with interest.
Under The Competition Act, 2002, coordination or exchange of current salary data between competitors amounts to an anti-competitive agreement under Section 3(3)(a), punishable with penalties under Section 27(b) up to 10% of the average turnover of each enterprise. Where HR or management personnel are involved, Section 48 extends liability to individuals. Even absent a formal cartel finding, the CCI may infer collusion if benchmarking results in parallel employer conduct.
The DPDP Act adds a separate compliance layer. Unlawful or insecure transfer of employee data violates Sections 8 and 9, with fines under Section 33(1) reaching ₹250 crore. Significant Data Fiduciaries face enhanced obligations under Section 10, including independent audits and data protection officers.
These regimes operate independently, meaning one flawed benchmarking exercise can simultaneously breach wage, competition, and data protection laws. Regulators assess documentation and intent lawful compensation benchmarking is supported by anonymised, aggregated historical data, third-party management, and complete wage registers under Rule 50 of the Code on Wages (Central) Rules, 2020. Informal exchanges of live or forward-looking compensation plans, by contrast, have repeatedly drawn adverse CCI findings and heavy administrative penalties.
Conclusion
Compensation benchmarking in India is legal work as much as HR work. The laws are clear about floors, registers and equal pay; competition authorities are alert to the ways sensitive information can be weaponised to coordinate employer behaviour; and data protection now requires employers to justify, document and protect payroll data even when processing occurs for legitimate employment purposes. The only reliable way to benchmark without risk is to integrate labour, competition and data-privacy controls into a single, evidence-based protocol and to execute it through independent aggregation, anonymisation, DPIA and rigorous documentation.
Organizations that institutionalize legally defensible benchmarking practices not only enhance pay transparency and equity but also mitigate regulatory and reputational risks. In India’s evolving compliance ecosystem, compensation benchmarking is not merely best practice it is a statutory necessity and a cornerstone of responsible corporate governance.
This content is originally posted on: https://humanelevation.co.in/
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