The Surprising Truth about CTC which Your Employer won’t Tell You

Campus placement is fashionable today. Students feel very proud and happy to share with others about their pay package. They think higher the pay package, higher will be their monthly salary. They just divide their package by 12 and calculate the monthly cash inflow and build their castle on it. These castles prove to be sand castles as they just melt away on the day they receive their first salary.

A chap was very happy to get an annual package of Rs 10, 00, 000/- and was expecting a monthly intake of Rs83, 000/- or so. His castle blew away when he saw that his monthly salary was only Rs 42, 000/-, half of his expectations. Let us examine how his expectations were shattered.

What is CTC?

It is the abbreviation for Cost to Company. How it is arrived at. There are several hidden costs added which inflate the salary package when initially offered and then the employee crashes down when s/he gets her first salary slip. This may appear to be a short sighted exercise by the employer, but they still get away with it.

Let us first have a look at what are the hidden costs in CTC and then how the employers get away with it and why employees reconcile to it.

Hidden Cost No. 1: Putting the Employer’s Contribution in Employee’s Provident Fund

While provident fund are deducted from the salary of an employee every month, employers are also required to contribute a similar amount. This amount of employer’s contribution is added to the CTC, and the employee is not going to get the money at the end of the month.

Hidden Cost No. 2: Including the One-time Joining Bonus in CTC

To lure away qualified and experienced employees, employers offer one-time joining bonus with a rider that if the employee leaves the job before a predetermined period s/he will have to return this amount of one-time joining bonus. Adding this amount inflates the CTC.

Hidden Cost No. 3: Including Gratuity, Insurance premium, food coupons and transport facilities in CTC

Almost all big, medium and small companies offer the above facilities as part of the job; however, they also add the cost of these facilities as part of the CTC and thereby inflate it to make it more competitive in the job market. These facilities too do not convert themselves in to cash inflow and therefore go on to reduce the monthly intake.

Hidden Cost No. 4: Adding a notional variable component in CTC

Dividing the salary package in to fixed and variable component is very common. The trick is to make the variable component larger and which is dependent on performance rating. Very few lucky employees get the best performance rating and therefore get the full variable component. Remaining unlucky ones have to satisfy themselves with much less variable component by getting even less than the promised annual CTC.

Hidden Cost No. 5: Putting Stock Options in CTC

Offering stock options is another enticement to get qualified and experienced employees. The stock option also comes with preconditions that they cannot be sold before a fixed period. The employee is stuck with those options and there is no cash inflow at the end of the month.

A first time employee will be fooled by the above hidden cost. However, employees with a few year job experiences know about all these costs and whenever they switch jobs, they examine the hidden costs. However, employers are also smarter they have lot of scope to hide in the above Hidden Cost No. 3, 4 & 5. Employees after working for at least one year will be able to find out how much s/he has been fooled.

So whenever you get or switch your job, don’t forget to understand your CTC is not your take home pay Calculate what is your net take home pay before accepting the job offer