5 hidden costs in your CTC

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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.

Mohan was very happy to get an annual package of Rs 10,00,000 and was expecting a monthly intake of Rs 83,000 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. There are several hidden costs added to CTC, which inflate the salary package when initially offered, and then the employee crashes down when he gets his 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 take a look at what the hidden costs of CTC are, and then how the employers get away with it, and why employees reconcile to it.

Hidden cost No. 1: Adding the employer’s contribution in Employee’s Provident Fund
While provident fund is deducted from the salary of an employee every month, employers are also required to contribute a similar amount. This amount of the 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 qualified and experienced employees, employers offer one-time joining bonus with a rider that if the employee leaves the job before a predetermined period he or she will have to return this amount. Adding this amount inflates the CTC.

Hidden cost No. 3: Including gratuity, insurance premium, food coupons and transport facilities in CTC
Almost all 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 into 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 into fixed and variable components is very common. The trick is to make the variable component – which depends on performance rating – larger. Very few lucky employees get the best performance rating and, therefore, the full variable component. The others 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 costs. So always remember that your CTC is not your take-home pay.

Story first published on NDTV: September 13, 2013 15:50 IST

1 COMMENT

  1. Thanks for clarifying the air over how do we calculate in hand amount after knowing the CTC being offered. It has been an area of confusion for long.

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