Tuesday, October 8, 2013

Is Your Take Home Salary Much Lower Than Your Salary Package???

Are you someone who wonders where all my on-paper salary goes when your salary gets credited every month? Did you think that the salary package offered by your employer was good when you actually signed the offer and regret it now because the take home salary doesn’t reflect the salary raise? If so, read this article carefully. The purpose of this article is to understand why our take home salary does not match up to our offer letter and what we can do to handle it...

Before we Begin - What is CTC?

These days, most private companies combine all salaries and benefits offered to its employees using a blanked term called "Cost To Company" a.k.a CTC. This CTC includes all costs that the company incurs in order to retain you as an employee.

Why is my Take Home Salary SO LESS in comparison to my CTC?

As I just said, CTC includes all monetary expense the company incurs on your head, not just your actual monthly salary. Unfortunately, many of us fail to realize the fact that, not all components of our CTC salary directly translate to "Take Home" salary. That is why your take home salary is so less in comparison to what is printed out on your offer letter (or CTC)

So, How Does our Employer Accomplish this?

The following are some commonly used ways by which employers boost your CTC in your compensation letter. This list is in decreasing order of impact on your take home salary:

1. Including Variable Components as part of CTC

A Variable component in your salary package is something that is not guaranteed. The compensation letter clearly states that this variable component will be paid out at the end of the year depending on your individual performance as well as the company's performance as a whole. Technically, this is not part of your monthly take home salary and you will get it in lump sum at the end of the year.

So, if your annual CTC is 12 lacs and this variable component is Rs. 15,000/- per month, your actual CTC for calculating the Take Home Salary is only 10.2 lacs. The remaining 1.8 lacs is variable salary which you may or may not get at the end of the year.

2. Including Transport Facilities, Insurance etc. as part of CTC

Most companies these days offer Transportation Facilities and Insurance coverage to all of their employees.

For ex: If the company offers you free Transportation pick-up and drop to office, they assume a notional expenditure of some amount (Say Rs. 2000/-) per month and add that as part of your CTC. This 2000 rupees is added to your salary for CTC purposes but this is something you will never get in your hand. Similarly, if the company is offering health insurance to the employee and his immediate family, they happily include the insurance premiums into the overall annual CTC.

Technically speaking, the company actually incurs expenditure in providing transportation or insurance to the employee. By adding an assumed value for the same, they hike up your CTC which reflects badly when you get your salary at the end of the month.

These are just two commonly used examples. Any other benefits like food coupons, shift allowance etc could also be clubbed up with your overall pay package to make the CTC seem much higher than it actually should.

3. Adding Employer EPF & EPS Contributions as part of CTC

In India, every company is expected to contribute 12% of the employee's basic salary into EPF and EPS schemes. For an employee whose basic salary is Rs. 10000/- the company has to shell out an additional Rs. 1,200/- for this. Remember the article titled Employee Provident Fund Demystified where we had covered the detailed breakup of the money that goes into the EPF and EPS schemes?

12% of the basic salary is contributed by the employee and another 12% is contributed by the employer. So, technically speaking 24% of your basic salary is not part of your take home salary. The company will include their 12% share as part of your overall CTC.

Is this list - Exhaustive? Actually No. These are the 3 biggest means by which company's inflate our CTC and we end up heartbroken when the salary actually gets credited into our bank account...

Is this Illegal?

No. What our employer is doing is perfectly legal. All he is doing is, just including all of your monetary benefits in one package and calling it "CTC". If they mention that the variable component will be paid out 100% in the offer letter and give you only 80%, that is illegal. But, if they clearly mention that the amount paid-out will depend on company performance, it is perfectly legal...

So, what can I Do?

If you are already working for some company, chances of re-negotiating your salary package is almost impossible. However, if and when you actually switch jobs in the future, remember to do the following:

TO-DO No. 1: Don’t Go Blindly by CTC/12. Your Take Home Salary will never be that much...

In the first page of the offer letter, the company will quote a notional figure as your annual CTC pay package. Your actual monthly take home salary will never and I mean never equal that number divided by 12. DO NOT accept an offer just based on that number. Go to the breakdown section and see what are the actual components that get paid out every month. Add them up and see if this number is a reasonable or acceptable raise in comparison to what you are earning now...

Real Life Trivia:
In my first job, my pay package had 3 variable components - One based on my performance, One based on company performance and One based on my Business Unit performance. Almost 30% of our salary went into these 3 buckets. So, technically my CTC was a healthy number but my take home was not so healthy.


DO NOT and I mean DO NOT accept an offer without negotiation. If you feel some components are too high (for ex: Variable components) talk to the hiring HR Manager and ask them to reallocate the numbers so that a bigger chunk falls into the fixed salary components. If they give you this standard statement that says - we usually pay out around 2 months’ salary as bonus and adds that 2 months into CTC, tell them that this bonus is not part of the guaranteed pay-out and hence you cannot consider than as motivation enough to take up the offer...

Real Life Trivia:
When I switched from my 2nd Job, I was offered a healthy 20% raise from a CTC to CTC Perspective. When the HR called me up with the number I was pretty impressed and asked them to send the offer letter. When I opened the offer letter I saw that around 15% of the actual raise was on company performance based variable components and technically my hike was only a couple of thousand rupees. When I called up the HR Manager she was like, your current company doesn’t offer performance bonus but we do. We usually pay 2 months bonus and blah blah blah, I just said that the offer was not good enough and refused to accept it.

Care to venture a guess on what happened after that?

The Lady called me back the very next day with an offer that was significantly higher than what was offered initially with around 80% of that raise going into the monthly fixed salary...

At the end of the day, it is our pay package and we have the right to negotiate as well as refuse the offer if we do not like it. Please note that all this negotiation is only possible until you sign the offer letter. Once you join the company your salary structure is fixed/frozen and you cannot negotiate any more. So, make sure you do all the negotiations up front, otherwise you will end up repenting your decision to switch to a new job...

Happy Negotiating!!!

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