Compensation is a critical area of human resourceDocument Transcript
The concept of Cost to Company (CTC)
Simply speaking, CTC is the amount that you cost your company. That is, it is the amount
that the company spends –directly or indirectly – because of employing you.
Thus, it is the money given to you (your in-hand component), plus the money spent because
of you. You’ll understand this better while we discuss the various components of your CTC
salary, so let’s jump into it right away! We will also use an Example parallel to the
discussion, so that you can understand the concept of CTC better.
Components of Cost to Company (CTC) Salary
In ―Understanding components of your salary‖, we saw the various components of your
Dearness Allowance (DA)
Incentives or bonuses
House Rent Allowance (HRA)
Leave Travel Allowance or Concession (LTA / LTC)
Telephone / Mobile Phone Allowance
All the above are a part of your in-hand salary, and therefore, are a part of your CTC pay as
Let’s understand this using a simple Example. Say your basic is Rs. 15,000 per month, DA is
Rs. 10,000 per month, you get conveyance allowance of Rs. 800 per month, and you get
HRA of Rs. 4,500 per month. So, your package so far is Rs. 3,63,600 per year.
Now let’s look at some of the other components of your CTC pay – the parts that
inflate your CTC package but may not be actually given to you!
Company’s contribution to Provident Fund (PF)
It is mandatory for you to contribute 12% of your basic towards provident fund (PF). Your
employer makes an equal contribution (12% of your basic) to your PF account.
(Please read ―Provident Fund (PF) and Voluntary Provident Fund (VPF)‖ to know more
about provident fund)
So, although this amount is not given out to you every month, for your company, it is an
expense that it incurs on you every month! Therefore, this forms a part of your CTC pay.
12% of your basic is Rs. 1,800 per month. That is, Rs. 21,600 per annum. Your CTC package
becomes Rs. 3,85,200.
Various reimbursements that you get from your company can also form a part of your CTC
This includes reimbursement of:
Book purchases, etc.
Say you get reimbursement of medical bills of upto Rs. 15,000. So, your CTC package
becomes Rs. 4,00,200.
Life Insurance and Health insurance
Most respectable employers provide free health insurance cover to their employees and their
dependents. Some companies also provide life insurance for their employees free of cost.
The premium amounts paid for such insurance on your behalf can be included in your CTC
Say you get a health insurance cover of Rs. 1 Lakh for yourself and your family. The
premium for this is Rs. 2,000. Thus, your CTC package becomes Rs. 4,02,200.
Many companies have in-house health centers, hospitals or other health care facilities where
medical care is provided free of cost to employees.
Companies work out a per-employee cost for such facilities, and can include that in your
CTC pay package.
Many companies provide free transport facility to their employees from their place of work to
the job location.
The cost of such transportation can be added to your CTC package.
Many companies run canteens or cafeterias for their employees, which provide subsidised
meals to the employees. Such subsidy can be included in your cost to company package.
Let’s say your company provides you lunch for Rs. 10, and the actual cost of that lunch is Rs.
25. Thus, there is a subsidy of Rs. 15 per meal.
For 21 working days in a month, this is Rs. 315. Or, Rs. 3,780 per year. Thus, your CTC
package becomes Rs. 4,05,980.
Taking it too far…………………………….
The components of your CTC salary sound reasonable so far, right? After all, this is the
money that you get in one form or the other. But some companies take the concept of cost-tocompany too far! Look at the following:
Office phone bill
The bill for the office phone that you use can be included in your CTC salary too.
Office space rent
Shocked? Its true! There are many companies – especially large investment banks – that
include your office space rent in your CTC package!! Yes, it defies logic, but it is true!
Let’s say your office is in Churchgate in Mumbai. Your have a small cubicle, say 6 feet by 8
feet (48 square feet). Let’s say the going rate for rent for office space in that area is Rs. 200
per sq. ft. per month.
What is the cost of your cubicle in that case? Its Rs. 200 * 48 = Rs. 9,600 per month, or Rs.
1,15,200 per year.
When this is included in your CTC, your overall CTC package becomes Rs. 5,21,180!
A side note: Remember this when you read about the whopping, exorbitant salaries paid out
to fresh management graduates (Like the IIM Ahmedabad MBAs)! Their large salaries might
include the office space rent as well!!
A note on government salaries
We often hear people say that the salary of government employees is quite low.
Although there is truth in this, government salaries wouldn’t seem too less if we look at it
from a ―CTC‖ point of view.
When we talk about government salaries, we only talk about the ―in-hand‖ component. But
we forget that on a cost-to-company basis, it can be quite substantial.
What extras do government servants get? Here’s a sample list:
The 12% of basic that the government deposits in their PF accounts, just like private
Membership of government clubs or gymkhanas
Free stay at various circuit houses and government guest houses
Free telephone connection at home
Free car with driver
Reimbursement of newspaper bills
Free use of many libraries
In case of defense personnel (Army / Navy / Air Force), ahuge subsidy on items bought
from their ―canteens‖ (like groceries, appliances, etc.
HR professionals might create the pay structure for their organization, or they might work
with an external compensation consultant. There are several steps to designing a pay
structure: job analysis; job evaluation; pay survey analysis; pay policy development; and pay
structure formation. Each step is briefly explained below.
STEPS/STRATEGIES ON WHICH SALARY IS BEEN DESIGN
Step 1: Job Analysis
Job analysis is the process of studying jobs in an organization. The outcome of this process is
a job description that includes the job title, a summary of the job tasks, a list of the essential
tasks and responsibilities, and a description of the work context. Also included are the
knowledge, skills and abilities needed to perform the job.
Step 2: Job Evaluation
Job evaluation is the process of judging the relative worth of jobs in an organization. The
outcome of job evaluation is the development of an internal structure or hierarchical ranking
of jobs. Job-based evaluation is used more often than person-based evaluation, and so the
former will be the focus in this case. There are three methods of job-based evaluation: the
point method (which is the most commonly used); ranking; and classification. Job evaluation
helps to ensure that pay is internally aligned and perceived to be fair by employees.
Step 3: Pay Policy Identification
Pay policy identification is the process of determining whether the organization wants to lead,
lag or meet the market in compensation. The pay policy or strategy will likely influence
employee attraction and retention. Pay policies can vary across job families (i.e., groups of
similar jobs) and job levels if the top management feels that different strategies can be
effective in different areas of the organization.
Step 4: Pay Survey Analysis
Pay survey analysis is the process of analyzing compensation data gathered from other
employers in a survey of the relevant labour market. Gathering external pay data (e.g., base
pay, bonuses, stock options and benefits) is essential to keep the organization’s compensation
externally competitive within its industry. Employee attraction and retention can be improved
by maintaining externally aligned pay structures.
Step 5: Pay Structure Creation
Pay structure creation is the final step, in which the internal structure (Step 2) is merged with
the external market pay rates (Step 4) in a simple regression to develop a market pay line.
Depending on whether the organization wants to lead, lag or meet the market, the market pay
line can be adjusted up or down. To complete the pay structure, pay grades and pay ranges
In this case, upper-level undergraduate or graduate HR students will design a pay structure
using a case scenario and integrated application exercises.
How to Set a Salary Scale for Your Employees
You need to establish a salary pay scale for employees within your business. Don't hire
employees and offer them salaries at random. The salary scale you decide on can influence
your business, so choose a compensation philosophy wisely.
The following are the most common methods used to establish pay scales:
The going rate: You determine what other businesses in your industry and region are
paying for similar jobs, and structure your pay accordingly.
Job evaluation and pay grading: You evaluate each job based on several factors,
such as how it affects the bottom line, how difficult or dangerous it is, and what kind
of training is necessary, and then you develop an appropriate pay range.Job evaluation
and pay grading works best for large companies that must have some type of
structured approach to pay ranges.
Management fit: You decide the amount of pay for each employee, without using
any system. As you may expect, the management-fit approach usually results in
inconsistent pay. Resentment, hostility, and a lack of teamwork can result when
inequities are discovered. You can also look into alternative structures that are based
more on what the employee can do and less on what the job description .
Skill-based pay: Pay scales are determined by skill level, not job title. You create a
list of skills necessary for each job and develop the criteria that signify the mastery of
each skill. As your employees master the skill, they receive pay increases.
Competency-based pay: This system bases compensation on an employee’s traits or
characteristics, rather than on specific skills. Salaries and raises are based on how well
employees acquire the core competencies needed for their positions.
Broad banding: You group several related jobs, such as office assistant and
receptionist, into one band — for Example, administrative staff. You assign a pay
range to that band, but you don’t base it on a job title.
Variable pay: This system links a percentage of an employee’s pay to performance
and accomplishments. You first establish a base pay rate, and then define group and
individual objectives as a variable salary component.