What is Cost to Company (CTC) & how to negotiate it? - A job seeker’s guide

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What is Cost to Company (CTC) & how to negotiate it? - A job seeker’s guide

Cost to Company (CTC) is one of the first things job seekers are curious about when opportunities knock on their door. Right from when a recruiter makes the first screening call to the salary discussion round, the recruitment team asks you about your current CTC to decide and offer you an appropriate salary. However, most people in their initial years of employment and freshers don’t know CTC’s full form and meaning.

Hence, you must know everything about CTC and how to negotiate it with the HRs in the salary round.

What is CTC in salary?

CTC meaning: CTC is the word companies use to define the quantitative cost per person they hire. It is the total amount of yearly money an employer spends on their employees. It also helps them calculate increments in your salary per the company’s defined duration.

Percentage hike in salary = New salary - Old salary / Old salary * 100

It includes all forms of tax deductions, provident fund, gratuity deductions, professional tax, health and medical insurance, and other employment benefits.

It is sometimes confused with in-hand salary. And thus, people complain about their annual CTC sounding lucrative but lesser actual in-hand salaries.

What is gross salary, and how is it different from CTC?

Most often, when salary is discussed, people discuss the amount they receive at the end of every month or collectively in one year.

Gross salary or salary is the take-home amount, including basic pay and allowances paid as remuneration. Simply speaking, it is the in-hand amount credited to one’s bank account for their work - the total of components like basic pay, Dearness Allowance (DA), House Rent Allowance (HRA), and others.

You are left with a gross salary if you separate deductions like EPF, Medical & life insurance, gratuity, etc., from the CTS.

Let’s see an example of an employee whose annual CTC is 5,44,000; upon deduction, his gross or take-home salary comes down to 5,04,000.

Here, the employee receives remuneration or gross salary and benefits like medical insurance and some prerequisites, such as free meals, gym access etc., but not deductions like EPF and gratuity.

So, here CTC = Gross salary (Direct benefits) + Indirect benefits

How do companies calculate or define your CTC in salary?

Let’s break down the CTC into all its components and understand each in greater detail.

CTC = Direct benefits + Indirect benefits + The employer’s contribution to your savings (EPF, Gratuity and others)

Direct benefits are the take-home amount or the salary, indirect benefits are allowances for which the employer pays on your behalf, and the employer contributes to your savings by depositing a determined amount every month to your PF account.

Let us understand the various components in greater detail:

• Basic pay or basic salary: It is the major salary component which contributes 40 to 60 percent to the CTC amount.

• Dearness Allowance (DA): Dearness allowance is the amount added to the basic salary to curb inflation’s effect on an employee’s cost of living. It is generally 50% of the basic pay. However, it is not a compulsory component of a CTC structure.

• House Rent Allowance (HRA): The amount added to your gross salary to compensate for rented accommodation. It varies based on how affordable the accommodation is in your posting area. While it will be higher in a tier-1 city, it will come down for tier-2 and tier-3 cities, towns and villages.

• Bonus or incentive: It is the extra amount on top of the regular salary. You may get a bonus for multiple reasons. However, it is primarily given when a company makes a good profit and wants to share a portion with its employees. Others could be festival bonuses and performance bonuses.

• Conveyance Allowance: It is added to CTC to compensate employees’ travelling expenses.

• Perks: Perks are often counted as additional employee benefits only a few enjoy. These are benefits like newspaper bills, phone bill reimbursements and free or subsidised meals at work.

• EPF, medical and life insurance: These are the benefits necessary for an employee’s well-being and a secure future ahead, with the government intervening to ensure employees at various organisations are entitled to necessary benefits. These benefits include - provident fund, health and life insurance and pension benefits (in selected job categories, especially in the public sector).

• GYM, team outing and L&D: Well-known, established, and modern-day startups offer many attractive benefits like GYM passes, team outings, learning and development funds, and much more. It helps them attract and retain the best brains.

How to negotiate CTC effectively?

Failing to negotiate CTC effectively might lead you to settle for a lower annual salary than you could get if negotiated well. So, what is it that can help you in the process? Flowing are things to do to ensure you get the maximum out of your salary discussion round:

Research

When you are unaware of industry-standard pay, you are happy to accept the offer without much negotiation. Hence, a little research about the CTC of people in similar jobs and the same experience level can be the starting point for developing your negotiation. You can now compare your skills and experience to determine your market value.

Prioritize needs

Set your priorities right and put forth straightforward for the various components of the CTC. While cash could mean more than anything else, some might value employee benefits. So, set your priorities right and enquire well before saying yes to the job.

Do not bring up salary discussions on your own

It sends a negative message when you care about the remuneration more than the opportunity. Hence, if you sound curious about the roles and responsibilities associated with the job, you will likely not disappoint the employer. It might get you closer to the final salary discussion round, where the employer is more than happy to offer you the CTC you expect.

Be open to negotiation

If you are too rigid to negotiate your expectations, it might hamper you. Right during the screening round, when the recruiter calls you to ask some basic questions, they ask you about your expected salary and whether or not you are okay negotiating it. And a straight no could send a red flag or end your chance of being shortlisted for the next round of hiring. Instead, try to clear all the rounds to prove to the employer that you are worth every penny you ask for. I am sure you will end up getting what you expected.

Communicate effectively

Communication skills can win you that extra bucks and help you make the most out of salary negotiation. Often, when you don’t sound confident, you sound needy, and you are at the losing end. Instead, sound confident enough to send a message that the employer needs you and your skills. Practising this will help you get a higher CTC package the next time you think of changing jobs.

Most working-class people are unaware of the many components of CTC. It might lead to confusion during the hiring process. Hence, while the recruitment professional must convey every detail related to CTC to the candidate, it is always better to make an extra effort to understand the nuances of it on your own.