Understanding Cost To Company v/s Take home For Improved Salary Management

Salary negotiations are one of the essential aspects of the hiring process. From the HR perspective, every recruitment or HR executive looks to negotiate the salary to reduce company costs. But it's also critical to understand that, even if you successfully negotiated the salary to an amount less than your budget, the employees often understand the pay parity when they join the company. When the dissatisfied employee leaves the company, the company has to bear the cost of rehiring and training a new candidate, which is often 50-60% of the pay. That is why the goal of salary negotiations should not be only reducing the spending but offering a fair salary to the candidate as well.

Salary negotiations boil down to human communication. The fear of asking for more money deters some people from even trying. While women are less likely than men to negotiate their salary, this is an issue that affects both genders. As many as 68% of women and 52% of men took the compensation, they provided without negotiating.

Candidates that refuse to negotiate their salaries jeopardise their long-term earning potential. This is due to the fact that bonuses and raises are frequently computed as a proportion of the base income. Evaluating your market value is complex, and most people prefer to avoid the difficulty.

Many HR heads and recruitment executives are familiar with CTC or Cost to Company, Basic Salary, and Take-home Salary; it's essential to understand how these figures affect the final salary negotiations. Every HR head must look to offer a justified salary to the candidate while keeping the company's cost in mind. Understanding the final salary calculator matrix will tell you that there is a great scope to achieve the right balance where the employee is satisfied with the salary he gets, and the company doesn't have to spend more than it should.

Difference between CTC and Take-Home Salary

The total salary matrix comprises a long list of entries to which different amounts from the total are assigned. Basic, taxes, house rent allowance, benefits, food allowance, provident fund, and so on are examples of these entries. These items are grouped under the umbrella term CTC or Cost to Company.

Components of CTC

Cost To the company is composed of several components. CTC is essentially the sum of Direct Benefits (the amount given to an employee every year), Indirect Benefits (the amount paid on behalf of the employee by the business) and Saving Contributions (saving schemes to which the employee is entitled). Now let's take a look at each of these elements.

Direct Benefits

• Basic Salary

The basic salary remains constant and does not vary like other elements of CTC. The in-hand salary includes the entire amount of the basic salary.

• House Rent Allowance (HRA)

HRA is a component of the CTC that an employer gives to its employees. It includes tax benefits if employees pay for housing annually and amount to around 10% of take-home pay.

• Dearness Allowance (DA)

Inflation rates continue to rise yearly, and Dearness Allowances are offered to resolve this issue. This is a cost-of-living adjustment given to the employee to offset the effects of inflation.

• Leave Travel Allowance (LTA)

Another tax-free component of a CTC is LTA, which is offered to employees to pay their travel expenses wherever in the country. It is also important that an LTA only pays for the travel allowance, not other expenses such as food and drinks.

• Income Tax Savings
• Incentives or bonuses
• Conveyance Allowance
• Medical Allowance
• Vehicle Allowance
• Special Allowance/ City Compensatory allowance, etc.

Indirect Benefits

• Interest-Free Loans
• Food Coupons/Subsidised meals
• Company Leased Accommodation
• Medical and Life insurance premiums paid by the employer.
• Office Space Rent
• Income Tax Savings

Savings Contributions

• Employer Provident Fund (EPF)
• Superannuation benefits
• Gratuity

In layman's terms, CTC is the entire cost borne by the company for an employee. All the above components combine to make one total remuneration, known as the Cost to Company (CTC). These elements are both monetary and non-monetary. The main disadvantage of the CTC structure is that it includes various deductibles that are part of the overall salary but are not in the employee's control. CTC appears significantly more exaggerated as a result of this. This is where the concept of take-home pay comes into play.

Take Home Salary

Take-home salary, also known as Net Salary, is the amount of money an employee receives after deducting taxes and other expenses. It is the amount left over after deducting Income Tax at Source (TDS) and other deductions allowed by the relevant company policy.

Net salary is the amount of income tax, public provident fund, and professional tax deducted from gross salary. It indicates that Employee Provident Funds and Public Provident Funds are a set percentage of an employee's salary, usually no less than 12% of the base salary. On the other hand, gratuity is a proportion of the basic salary, often 4.81% of the employee's basic income.

There are various methods for converting CTC to take-home pay. Some of these strategies are based on land and taxation laws, while corporate policies and compensation structures influence others. Here's an example to understand the various compensation components, CTC, and how to compute take-home pay from CTC.

From the highlighted amount of CTC, the take-home salary can be calculated as follows,

Take home salary = [CTC – TDS – professional tax – PF – any other expenses]

 Salary negotiations are one of the most challenging points of conflict between an employer and an employee. While you may want to get the most out of a prospective resource at the lowest possible cost as an employer or HR head, you must also ensure that you are not underpaying talent in any way or engaging in any practices that could lead to exploitation and injustice.

 A clear understanding of the salary structure empowers you to make the right HR decision. Having a cloud-based HR and payroll platform can help you ease the salary negotiations based on the in-built salary calculations based on your company policy, compliances and government regulations.

Teamnest's cloud-based HR and Payroll platform empower employers and HR heads to make salary negotiation based on accurate and automatic calculations. Teamnest helps HR heads to build a tax-friendly CTC while fulfilling all the salary and tax regulations. It also automates and regulates PF, ESIC, and professional tax deductions per employees' investment records. Contact our TeamNest expert TODAY @ +91 913-786-6322 or email at sales@teamnest.com and get ready to build a sophisticated salary structure and make salary negotiations that are win-win for you and the candidates.