The phrase "Cost to Company" or CTC, as it is commonly known, means different figures to different people. For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.

For employees, Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash. For the Finance Manager it is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation. And for most others it is plain confusion! This confusion prevails even now amongst the older employees - employees of the "pre-CTC" era - where they were more interested in their gross salary, deductions and the net pay. Employers' contributions towards provident fund etc. and retiral benefits were considered to be outside the scope of salary.

Though these definitions have their own merits, the fact of the matter is that Cost To Company needs to be demystified and it is necessary to arrive at a common plane for the term.  CTC would generally include the following cash, non cash and perquisite-based components:

* Components of the salary like Basic, DA, HRA, Allowances

* Perquisites and Reimbursements given to employees (i.e.) - bonus, incentives, reimbursement of conveyance/medical/telephone/, benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc.

* Contributions that the company makes for the employees like PF, Super Annuation, Gratuity, Medical Insurance, etc.

* Reasonable estimates of Leave Encashment, Stock Option Plans and Non cash concessions

* Fringe Benefit Tax on Stock Option plans only.

And would not include

* Gifts and Promotional items

* Overhead costs of the company

* Adhoc payments and commissions

Here are some tips to Structure the CTC of your employees:-

* The breakup of the CTC needs to be clearly mentioned in the appointment letter to the employee.

* Frequency of payment (Monthly, Quarterly, Annual..), Variability and calculation logic is to be explained in the appointment letter and/or the policies of the company.

* Base pay needs to be differentiated from performance and variable pay

* Cash, Non-cash components and perquisites have to clearly identified

* If the employer is offering a Flexible benefit plan the rules for availing the Plan have to be clearly mentioned.

* Impact of Fringe Benefit Tax, if any has to be mentioned to the employee. Though some companies have decided to include Fringe Benefit Tax as a part of the CTC. In my opinion it cannot be done since it is the company's liability, except in case of stock option plans.

* Include reasonable and actual cost to the company for Non cash benefits like Canteen Facility, Recreation and Entertainment facilities, Gratuity and Super annuation benefits.

* Check for the wage rates as per The Minimum Wages Rules of the State.

* Compare the tax benefits of House Rent Allowance vis-à-vis Company leased accommodation.

* Finally it helps to keep the CTC Structure simple

De-mystifying the concept of CTC and allowing employees to plan their own structures through Flexible Benefit Plans that minimize the tax impact should be the one of the foremost points that an HR manager should be aware of to both attract and retain talent.  

Raghunandan is the Co-founder and Director of Bizprout Corporate Solutions Private Limited and a Chartered accountant. Bizprout provides solutions in the Accounting and Payroll Space.

Issue BG88 July 08

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