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Understanding CTC Components

I conducted this poll last week to understand how well versed and well researched are the people here on LinkedIn on the segments of their CTC.

To my surprise, 49% of the voters are inclined towards "sort of" or "no idea at all" answers.

Here are some harsh truths to digest: 

  1. You cannot always ask for a higher "Take Home" component. 

  2. You cannot divide your offered CTC by 12 to calculate your Take Home salary

(I was tagged in a few memes on the 2nd point but they are too political to be a part of my article.)

When people enroll for my Kareer Kite services, one of the frequently asked questions is "how do I negotiate a higher offer". While each person has a different need, there are a few common components of negotiating offers, if you understand your CTC well.

I am neither a finance personality nor a wannabe know-it-all. I am writing all of this with the help of my recruitment experience and a few reference articles. (reference links at the end)

Let us understand a few common components and terminologies first:

  1. CTC- Cost To Company is a laundry list of components which constitute "how much a resource/talent costs a company"

  2. Basic Salary: It is the amount paid to an employee for their services to a company. 

  3. Gross Salary = Basic Salary + HRA + Other Allowances 

  4. Allowances:

  • HRA or House Rent Allowance: It is an amount paid out to employees by companies for expenses related to rented accommodation.

  • Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover domestic travel expenses of an employee. It does not include the expenses for food, accommodation, etc. during the travel.

  • Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.

  • Not covering others as they might not be available for everyone (e.g. DA)

 5. Deductibles: PF, Gratuity (Yes. These are deductions from your CTC which will come back to you later on in your life.)

 6. Reimbursements: Fuel Bill, Mobile Bill etc.

 7. Variable Components: Annual Bonus, Performance Bonus (Companies do not compulsorily pay 100% of this)

 8. Net Salary or Take Home Salary

Net Salary = Basic Salary + HRA + Allowances - Income Tax - Employer's Provident Fund - Professional Tax

There are a plethora of details attached to CTC but I am purposely highlighting only the ones which are mentioned often during negotiations and offers. I am enclosing reference links at the end for anyone who wants more details. 

Here is how you can negotiate better:

  1. Negotiate for a higher Take Home Salary and a lower variable option. Now this is applicable for entry-level to early mid-management roles. As you go ahead in the hierarchy, you will find higher variable options attached as performance gets more importance. Counteroffers are made by restructuring these components. 

  2. If you are in the higher income bracket then negotiating a higher Variable Component makes more sense because it helps you in marketing yourself as someone who "walks the talk" . It also shows that you are confident about your abilities to achieve more than company's expectations. (My high-income bracket mentee got 2X her previous CTC. Check the post.) Don't be too cocky :)

  3. If you are getting a raise or appraisal for the same role, ensure that your take home components are increasing too. Most appraisals for same level roles come with variable component appreciation (making payouts more reliant on performance.)

  4. There are other components like ESOPs and RSUs which are also offered as a part of CTC (mostly by startups or for senior management roles). If you have read news like "IIT student bags 2.5 Crore CTC" then chances are this candidate is being offered ESOPs or RSUs as a part of the deal. This is a useful link for anyone looking to explore these further.

If you walk into a conversation with the knowledge of your CTC components, you will be able to ask for something better always. 

  • If you found this useful then do check out Kareer Kite website to learn more about my services. 

  • Another mentee lands close to 2X CTC. Check this post.

Reference Links:

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