'If you pay peanuts, you will get monkeys,' goes an adage. These days with a shortage of good talent in the job market, the saying doesn't really hold true. Companies are willing to offer good salaries to the right candidates.
But even after this there are things that individuals should keep in mind while negotiating their salaries. What may look like an increase in salary may not lead to a real increase.
This is primarily because these days most companies quote annual salary packages they offer to their employees in terms of what is known as 'cost to company,' or CTC.
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 be salary for the employee.
Hence very rarely does it happen that the CTC divided by the number of months in a year, i.e. twelve, comes down to the actual monthly salary that an individual receives.
Let's look at the various ways in which companies boost the CTC packages they offer to their employees.
a) Useless allowances: These days individuals get various kinds of allowances. The reason offered is that this brings down the taxable component of the salary. Fair enough. But at times some allowances are subject to producing bills.
Let's take the case of mobile allowance that companies offer. An individual has a mobile allowance of Rs 3,000 per month. He will get that money only if he runs up a bill of Rs 3,000 during the month. Now if the individual does not really use this to the hilt, and usually gets a bill of around Rs 1,200 a month, then he faces a clear loss of Rs 1,800 in a month. This amounts to a loss of Rs 21,600 during a year.
So while negotiating the CTC packages individuals should beware that companies are not stuffing up the CTC with such allowances, which he or she may never be able to claim.
b) Food coupons: Food coupons are the rage these days with companies. The primary reason is that this helps bring down the taxable component of the salary. Food coupons, up to a maximum of Rs 60,000 in a year, are non-taxable.
But having this as a part of the salary may or may not suit everybody. If you are single and don't cook at home, then there is hardly any way that you are going to use them.
Some companies offer subsidised food to their employees. This subsidy is also at times added to the CTC salary. By doing this the subsidy does not remain a subsidy, the employee is actually paying for it.
c) Interest subsidy: This trick is a favourite with private sector banks recruiting fresh candidates. Let's see how this works.
The bank may promise a candidate a maximum loan of Rs 10 lakh (Rs 1 million) to a candidate during a year at a favourable rate of 3% per annum. The interest subsidy the candidate receives is directly added onto the CTC package.
What this means is that if an individual after joining the bank were to take a loan from the bank of Rs 10 lakh, he would pay an interest of Rs 30,000 (3% of Rs 10 lakh) in the first year. If he had taken the same loan at a market rate of, let us say, 12%, then he would have paid an interest of Rs 120,000 during the first year.
The difference between the two interests amounts to Rs 90,000 (Rs 120,000 - Rs 30,000). This is known as the interest subsidy and added to the CTC package. The issue that arises here is that an individual may not want to take the loan of Rs 10 lakh. Or he might take a part loan. And even if he does take the entire loan, with the interest subsidy being added to the CTC, he is paying a market rate of interest.
d) Variable salary: These days companies also offer a variable component in the salary subject to the candidate reaching certain set goals during the course of the year. Usually the maximum possible variable salary that an employee can get in a year is added onto the CTC.
Achieving this may or may not be possible. Currently this may not matter much because the Indian economy is doing well and individuals may be able to achieve their high targets.
e) Gratuity: At times even gratuity gets added onto the salary. Now this is a payment that an employee gets only if he quits after having spent at least five years in an organisation. Going by the rate at which individuals change jobs these days, it's been a long time since one heard anyone getting a gratuity.
f) High leave travel allowance (LTA): This is another standard trick that organisations use. The leave travel allowance usually is paid to an employee with the salary of the last month of a financial year. So this financial year's leave travel allowance will be paid along with the salary of the month of March 2008, nearly 10 months from now.
Even though an individual gets the amount in the end, he will lose interest on that amount had he chosen to invest it, if he got the amount month on month.
For a company this makes utmost sense, because they don't have make a payment month on month and can earn an income from investing that amount.
WYSIWYG (pronounced Wizwig) is an acronym commonly associated with computers and stands for 'What you see is what you get.' Now that is certainly not true of CTC salaries.
The simplest way for individuals while negotiating salaries is to clearly ask what the take home salary at the end of the month is going to be.
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