Understanding CTC: The Real Deal Behind the Glorified Numbers

In the world of tech companies, CTC is the method that is adopted. While it mostly represents the cost that is spent on an employee from that company, from salaries to compensations and benefits. But is it actually beneficial to the employee or just a marketing tool that has appealing numbers to our eyes?

What is CTC?

 CTC is Cost to Company. Which comprises all the costs that will be incurred by a company on an employee throughout the year. That includes base salary, joining bonus, ESOP’s, retention bonus, insurance, performance bonus, HRA, and other allowances. This shows the complete compensation, but the reality is more complex.

Who is the actual beneficiary?

This is used as an anchor to attract employees and position their offer as superior to compared competitors. Who is benefited in this case? For surely, the employer, as most of the components of the CTC do not constitute to direct cash to the employee and mostly come with a clause. For instance, they give a joining bonus to employees but would have a longevity clause stating the employee must give back the joining bonus if they are to leave the organization within a certain timeline. Same is the case with ESOP’s, where you will have to stay with the organization for several years, and then you shall receive the benefit of ESOP’s or employee stock ownership plan. In case you exit the company before that timeline, you will not be able to enjoy that benefit.

Impact on Employees

The wide gap between advertised CTC and take-home pay is usually pretty significant. Employees may be attracted by a high CTC figure only to find their monthly salary to be lower than expected after considering all the tax deductions. This gap can lead to dissatisfaction and frustration, particularly if the high CTC was a major factor in their decision to join the company.

How does this arrangement benefit the government?

Imagine a company gives their company shares as a part of ESOP’s, which is initially taxable per your tax slab when the option is exercised, and again, when you sell your shares, you will have to pay capital gain tax. Which is also called the dual taxation on stock options. It ensures tax revenue at multiple stages through both income and capital gains of the employee from stock options.

Another scenario is when a startup or a private limited company grants stock options to employees. As the company grows, the stock price soars, but employees face high taxes and lack liquidity since the company is private. Meanwhile, the startup benefits from greater staff retention and reduced cash outflow.

Conclusion

CTC shows the total amount a company spends on an employee, but it often includes parts that don’t affect immediate take-home pay. Employees should carefully review what’s included in their CTC and understand what each part is worth. Knowing how different benefits and allowances impact their actual earnings and taking their decisions.