The Hindu Business Line : What’s on paper… and what ends up in your pocket

Between what companies offer as pay, and what one takes home at the end of the day, there is a significant difference. A look at the concepts that come into play.

K.Venkatasubramanian

Sirisha was on cloud nine. And why not? Fresh from her MBA, she got an offer on campus from her dream company, Honest KPO Services. The annual ‘cost-to-company’ mentioned in the offer letter was Rs 6 lakh and she dreamt of receiving a good Rs 50,000 every month. But at the end of the first month, her heart sank as she stared at her salary slip. Printed in bold was a sum of Rs 23,337!

With her batch mate Sandhya, who felt equally ‘short-changed’, Sirisha stormed into the HR manager Trisha’s cabin. Not one to hold back emotions, Sirisha shouted, “this is not what I was promised! There is a huge disparity between my offer letter and my actual salary. I need an explanation.”

Trisha asked them both to sit down, gave them a glass of cold water and a knowing smile. She called Vineeta, the new recruits’ senior in college and the ‘best employee’ award winner of Honest KPO Services for two successive years. She could have done it herself, but Trisha decided that Vineeta could help calm matters and would possibly exercise greater influence on the new recruits.

Gross Compensation

Vineeta started to explain in her calm and composed style. “All companies are under pressure to recruit the best candidates and package their offers as attractively as possible. This being the case, candidates should understand that when companies quote a ‘cost-to-company’, it includes several non-monetary components to salary which may not be reflected in your actual take-home pay. This doesn’t mean they are cheating.

Let us understand salary components in general. Broadly, the gross compensation offered by a company includes not only basic salary and allowances but also perks, reimbursements, retirals and other elements such as soft loans.

“The basic salary is arguably the biggest component (35-40 per cent) of the total pie for any employee, and definitely so for most people for the first few years of their career. Most other components of your pay are a percentage of this basic pay. This is definitive pay and goes to the monthly kitty. House rent allowance is another fixed component of your salary. So is your city compensatory allowance, which depends on the category of the city you work in. Travelling allowance and a generic “special” allowance may also be part of the fixed component. Together, all these can account for about 55-60 per cent of your gross salary.”

“That still does not explain these figures” said Sirisha and Sandhya in unison, becoming a bit testy.Unperturbed, Vineeta continued. “Now comes the provident fund or retirals part. In India, 12 per cent of your basic salary is deducted towards PF, as a social security measure. An equal contribution is made by the employer and is added to your gross compensation. You also become eligible for gratuity after five years of working here. The company on a monthly basis contributes to this kitty, which will be paid either on retirement or on resigning. This also adds to your gross sum.

Reimbursements

“Let us get to the most misunderstood ‘reimbursement’ part. Leave travel, telephone, and canteen subsidy need some briefing. At Honest KPO Services, we follow a policy of reimbursement for LTA, wherein you can produce bills and get the expenses reimbursed, subject to tax rules. There are companies that apportion LTA on a monthly basis as well. But we don’t do that. So is the case with telephone bills as well as medical bills/medical insurance premium paid on your behalf. You pay your bill and produce it to the company, which, in turn, compensates you. The periodicity can be monthly/annually as you choose”.

“But we pay these out of our savings and it is not an extra amount” fumed Sirisha. “But Honest KPO Services foots it nonetheless, dear,” Sandhya, the sarcasm not lost on anyone.

Vineeta continued with her matter-of-fact explanation: “Now, you get food at Rs 5 at our canteen, which is worth Rs 25 actually, if you eat out! Honest KPO Services puts the Rs 20 difference as a part of your CTC, which is the extent to which the food is subsidised. Gift vouchers for your birthday, fee for Chill-Out, the five-star leisure club in this city, whose membership is paid by the company, is obviously a cost and added to your CTC.”

Bonus and soft loans

“As a means to retain talented employees, Honest KPO Services pays fixed as well as performance-linked bonus on a yearly basis. This too is mentioned in your offer letter. But this assumes that you earn a 100 per cent bonus for being the best performer; everyone is recruited on that basis! But actual bonus may go down to 85-50 per cent of these levels depending on the way your performance pans out. The fixed part will come in automatically and is paid annually during our founder’s birthday. HR assumes the best-case scenario in both cases and includes the amount in your offer letter.

At Honest KPO Services, we provide loans for purchase of two/four wheelers or white goods at interest rates that are much lower than traditional banks or, as in my some cases such as mine, at nil interest rates!

Naturally, this interest subsidy, which is opportunity cost for the company, is also added to your gross compensation, assuming that you will avail of them as soon as you join.”

Enter Tax angle:

Varsha, a tax-expert advising Honest KPO Services, who had slipped in during the course of this conversation, interjected. “All these form your gross compensation, which is before income tax. So after the above components are taken away, depending on the 10, 20 or 30 per cent tax slab that you fall in, you are taxed and only the net salary is credited to your bank account. That will explain why your take-home monthly pay is Rs 23,337 and not Rs 50,000!

Sirisha and Sandhya were crestfallen. It all seemed so logical, nothing much to argue, how they wished they had quizzed Trisha on the actual take-home on campus, during their recruitment!

Trisha thanked Vineeta and said “Most employers tailor their offers to make it look as attractive as possible for the best and brightest candidates. And hey, it is the job and not the compensation that should be your main driver. That is what will take you places. Look at your senior Vineeta as an example”.

After Sirisha and Sandhya left the cabin without as much as a whimper, Vineeta said to Trisha “These youngsters! How impatient they get. I never asked such questions when I came in”.

The sadder but wiser twosome vowed to ask questions and get clarity, at least in their next job!

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