Monday, February 22, 2010


The concept of showing the Salary of an employee in the form of CTC (Cost To Company) is a gimmick developed by (new generation) companies to attract employees. The CTC will include all costs – fixed and variable, historic and future or actual and anticipated- which are to be incurred due to employment of a person. Under the CTC concept even the expenses which are to be met after 5 years of employment are not spared but the projected sum is distributed evenly through out right from the month one of service!

An offer letter issued to an employee by a Multi National Company is given below.


Basic Salary
House Rent Allowance
City Compensatory Allowance
Special Allowance
Conveyance Allowance


Meals coupon
House Maintenance Allowance
Uniform Allowance


Leave Travel Allowance
Telephone Expenses
Mobile Phone reimbursement
Credit Cards
Holiday Facilities
Medical Reimbursements
Medical Insurance


Provident Fund


Fixed Bonus
Productivity Linked Variable Bonus

The total amount mounts up very huge and one looking at is impressed by the OFFER given by the company. This is just to lure employees. With the exception of Fixed Salary, all other payments are reimbursements of actual amount spent. Most of them are payable yearly and leave travel concession is generally paid once in two years. Provision of subsidised food (see Meals coupon) may be a requirement of the company entailed after any enactment like the Factories Act, 1948. In some cases bonus will never accrue although amount will be projected well at the time of preparation of offer letter. Later on the employee will be denied of the bonus quoting salary ceiling provisions in the Payment of Bonus Act. I have come across to find an employee whose expectation was that he would get the stated sum every month but was deprived of of many reimbursements for want of adequate proof of having spent the amount claimed. Surprisingly, these companies do not pay any Dearness Allowance which will compensate the cost of living in real terms to a great extent. This is because the company can not graph the cost of living on which the DA is structured.

Similar are the cases of Employees Provident Fund contribution and the Gratuity. These are statutory obligations of the employer. Though EPF contribution takes place every month the gratuity payment takes place only once and that also after five years of service. When no one is certain that he will be in continuous service for five years with an employer the practice of showing gratuity in the salary cannot be encouraged. More over, gratuity is not payable to any employee during his service but it is payable only when he leaves due to any reason including death.

The practice of including employer’s contribution to EPF as part salary and then making a deduction of the amount from the salary shall be interpreted as recovering employer’s contribution from the employee and can be challenged as ‘ an employer shall not deduct his own share of contribution from the salary of the employee’. Similarly an employer cannot realize any amount from the employee for payment of gratuity in future.

In the conventional style of salary fixation, the Basic Salary is fixed and allowances like Dearness allowance, House rent Allowance etc are declared as percentages of the fixed basic. The other benefits will be offered as ‘stated in the standing orders of the organisation’. Normally an organisation will have certified standing orders of its own which define the relationship between an employer and employee. The standing orders will speak about different benefits available to different categories of employees.

When the employers think of cost to company, why doesn’t there be a much fruitful Benefit To Company concept? The benefit that the company gets out of employment of each and every employee shall be worked out applying any theory like that used to measure the marginal productivity of labour. Since transition of Personnel Management concepts to Human Resource Management, labour has been recognised as a capital gifted with rich resource. In this context it is not worth to relate the service of human capital to Cost to Company alone, rather the services rendered shall be measured in tune with Benefit To Company (BTC). This is relevant in fixing remuneration in functional areas like Marketing wherein the marginal revenue, the benefit to the company by employing the marginal labour, determines the salary. The psychology of mass retrenchment in a reputed MNC which lead 500 skills unemployed tells us that those with negative or diminishing BTC have no room in an organisation. When performance is the yardstick for deciding whether or not one employee shall be shown the way out, the same shall also be the index for retention of employee. A good performer brings in many benefits which a bad performer doesn’t. Imagine that the supply of labour is inelastic and there exits alternative employment. In such situation it will be the labour who fixes the benefits that the company gets by employing him!

Retrenchment of employees for poor performance shall be justified provided all efforts using the highly sophisticated tools of the (modern) HR to rearrange and reallocate work have been bushed. But, ironically, many are routed out of the organisation without redistribution of functional areas just finding them unbeneficial to their respective job. Here benefits play the lead role rather than the cost, the very end of which is in the hands of the employer with plenty of ‘variables’ hidden in the pay scale. Above all, the question commonly asked in a job interview that ‘why should we appoint you?’ has an implicit meaning ‘what benefit the company gets out of employing the candidate’.



  1. Hi Madhu,

    Very nice Article explaining the difference between the CTC and BTC.

    I would like to ask a question about gratuity here.
    In my CTC package in previous company gratuity component was mentioned. I left the organization after serving about 3.5 yrs. Whether i would be eligible for gratuity amount?

    Thanks and Best Regards,

  2. If every month an amount is shown in your salary slip as deducted from your salary, you can claim it. If not shown in salary slip, forget it.


  3. Dear Sir,

    i read this artcile by chance. It's an eye opener. Thanks. Later i went thru a few of your blogs and reverts - it's all to the point and by n large qualitatively superb compared to what we generally come across in the net...

    i've a few questions. i'm employed in pvt sector since May 2001 and has just joined my 5th employer. The tenures of my previous 4 employments are 1yr 8m, 11m, 1yr 6m and 6yr 1 m. There were 1-2 weeks gap between the jobs. The 2nd and 4th employers had own PF Trust. I've withdrawn PF from my 1st employer. I've not transferred my PF amounts when jobs were changed. In this context:
    1. Can i tranfer all my previous 3 PFs to my latest PF account by applying thru my current employer using 3 seperate Form-13. Along with PF will EPS amount also get transferred. If not what to do for transferring EPS?
    2. When i withdrawn my first PF, was the EPS amount also paid to me by default as the service was only 1.8 yrs?
    3. Am i eligible for applying for scheme certificate? To calculate 10 yrs of service, can the tenures of all employments be added; or is it 10 yrs under single employer?

    Thanks & Regards

  4. Hi Madhu
    Very enlightening. Can you clarify weather Gratuity is obligatory on the part of an organisation. Specially if one is not assumed to serve 5+ years in an organisation. And if by chance he serves can it be waived off under the assumption that it is not considered or included in the monthly wages.
    Thanks in advance
    madhusudan rao

  5. Good information sir....

    Thank you...


  6. Dear Rao,
    Gratuity as per Payment of Gratuity Act, will accrue only if the employee leaves after completing at least five years of service. However, as stated in the article, if the amount (projected) is shown in the offer letter as included in the pay and later on it is denied, the same may lead to disputes and even there is every chance that the employer may be forced to pay it even in the cases of employee leaving before five years of service. There seems to be no such case being filed on the issue. Still we cannot overrule its possibility because it is a new concept.

  7. Hi Madhu,
    Good information.I have the same douts as Ajith raised.Awaiting you views.

  8. hi Madhu
    This blog is really useful. I need a help from U. MY company is a manufacturing company in Grade B city. MY marketing staffs are located in different cities Grade X, and grade A. So I need to calculate CCA. I am little confused in calculating CCA. Do u have any model for calculating CCA. pls help me..