Components of CTC Companies, offer various attractive components in the CTC to retain and boost the morale of the

employees. Where some salary components are fully taxable some are fully tax-exempt. The composition of your CTC and a few of its components could be grouped as below. 1. Fixed Salary: This is the major part of your CTC and forms part of your monthly take home. It commonly consists of: -Basic Salary: The actual pay you receive for rendering services to the company. This is a taxable amount. -Dearness Allowance: A taxable amount, this is paid to compensate for the rising cost of living. -House Rent Allowance or HRA: Paid to meet expenses of renting a house. The least of the following is exempt from tax. Click on the following link for more information on HRA exemtion. Actual HRA received 50 percent of salary, basic plus DA, if residing in a metropolitan city, or else 40 percent. The amount by which rent exceeds one tenth of salary, basic plus DA. -Conveyance Allowance: Paid for daily commute expenses. Up to an amount of Rs 800 per month is exempt from tax. 2. Reimbursements: This is the portion of your CTC, paid as reimbursements through billed claims. -Meal coupons: Many companies provide their employees with subsidized meal coupons in their cafeterias. Such costs incurred by companies in the form of subsidies are included in the CTC. Meal coupons are tax exempt provided it is not in the form of cash. -Mobile and Telephone Bills: Telephone or mobile expenditure up to a certain limit is reimbursed by many companies through a billed claim, and is a taxable amount. -Medical Reimbursements: Paid either monthly or yearly, for medicines and medical treatment. The entire amount is taxable. However, up to Rs 15,000 could be tax exempt, if bills are produced. Read article on Section 80D, to better understand health insurance and mediclaim. 3. Retirement Benefits: This is available to you only on retirement or resignation. -Provident Fund: Employers contribute an equal 12 percent to the provident fund account. This employers contribution though received only on retirement or resignation, is an expense incurred by the company every month and thus is included in the CTC.

-Gratuity: Companies manage gratuity through a fund maintained by an insurance company. The payment towards the gratuity annually is sometimes shown in CTC. 4. Other Benefits and Perks -Leave Travel Allowance: It is the cost of travel anywhere in India for employees on leave. Tax exemption if allowed twice in a block of four calendar years. -Medical allowance: Some companies offer medical care through health facilities for employees and their families. The cost of providing this benefit to the employee could also form part of CTC. -Contribution to Insurance and Pension: Premiums paid by companies on behalf of employees for health, life insurance and Employees Pension Scheme, could form a part of the CTC. -Miscellaneous Benefits: Other perks which companies include under CTC could be electricity, servant, furnishings, credit cards and housing. 5. Bonus: This is the benefit paid on satisfactory work performance for employee motivation. Though this amount is not assured to the employee, most companies include the maximum amount that can be paid as bonus, to the CTC. The two types of bonuses that are normally paid out are: -Fixed Annual Bonus: Paid on the basis of employee performance, either monthly or in most cases annually, it is a fully taxable amount. -Productivity Linked Variable Bonus: Complete bonus amount is paid only on 100 percent achievement of target, nevertheless it still is included as part of your CTC. Having understood what CTC is: Each company too has its own way of calculating the cost to company. Let us revisit Ravis case. Ravi realized, that an attractive CTC does not necessarily indicate a heavy monthly take home. Benefits like training and development, whether undertaken by him or not was still considered part of his CTC. This is what he now feels. -One must take time to find out what the actual benefits are by asking for the break-up of the CTC so as to know the entitlement. -If you are just joining the company, try to negotiate with the HR as to opting out of some facilities in exchange for increasing the take home. Understand the expenditure limits and tax angle of perks and benefits, and use them smartly.

Recent Posts

Do Attractive People Get More Jobs and Money? FLSA Compliance - "11 Main Test" for Independent Contractors

Record Black Friday Sales Signal a Shift Why We're Thankful for HR Non-Profit Compensation in a Down Economy Holiday Pay for Employees Comp Basic: Mean vs. Median Tips for Entry-Level Recruiting PayScale Compensation Quiz Take Caution When Terminating Older Employees

Categories

Compensation Data Compensation Plans Employee Labor Laws Employee Performance Reviews Employee Retention Executive Compensation Health Care Reform and Human Resources How To HR Management HR News HR Recruiting Job Descriptions Salary Benchmarking Salary Ranges Talent Management

Archives

December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011

More... Effect of Executive Compensation Cap | Main | Cost Cutting Examples of Compensation Plans

How to Write a Compensation Plan

02/26/2009

inShare Share |

How to Write a Compensation Plan: Some Fundamentals During a Recession

Maybe as employers, we can get a little complacent about our compensation plans this year. Were all sitting in the catbird seat today. And maybe still will be next year. Along the way, especially if the economy doesnt improve, the only folks were really likely to lose are who? Well, theres a concern! Its our outstanding employees who are the highest turnover risk those who are keeping us successful during a recession. So lets discuss how to write a compensation plan, today, that will keep us in business for the long run. One that will encourage employee retention, maintain morale, limit employee turnover and keep us HR types on the CEOs nice list. Heres how:

Keys to Successful Employee Compensation Plans

Working on a comp plan? Get it done in 5 easy steps, with our white paper guide, 5 Easy Steps to a Smart Compensation Plan.

1. Retain our critical employees when has retention been more critical? 2. Dont overpay a dime, if possible what company has profits to burn needlessly? 3. Pay everyone fairly (enough) so that they can focus fully on their work I know what youre thinking, How do I develop a compensation plan that meets all of these objectives? The most critical are the last two points: pay enough without overpaying. And to accomplish that we can be grateful for the solid pay data Payscale provides. But theres still much more for us to do to develop a sound compensation plan.

Working Examples of Compensation Plans for Critical Employees

Top employee retention seems to be a frequent missing logic step in designing compensation plans. Here are two examples of how to recognize if you have a critical employee on your hands:

Compensation Plan Example #1: What do you pay your star retail salesperson?
Probably high, as in above market median, but you cant open the vault for this employee. Even if theyre brilliant, a salespersons success is dependent on many other employees tasks being done well. The buyer has to buy the right goods at the right price. The inventory person

has to ensure the appropriate stock is in the right store. The floor designer has to display the merchandise to its best advantage. Many, many tasks are required for success. So in retail, ultimately, the entire system is more likely to be critical to company success than any one employee in the system, no matter how well they do their job. Overpaying a star salesperson isnt likely to give you much of a return on that investment.

Compensation Plan Example #2: What do you pay Sid Meier?

Sid Meier is the video game designer responsible (well, I also played a role) for really irritating my family a few years back. That was after our son taught me how to play Sids computer game, Civilization II. The dog I got addicted. Wheres Dad? On the computer. Sid was the dog visionary who designed the game. It was a bestseller. The latest version still may be but I wont allow myself to go near it. The point is that rarely, in certain jobs and companies, one person really can have a big impact on the success of the entire company. The costs of employee turnover for one person might threaten a companys future. Steve Jobs seems to have had this impact on Apple. You can think of your own examples. Heres a case where you might want to open the vault! Like hiring the hot movie star, you could get a great ROI on off-the-charts pay for a top talent. Sid, I hope it worked out for you; its really an entertaining game!

The Cost of Overpaying in Employee Compensation Plans

Rigor, such as the compensation data from Payscale.com makes possible, is more than a nicety. It may be a key to survival. Lets do the math. Say your company has 1,000 employees. Revenues are $100,000,000 a year, profits will be $1,000,000 next year, and the Board is pretty happy after all, $1,000,000 in profits during a recession is a lot better than many companies are doing. So you give all of your employees a raise on January 1 and, because youre nice, you end up overpaying everyone by only $1,000. On an average salary of, say, $50,000, thats nothing. But then, we do the math. Uh-oh. $1,000 x 1,000 employees is (yikes) your entire profit. Get your compensation data from a reliable source, like Payscale.com, and make your profit target for the year instead of gobbling it up. Its much nicer than layoffs in the long run.

The Cost of Underpaying in an Employee Compensation Plan

Older news here: Jac Fitz Enz showed the cost of employee turnover was 6-24 months of salary. For a key employee making $100,000 per year that cost might be $200,000 - or more, if his name is Sid. Its worth keeping this cost in mind. Retention pays. It could pay a lot.

The Art of Designing Compensation Plans

Well talk more about this on another day, but heres the simple core reality of employee compensation plans: to design a compensation system that pays someone competently not too much, not too little you only need to do three things:

How to Write a Compensation Plan - 3 Important Steps

1. Determine the market compensation rate 2. Compare an employees work to the market 3. Align employees compensation with their work, relative to the market.

It is simple, in concept. At raise time, it can be this simple: High pay + poor results = no raise Low pay + great results = big raise

The Goal: People Forget About Pay, So They Can Focus Fully on Work
Frederick Herzberg made this point, and Im not sure its ever been improved upon: compensation does not act as a satisfier, or motivator. But it sure can act as a dissatisfier if someone believes theyre underpaid. W. Edwards Deming fully agreed. And he was one consultant who got consistently brilliant results. Can you name anyone with half his record of turning organizations into profit machines? Demings prescription: pay people well, so they forget about pay. Any ideas triggered for you by what Ive mentioned above? As always, Im curious. Top Five Non Monetary Items Employees Want in the Workplace : 1. Opportunity to Learn, Develop and Advance as an Employee. Employees understand they need to grow, learn and develop new skills in order to advance. The ability to be able to choose their assignments and rise to new challenges offered by new responsibilities. 2. Flexible Hours. Family, children, friends, church, sports, hobbies and other activities all have demands on today's employees. A flexible schedule or the occasional afternoon off

can help employees meet some of these obligations. By allowing some flexibility in an employees schedule you can increase their desire and motivation. 3. Recognition. In today's high paced work environment it is reported that employees consider recognition of their work and efforts rare and infrequent. Think about it - What better way to have an employee continue their good work and success then to offer them praise-verbal, written or ideally a public announcement. 4. The Opportunity to Contribute. - The opportunity to be part of the team. - To work closely with managers and management. - To be involved in key decisions. - To be listened to and heard. 5. Independence and Autonomy. Employees want to be able to work independently. They do not want someone constantly watching over them and questioning their every move. They like to receive their assignments -preferable with the time frame required for completion and then have the independence to complete the work given the guidelines and framework you have set on their own merits. These benefits can go a long way in creating Employee/Employer loyalty and respect. This clearly demonstrates there are many points, besides money, to consider when you establish your management and employee policies. Monetary Bonuses and Incentives Versus Gifts & Awards : Research on what employees value for rewards and recognition indicated a monetary reward only ranked 12th in a list of items important to employees. It is true, we all need money for the expenses of day to day living but studies indicate that when employees receive a monetary bonus it is typically used to pay bills, expenses or purchase something that the employee needs, not some thing they truly enjoy. Consequently money becomes a very inpersonal gift. Conversely, if you want to give a very sincere gift that not only says thanks but will help create the loyalty, dedication and motivation you would like your employees to have, consider a gift or award that will touch them personally. Something they will truly enjoy and use or some thing that brings them pleasure in their leisure or family time. Please see What Employees Want on our main menu under Recognition for more information on this subject.