Why Do Employers Base New Salaries on Previous Pay, and How Can You Negotiate Better?

Why Employers Consider Previous Salaries

Why does the employer consider the candidate's previous salary when fixing the salary package? Is there a rule of thumb for offering a new salary based on the previous one?

Negotiating for the Maximum Package

Please guide on how to negotiate with the employer to secure the maximum package.

Regards to all.

Conceptually, a bonus is a share in the profits of the organization. By provisions of the act itself, some employees will get covered under the act, and others may not be covered. This situation also changes as the emoluments rise over a period of time and as the government raises coverage limits under the act. It is a fact that even if the organization makes a loss, it is obliged under the act to pay a minimum bonus of 8.33% as per stipulations of the act to the covered employees. These two statements will make it clear that bonuses can change from time to time and from person to person depending upon the coverage status scenario.

Understanding CTC

Now, when we talk about CTC, we mean that it is the cost incurred by the employer in respect of the employee for having employed him/her. CTC is NOT the money the employee gets in his hands every month or periodically. Organizations must confine the use of the concept of CTC only for the purpose of budgeting employee costs for the organization and certainly NOT as a tool to bargain salaries during recruitment. But many employers seem to do this (perhaps since there is no law against it!).

Components of Salary

Salary is a sum of direct payments that the employee receives in his hands whether monthly or periodically. There are certain indirect payments like benefits of Provident Fund, ESI, etc., he will be eligible for (though not necessarily entitled to, if he does not fulfill the laid-down criteria), and there would be incidental payments that are conditional and may accrue upon specific results being achieved, like commission on sales, production incentives, attendance bonus, etc. The non-monetary benefits cost the organization but do not represent "money in hands" as far as the employee is considered.

Therefore, during salary negotiations, our approach should be to compare on a "like-to-like" basis, as far as possible. Alternatively, we must build complete clarity about what is being discussed, negotiated, and contracted so that there will be no room for ambiguity, confusion, or misunderstanding. Transparency is a great strength in all interpersonal relationships, especially when money is involved!

I hope your query is answered.

Regards,
Samvedan

November 16, 2010

Hi Sim, an employer has no control over statutory benefits such as bonus, PF, and gratuity; that is why they are not included in CTC (cost to company). However, other costs like basic salary, HRA, and other allowances can be negotiated if the salary is not based on a fixed package. This point is also clearly stated by Mr. Samvedan.

All the best.

Thank you, Mr. Samdevan and Mr. Gobinda, you have very nicely explained the logic behind why a bonus is not considered as part of CTC. I would like to seek your expert guidance on the following incident.

In one company, the offer letter given to the employee mentioned the CTC as 1.2 lakh p.a. (Rs. 9230/- per month + yearly Bonus Rs. 9230/-). Subsequently, it was noticed that the company includes the bonus as part of the CTC. Therefore, the monthly salary of the employee is obviously less than expected.

After completion of a year, when the employee applied to another company for a job, the new employer did not consider the CTC which includes the bonus, affecting the salary negotiation.

Dear Experts, please express your opinion on such a situation.

1. Is it fair practice for the company to include the bonus in CTC?

2. Is it justified that even though the appointment letter states CTC as Rs. 1.2 lakhs p.a. (including bonus), the new employer refused to consider the written CTC letter and only considered the salary slip, which shows a lower payment to the employee?

Regards to all members.

In your example, you have stated a bonus of Rs. 9230/- per annum. If the person concerned is covered under the Payment of Bonus Act 1965, this bonus would represent the Minimum Bonus. It would work out to Rs. 8400/- under the Act. So, the bonus included in the salary (or CTC) of the person is NOT the bonus under the Act. We have to know if there are any conditionalities attached to the payment of this Rs. 9230 bonus. For this reason, this amount is a part of the salary itself.

If this logic was explained to the new employer, perhaps he would have accepted it, especially if the old employer had, in fact, paid this amount!

I think the mischief is on the part of both the employers but more of the old employer and less of the new employer who at least is saying that he will NOT consider this element in his offer.

That is why the concept of CTC is a WRONG approach to negotiate salaries. Each employer is free to define his own CTC, and there is no law against or to standardize it.

Please follow the logic presented by me in the first reply.

Tough Luck.

Regards,
Samvedan

November 17, 2010

Hi all,

There is no certain definition of CTC. It varies from company to company. Some companies add bonus as a part of CTC, while some do not. Additionally, some companies include gratuity, interest on housing loans, etc., as a part of CTC. Also, there is no legal binding on what to include or exclude in CTC.

Thanks,
Siba

Understanding Cost to Company (CTC)

As the definition itself is COST TO COMPANY, all costs the company incurs or is likely to incur in respect of the employee are considered as COST TO COMPANY.

Though you have mentioned that the salary is Rs. 9230/-, there is no mention of the breakup of Basic + DA, which is the basis for computing the bonus as per the act.

In my opinion, if the employee is able to furnish a Form 16 provided to him by the former employer, then the succeeding employer would consider this as evidence.

Verification of Earnings

Generally, companies verify statements made by employees. In some instances, we come across employees producing the actual earnings + probable earnings (incentives). But in many cases, the full incentive earning is not earned by the employee, even though the offer letter will indicate the maximum CTC the employee can earn. In such cases, employers tend to verify the claims made by candidates, and this is usual.

So it is for the candidate to prove that he has, in fact, earned the CTC in his previous employment.

Trust the matter is clarified.

Regards,
M.V. KANNAN

Dear Mr. Kannan,

I have this question for you. Where a company includes a bonus (performance bonus/variable bonus) component in CTC and does not declare and distribute consistently, citing poor performance, what is the position of the employee? In the first place, this component is only the "probable earnings" for the employee and does not reflect a regular income. Is the company correct in making such an offer?

The subject has been well explained by Mr. Samvedan and Mr. Kannan. The CTC concept varies from company to company; it is very tricky. The person who is offered employment has to use their discretion and negotiate by looking at the different components.

Regards,
K. Ramachandra

Thank you to all the learned members who answered this query. Your advice will be very useful to all job seekers to understand these concepts and to have better salary negotiations. Thank you once again.

I want to reply to the first part of your query regarding why prospective employers look at the previous CTC when negotiating the future CTC.

Please note that the logic behind this practice is that people generally change jobs for an improvement in their financial status. Unless a person is offered a better CTC than the previous one, they may not join. Therefore, this is generally done to motivate a person to leave their present job and join a new organization. Referring to the present CTC is a thumb rule in this context.

However, more importantly from the employer's side is the position we are trying to fill and the pay that can be offered for that position, rather than the previous CTC of the individual. Many times as employers, we come across good candidates, but since we cannot offer an improvement over the existing CTC and disrupt the internal wage structures, we cannot recruit them.

From the individual's perspective, it is a fact that the existing CTC comes into consideration when negotiating the future CTC, as people may not offer much more than the present CTC. Rarely, we come across cases where a 100% increase over the present CTC is offered.

Regards.

Dear All, I fully agree with Mr. J.R. Kumar's view. However, during negotiations, if we have any doubts about the claims made by the prospective candidate, we politely request their previous year's CTC. This reveals their actual earnings, excluding LTA and medical reimbursement, which are subject to a ceiling if exempt from tax according to current IT rules.

Regards, M.V. Kannan

Dear All, The points on CTC have been well explained by Mr. M.V. Kannan from the beginning. Mr. JR Kumar's concern is valid; we often encounter good candidates, but companies may not be able to hire them due to internal salary structures.

Indeed, in the current market scenario, with high costs of living and ambitious expectations, the demands placed on candidates are substantial. If companies are unable to meet these expectations or negotiate effectively, they may need to consider candidates who align with their existing salary packages.

However, this does not mean that quality candidates willing to work for lower salaries are unavailable. Nowadays, due to the specialized skills offered by MBA and other courses, as well as the high urban living costs, candidates often believe they can command higher salaries. This trend is particularly prevalent in MNCs and foreign collaborative companies, where new hires may receive high salaries while existing senior employees may remain at lower salary levels.

Companies and recruiters should not be discouraged by these challenges. I strongly recommend seeking candidates who fit within the company's salary structure. Encouraging applicants from the outskirts of cities or those with experience working in smaller towns can also be beneficial. If offering increased salaries beyond the previous CTC is not feasible, it may be necessary to consider candidates within the company's existing salary range. Nonetheless, there are still competent individuals who are eager to secure employment and are willing to work for moderate salaries.

Regards,
K. Ramachandra
Bangalore

Dear Mr. Ramachandra,

You have clearly explained the manner in which we need to strike a balance between new employees and existing employees. I fully agree with you that we should not chase candidates aspiring for higher CTC throughout their careers. This suggestion is because even after you try to match their salary expectations, the probability of their duration in the company is short-lived. They constantly look out for employment with higher CTC. We have also come across candidates who get stuck with a particular company early in their careers because the CTC drawn by them in relation to their young age is not affordable by many companies. Hence, as rightly pointed out by you, it would be wise to groom candidates with a relatively lesser CTC.

Thank you, SIM, for initiating an interesting topic.

Regards,
M.V. KANNAN