Why Do Companies Use CTC Instead of Clear Salaries? Freshers Feel Misled by Pay Discrepancies

Understanding CTC and Employee Compensation

When CTC (Cost to Company) is not clearly defined by labor laws, why do companies offer it to employees? Employees work for wages, not salary.

Many freshers and beginners often feel deceived by the company when they receive a salary that differs from the amount initially offered or the "in-hand" amount. This discrepancy can lead to confusion and dissatisfaction, as the full breakdown of CTC is not always transparent, leaving new employees uncertain about their true compensation.

Understanding CTC and Its Implications

Really, the CTC is a concept adopted by employers to lure employees. I often tell candidates, especially when I take sessions at B-Schools, to study the offer letter and CTC part very carefully. They should ensure what their take-home salary will be, what their investments (like PF, Gratuity, etc.) will be, and then what should be ignored as a lottery (like performance-linked incentives). I had written an article on my blog back in 2010 about this. Please find the same at the link below:

https://madhu-t-k.blogspot.com/2010/02/ctc-vs-btc.html

CTC vs. BTC

I would say that it is not the CTC but the BTC (Benefit To Company) that is instrumental. That is why the interviewer asks the candidate, "Why should we hire you?" which implies what 'benefit' we shall get if we take you.

Most of the current youth in employment are almost aware of what is included in CTC and understand the different features of gross salary, net salary, take-home, etc. However, what is generally and broadly known is that conventional 'gross salary' represents total emoluments payable in "cash" and various deductions that are legally permissible in India, with the net amount payable/credited to the bank account - printed on the pay slip, which must be clearly understood.

Non-cash components

On the other hand, 'Non-cash' components refer to items not paid in cash monthly but as deferred payments, such as EPF Employer's contribution, which goes to the employees' EPF accounts, annual bonus, leave and leave encashment, gratuity, LTC, incentives, and others. When you combine both, it becomes CTC.

The Concept of Cost to Company (CTC)

Cost to Company is not defined at all in any labor law. It is something that HR has come up with to give candidates the impression that they are being paid more. This concept probably originated from MBA colleges that wanted to suggest their students receive high salaries.

That is why fresh recruits often leave without notice and jump at the first opportunity. In their next job, they first inquire about the take-home pay before making a decision. It is unclear how this benefits the company in the long run, but it has become the norm.

Reasons for Offering CTC Packages

Companies offer CTC (Cost to Company) packages for several reasons:

- To present a more attractive overall compensation
- To provide a comprehensive view of total employee benefits
- To allow flexibility in structuring compensation
- To align with industry standards

Challenges with CTC Transparency

However, the lack of transparency in CTC breakdowns often leads to confusion and dissatisfaction among freshers. They may feel deceived when their actual take-home pay differs significantly from the CTC figure. To address this:

- Companies should provide clear CTC breakdowns during hiring
- HR should educate new hires about compensation components
- Employers should emphasize actual take-home pay alongside CTC
- Freshers should understand that initial compensation may be lower due to training costs

While employees work for wages, CTC remains a common practice. Improved transparency can help avoid misunderstandings and maintain employee satisfaction.