Cost to Company (CTC)

What is cost to company (CTC)?

Cost to company (CTC) is the total compensation package an employer provides to an employee. It includes the annual costs for an employee’s base salary, benefits (e.g., health insurance, retirement contributions), allowances (e.g., transportation, housing, etc.), employer-paid taxes, and other additional forms of compensation provided over the year.

The CTC is often used in job offers to indicate the total value of the employment package. This helps candidates understand their complete benefits and compensation and allows for easier comparison between different job offers. However, it’s important for employees to understand that the CTC is not the same as take-home pay, as it includes many indirect benefits and mandatory deductions.

Furthermore, it allows employers to manage and plan their labor costs.

What does cost to company (CTC) include?

Direct benefits

These are the immediately tangible components of compensation that an employee receives in their pay package. They include:

• Basic salary: The fixed monthly income of an employee. It typically forms the foundation of the total CTC, around 40-60%.
• Allowances: Additional financial benefits offered to an employee to cover their personal and professional expenses, such as transportation, housing, and medical costs.
• Bonus and incentives: Performance-based pay that rewards employees for their individual or the company’s performance.
• Employer-paid taxes: Payroll taxes that cover social security, federal taxes, and workers’ compensation insurance.

Indirect benefits

These benefits are not paid directly as cash but contribute to the employee’s wellbeing and work-life balance. They include:

• Insurance: This can include coverage for health, life, or other types of insurance policies that the employer pays for.
• Company perks: Extra benefits such as subsidized meals, employee discounts, child care assistance, company car, etc.
• Health and wellness programs: Initiatives like gym membership discounts or reimbursements, mindfulness training, and access to mental health counseling.
• Professional development: Internal or external courses, training programs, coaching or mentoring, or any other programs to advance skills and careers.

Savings contribution

These are contributions made toward an employee’s future savings and security, which include:

• Gratuity: A lump sum payment typically offered as a sign of appreciation for years of service when an employee retires or leaves the company after a certain amount of time.
• 401(k) plans: A retirement saving plan where employees contribute a portion of their salary (pre-tax), and employers can also make matching contributions. Money is only taxed upon withdrawal.
• Stock options: Some organizations offer the possibility to purchase company stock, offering future financial gain depending on stock performance.
• Profit sharing: A program where a company distributes portions of its profits to employees (quarterly or annually). The profits can be shared immediately in the form of a cash payment or deferred into a retirement account.

HR tip

When creating compensation packages for new hires, tailor the mix of benefits offered within your organization’s CTC framework. By understanding the individual candidate’s situation (e.g., mid-career professional with childcare needs), you can design comprehensive and attractive packages that go beyond salary.

Gross pay vs. cost to company

Cost to company (CTC) and gross pay are terms commonly used to discuss employee compensation, but they refer to different aspects:

Gross pay refers to an employee’s total earnings before deductions. This figure includes wages, salaries, overtime, commissions, and bonuses, reflecting an employee’s direct payment for their work before taxes and other withholdings are subtracted.

On the other hand, cost to company (CTC) is a more comprehensive measure. It represents the total expense that an employer incurs for an employee. This includes not only the gross pay but also additional components such as employer contributions to health insurance, retirement funds, and any other benefits or allowances like housing or transportation.

In essence, while gross pay reflects the pre-deduction income of the employee, the CTC includes this along with all other costs the company bears for the employee, giving a fuller picture of the total employment expense.

 How to calculate cost to company (CTC)

The calculation of cost to company (CTC) involves adding up all the direct and indirect costs that an employer incurs for an employee in a year. You can use the following formula:

CTC = Gross salary + Direct benefits + Indirect benefits + Saving contributions or deductions

Here is an example of an annual CTC for an employee:

Total CTC = $120,100

This figure gives the total cost that the company incurs for employing this particular person over the year. 

What to keep in mind

Communicating the breakdown of an individual employee’s CTC can be an effective strategy for attracting and retaining top talent. HR can use it to highlight the entire compensation package for a particular role. This approach helps potential candidates, new hires, and current employees understand the investment their company is making in them.

Additionally, such transparency can facilitate salary negotiations by providing a clear view of the total value proposition, extending beyond the base salary.

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