What exactly is Cost to Company (CTC) and other salary structures
I was truly thrilled to be invited to participate with the phenomenal Tshidi Khunou on his #TopOfTheMorning video yesterday. If you haven’t subscribed already, I highly suggest that you do! When I saw him posting that he was going to be talking about cost to company and what it is made up I realised how important this topic is and how often, within Agency recruitment, we see candidates who do not understand what their own earnings actually are or what makes it up. It is then exceptionally difficult to be able to compare a new job offer with what you have. It is also so important to understand your package as it often gives you the tools to be able to negotiate a better offer from a potential new employer. The worst thing that could happen is that you accept an offer thinking it is more than you are currently on and then realise there were benefits your company was paying which you now need to fund yourself and you end up being worse off!
What is Cost to Company?
So…..let’s unpack what makes up Cost to Company. It is exactly what it means – the full amount you will cost the company to employ you. Performance bonuses are usually variable and therefore on top of this. A company will usually base your performance bonus on company as well as personal performance and it is usually subjective so you are not guaranteed any amount at all.
Let’s understand what benefits go into a Cost to Company
Another thing to remember with benefits vs cash is that it is all still your money so don’t only focus on the nett salary! It is very important to put money away for your retirement and the earlier you start the better and the easier it is to accumulate sufficient funds to retire well. Companies can offer a Pension or Provident Fund – the difference is how it is taxed and when you can take a lump sum and what has to happen to that money at retirement. You can ask a Financial Advisor to assist you to understand the difference but most companies will only have 1 or the other. You can sometimes choose how much you contribute into the Provident Fund. There will be a minimum amount that is the Employee (EE) contribution say 7.5% but can often go up to around 15%. There is usually an equal contribution from the Employee (EE) and the Employer (ER) BUT please note that both portions actually still come out of your CTC. The only difference is that the ER contribution is a company benefit which is therefore taken off your salary before tax whereas the EE contribution is paid by you as a deduction with after tax money.
The more you save now the longer it has to grow with compound interest. It is a trade-off – saving for your future vs using the money now. Think about it this way – many of you currently have to support parents and perhaps grandparents (often called “black tax” here in SA). What this means is that you have less money to buy assets and provide a secure future for yourself and your family – it makes it so much harder for you to grow wealth. Now do you want to perpetuate this cycle? Do you want to be the reason that your own children are not able to build a solid financial future? No you don’t! So before your children are even born make that decision that you are going to make wise financial decisions, save for your own retirement and free your children up to a future of success and financial independence!
Another very important thing to note is when you resign from a company DO NOT take the lump sum that is often offered to you by HR. This is the worst thing you can possibly do for your future retirement. You will set yourself back many years and possibly even decades. Unless you cannot afford to live and have been retrenched and desperately need to feed your children do not take the money. Only in exceptional circumstances. It always fascinates me at how few HR professionals understand this and actually encourage people to take the lump sum. You will be taxed on it and you will lose out on that future financial freedom that we just spoke about.
Medical Aid will often be a benefit that the company offers. You will usually be required to take out the medical aid unless you can prove with a medical aid membership letter that you are already a dependant on your partners’ medical aid. If you are not you will have to take out medical aid through the company. Many companies will offer you more than one medical aid company to choose from and you can also usually choose which plan you want.
13th cheque – make sure you understand that if you are offered a structured 13th cheque it does not increase you CTC. So instead of your salary being your annual CTC / 12 it is now your annual salary / 13. So you will get less money every month to save towards your 13th cheque. If you have big expenses over December and will need the money then go ahead and structure this in.
If you work for a bank and have banking benefits make sure that you understand how much you are saving per month vs if you were on normal retail rates. Take the difference and then add on tax! You have to pay for this out of your nett salary in the new company vs where the savings you get is pre-tax. You can only calculate for benefits you are actually using not for those that you can get but are not using. Most of the banks have a bond calculator on their website which you can use to calculate what you would pay on a higher interest rate and then compare that with what you are paying now.
What is or is not on my payslip
Make sure that you understand your payslip and what is and is not on it. Some companies break down the full CTC nicely and all your benefits etc show on the payslip. But many companies do not! So make sure you understand what your package actually is. I have had many candidates tell me for example that they are on R50k pm and then when we get to offer stage we see that the benefits are not on the payslip but the candidate says that they get them. So some companies pay the benefit for you separately and only put your salary on the payslip. You need to find out what the retirement contribution and medical aid contribution is – this should be in your original contract or you can ask HR. Be very sure you know exactly what you are currently getting or you can find yourself worse off.
Understanding a Multinational Structure
SA is one of the only countries that works on the CTC structure. Most American, Canadian and European companies work on a system where they simply offer you a basic salary.
What this means is that you are currently on a CTC of R500k and when you get the offer from the multinational company they are offering you R450k. Naturally you would be upset and decline the offer. What you are not understanding is that the offer is only a basic salary and that all the benefits are on top. Many multinationals have very attractive benefits such as fully paid provident fund and fully paid medical aid for your entire family on a very high plan. So your offer of R450k is actually R450k basic plus R50k provident plus R150k medical aid – so if you equate it to a CTC you are now getting R650k – that’s a great increase. The benefit to this as well is that any future babies born will automatically be included on the medical aid at absolutely no cost to you. Whereas if you are on a CTC if you add a baby onto your medical aid then your medical aid amount goes up and your nett goes down!
Shares vs Share Options
15 years ago many SA companies would offer you shares or share options when joining the company. Due to certain changes in the tax legislation as well as the uncertainty and volatility in the markets, not many companies do this anymore.
If you are lucky enough to be offered these they could be offered to you in different ways which it is important to understand. Most share schemes don’t actually offer you shares unless you are very senior. They usually offer you share options. What this means is that you get offered a certain amount of shares which you have the option to buy on a certain date in the future. Usually 3 years and vesting over 3 years. So you buy the shares on vesting date – either at zero cost or usually a reduced price (below the market price on the day they were awarded to you) and then you are able to either keep them or what most people do is sell them straight away. The difference between the purchase price and the selling price is your profit which is taxed as Capital Gains Tax.
Your share options can be worth R0! If you join the company when the shares are very high and something happens and the share price drops a lot then your purchase price offered may be lower than the market which means they are worth nothing. You need to understand what is being offered and how it is priced.
Additional Important things to consider when getting an offer
· Make sure you compare apples with apples
· Make sure you have a very good understanding of your current package
· You may also be given a company car or other things which do have tax implications
· Make sure you know if the company gives you a laptop, data, cell phone, fuel allowance etc
· Make sure you take into consideration any future increases and bonuses due to you soon – cannot be 6 months’ time but if within the next 3 months and you are expecting a higher increase because of this or are not prepared to walk away from a big bonus coming then make sure that the company or agent is aware of this.
· If you are going through a recruitment company please ensure that this discussion and clarification is made up front so that the client is aware of these things right from when your cv is sent. Your offer can completely be derailed should you suddenly, at offer stage, spring new things on them as the client has an expectation of what you are looking for. When you are invited to interview it is on the basis that the company can afford you and knows upfront what you are looking for. The recruitment agent should break this all down in detail so there are no surprises at the end of the process.
· If you currently get commission make sure you understand the new commission structure. Have a good understanding of what your commission has been over the past year so that you know what you can expect from the new company in terms of commission and bonus and whether it is worthwhile for you to explore. A candidate who knows their numbers well, (billings & commission) comes across as strong and has a far higher chance of getting the job too!
· Also think about things like location and travel time and expense which can cost a lot more.
· Many companies now are using remote workforce so you may want a company with more flexibility and therefore your costs may be lower.
In closing, I hope that this article will assist you to have a proper understanding of your current package as well as ensure that you negotiate from a place of knowledge for your next offer. Know your worth and understand what you are getting. Make informed decisions that will lead to a better future for you and your family