These days, an immense amount of personal effort is required to succeed on the work battlefield. Yet the worst time to be complacent is when you receive that job offer, promotion or pay rise and just need to sign on the dotted line. A cost to company package (CTC) can be a venus flytrap for the unsuspecting employee…
In a nutshell, a CTC package is the aggregate of guaranteed earnings, allowances and company benefits in respect of your services. A tpical CTC package for a salaried employee may include company contributions to the provident fund and medical aid scheme, a travel allowance and a cash component.
Over the years CTC packages have been widely adopted by employers to manage employment costs and risks. The end result is that a CTC package generates more ‘cost’ to an employee than benefits.
• Tax efficiency
Excluding commission earners, most allowances in a CTC package such as entertainment and cell phone allowances are useless. You can not secure a tax deduction even though you may be required to incur bona fide expenditure.
• Medical aid contributions
A CTC package allows an employer to cap their liability for medical aid contributions. In the event of interim hikes, you will fund the additional cost from the ‘cash component’. The result is lower take home pay.
• Retirement Fund Contributions
CTC packages have facilitated the move to defined contribution funds in keeping with the transfer of risks from the employer to the employee. While the monthly R contribution may seem a significant % of the package, it will bear little resemblance to the actual value of your total contributions.
A CTC does not readily allow you to make adjustments for personal circumstances. Flexibility in CTC is usually linked to organisational events such as a performance increase or driven by market forces like changes in medical aid contributions.
In the absence of a market/personal benefit, selecting from a range of tax neutral choices is the same as cash. Some employers provide a tax efficient benefit without choices such as one medical aid scheme. It becomes more of a ‘cost’ to employees who would have preferred another scheme offering better benefits or premiums.
With more employers moving to adopt CTC packages, greater care will be required by employees in future to negotiate a package commensurate with their value in the organisation.
(Star Workplace, July 2004)