Terminology and A Lesson in Motivation : NP, CTC, CCTC, ECTC, Lakh

Introduction

The terms NP, CTC, Current CTC, Expected CTC (ECTC) are used only in countries like India and South Africa.

The Confusion

Without the availability of information provided in a Total Compensation Statement, it difficult to get or give a true picture of CTC.

This confusion makes it difficult for people to distinguish between:

  • CTC
  • Gross salary
  • Net salary (Take Home Salary)

The added confusion comes some companies also include operating or running costs into the definition or computation figures. For example rent for office space the employee occupys; reimbursements for mobile and transport expenses that the employee incurs while carrying out his job; income taxes which is a personal liability (unless the company pays for them and also for the tax on tax).

An Indian internet source also pointed out that CTC means different figures to different people.

  • For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.
  • For employees,Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash.
  • For the Finance Managerit is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation.

During the last 20 years, because of the rising costs of providing employee benefits, American companies increase salaries minimally, so they came up with Total Compensation Statement to show to employees that they are getting more than just the dollars that they received as salaries.

Be Aware

The above mentioned Indian internet source also mentioned that “While switching jobs, people end up thinking that a hike on CTC as shown on the offer letter will increase the in-hand salary. When you receive a good offer, consider all these components separately and understand the impact they will have on your in-hand salary before deciding to take up that alluring offer.

  • Basic Salary
  • Allowances
  • Reimbursements / Claims
  • Deductions
  • Performance linked pay
  • Taxes

Also ensure that you have calculated your tax liabilities with the new income in accordance with the tax policies to figure out the amount you will receive in your pay cheque.”

Quick Reference Table

Abbreviation Meaning Description
NP

 

Notice Period This is period of the advance notice that the employer required the employee to give if he or she wishes to leave the company.
CTC

 

Cost to Company Annual cost a company incurs if the company hires a person
Current CTC Current Cost to Company Current annual costs that the current employer incurs for employing the person.
Expected CTC Expected Cost to Company Expected annual costs that the prospective employer can expect to incur if it employs the person.
ECTC Expected Cost to Company This is another way of saying Expected CTC
Lakh

(The Indian version is Lac or Lacs)

Unit of $100,000 For example, if your annual salary is $120,000

If the company has also to pay 25% (that is $30,000) after your salary for your income tax, the CTC in Lakh is ($120,000*1.25) / $100,000 = 1.5

 What’s Included in a Total Compensation Statement?

HR Performance website pointed out that at a minimum, the following items should be captured in a total compensation statement:

Compensation Information

  • Base Wages/Salary, Overtime, Bonuses/Incentives, Commissions

Leave Benefits

  • Holidays – X Days
  • Personal – X Days
  • Vacation/PTO – X Days
  • Sick Leave – X Days Available
  • Bereavement – X Days Available
  • Jury Leave – X Days Available

Insurance Benefits – Employee Cost and Employer Cost

  • Medical Insurance
  • Dental Insurance
  • Vision Insurance
  • Flexible Spending/Cafeteria Plan
  • Health Care Spending Account
  • Basic Life Insurance & AD&D
  • Supplemental/Dependent Life
  • Short-Term Disability
  • Long-Term Disability
  • Business Travel Accident

Financial Security – Employee and Employer Cost

  • Social Security
  • Medicare
  • Federal Unemployment Insurance
  • State Unemployment Insurance
  • Workers’ Compensation
  • Retirement Plan – 401(k) Match and Defined Benefit
  • Employee Stock Ownership Plan

Additional Benefits

  • Adoption Assistance
  • Auto Allowance
  • Childcare Program
  • Education/Tuition Reimbursements
  • Employee Assistance Plan
  • Employee Meals
  • Health Club Membership Discounts
  • Paid Parking
  • Uniform Expense

Herzberg’s Motivation-Hygiene Theory (Also known as Dual-Factor Theory)

In South East Asia, when we negotiate on the job offer, we are negotiating on either the monthly and annual salary and incentives package.

The salary compensates employees for performing all the tasks required of them and provides them with a consistent income. The incentive (which can be commission for salespeople and a bonus for others) motivates them to meet and exceed their goals and gives them the opportunity to increase their earnings.

Employee benefits are non-wage compensation provided to employees in addition to their normal wages or salaries. Some of these benefits are required by law, while other are not and sometimes employers may provide benefits above the level required by law in order to align with the job market or to stay competitive in attracting and retaining prospective employees and current employees.

For Americans, in order to retain staff and to meet the needs of mult-generational workforce, they implement flexible benefits, which are also know as cafeteria plans.

As a broad description, these types of benefits may include group insurance (health, dental, vision, life etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), funding of education, as well as flexible and alternative work arrangements.

It is the costs of providing and administering these benefits that drives up costs and causing American employers to cut back on salary increases.

As reported in Eremedia website by John Holton on 24 January 2013 in the article “What Motivates Employees To Stay? It’s Mostly About The Pay” reported that when employees were asked the question, “What ultimately entices workers to stay with a company?”, the majority of workers (70 percent) reported that increasing salaries is the best way to boost employee retention.

The lesson is cash is a liquid asset. Money derives its value by being a medium of exchange. It was invented to overcome the advantage of bartering.

SEMCO Brazil

In the 1960s, Semlar & Company (former name of Semco Brazil) had 110 employees and generated around $2 million on revenues a year. After Ricardo Semlar, the founder’s son took over when the company was facing a possible collapse, he turned business around. By 2003 it generated around $212 million on revenues and employed over 3,000 people.

Some writers pointed out that the business does not practice employee ownership, but rather participatory management implemented by a capitalist who believes strongly in workplace democracy that revolves around individual responsibility. The management gave up control. Employees make the decision on how they want company money should be spend. This include office furniture, their salaries, hiring and firing of people. The secret of why  employee gets motivated is they are given both the responsibility and the control; the profits affects their pay and they get a slice of it.

The Guardian dated 26 April 2003 reported “Semco doesn’t have a mission statement, its own rulebook or any written policies. It doesn’t have an organisation chart, a human resources department or even, these days, a headquarters.

Subordinates choose their managers, decide how much they are paid and when they work. Meetings are voluntary, and two seats at board meetings are open to the first employees who turn up. Salaries are made public, and so is all the company’s financial information.

Six months is the farthest ahead the group ever looks. Its units each half-year decide how many people they require for the next period. Naturally it doesn’t plan which businesses to enter.”

I think one of the biggest lessons that Ricardo Semlar learned is any motivation is self-motivation; it is hard to change people and you simply have to hire good people. This is the same lesson that Jim Rohn, multi-millionaire, author, motivational speaker learned. Ricardo Semlar found out the hard way. There were 2 reported incidents. The first was when he started running his father’s company, he ran the company from the top, with tight disciplines and control. The stress from his workaholic lifestyle landed him physically destroyed.  The other incident – One night on February 2005, his car was involved serious accident and he found that his company continued to operate during the months he was lying in the intensive ward recuperating.

In an article “Who’s in Charge Here? No one” written by Simon Caulkin in The Guardian dated 27 April 2003 pointed out “ The corollary of democracy and treating people as adults – the only real rules at Semco – is huge peer pressure and self-discipline.

‘It’s as free market as we can make it. People bring their talents and we rely on their self-interest to use the company to develop themselves in any way they see fit,’ declares Semler. ‘In return, they must have the self-discipline to perform.’

There’s no hiding place for those that don’t, even if performance is judged in non-standard ways. ‘To survive here you have to get on someone’s list of people they need for the next six months, and you can’t do that by playing political games.’”

Reading the Mind of Ricardo Semler

In the mind of Ricardo Semlar, I suspect that he is probably thinking: “If I were the majority owner of a business, I would want it to stay that way.” If I can read his mind, he would be thinking in the following way:

When it comes to managers, I want to have as few as possible. They do nothing but like to hold endless meetings; talk about strategies and plans; they are poor at transforming and implementation; they get better pay than the workers; and they waste valuable time micro-managing. Sometimes, there are conflicts between the workers and the managers or worst, the managers intimidate the employees and so workers who have good suggestions, do not come forward about those suggestions and when there are problems, they keep quiet to avoid getting into trouble. When trouble happens, it is usually too late. Anyway, managers think that it is too much work to manage risks and that is bad for me as a business man.

However, when it comes to hiring, retaining, motivating my workers, they are always demanding. Everyone wants to have better salaries and benefits, and better workplace facilities but they do not take care of my company’s properties. My managers is always chasing people around on their attendances and checking on them to see if the required had been done.

All these arises because the employees are standing on one side, and the managers and me is standing on the other side. So there is always this pushing back and forth, not giving way to each other, and sometimes getting into a fight. What a waste of time and energy!

For our company to compete in any marketplace, we have to price our services and products correctly. If we overprice them, our customers will buy from somebody else. If we price them too low, it eats into our profit and that defeat the purpose of us being in business. We need to make enough profit so that we can retain part of it to plough back into the business. We also need to enough of it because it is a reward for me as a return for my investment in the business.

So my deal with my employees is this. You decide whether we need incur the costs for a manager, a more beautiful office, better benefits or do you want more pay. You can even decide how much you pay yourself but if somebody gets more pay, there is less in the pool to be distributed to the remaining persons.

However, you know that our business can only afford so much business costs before we make lesser than our target profit or even a loss. I will teach you how to read financial statements and we will explain to you the impact of your decisions. All of you are adults. You come here to earn an income to take care of yourself, your parents and your family. I believe that you a responsible adult and will treat you like one.”

If you do not believe that Ricardo Semlar thinks this way, then read his article “Managing without Managers” in the September-October 1989 issue of the Harvard Business Review.

In Ricardo Semlar’s own words: ‘I stood to make at least as much money in partnership with a motivated workforce as I would as the sole beneficiary of the fruits of less inspired workers.’

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