The Truth About My ₹1 CRORE SALARY Package
Sir There’s a new college applicant. Newbie. But he’s demanding for 55 Lakhs. Give him 4 Lakh cash in hand. And sir what about the rest? Give Sodexo rental allowance, traveling expenses, and 3 Zudio gift cards.
Sir There’s still 50 Lakh left. Give insurance cover worth 50 Lakhs. Wow sir, it adds up to 55 Lakhs.
55 lakhs per annum, but in hand. Only four lakhs. And I'm sure that you would not have experienced something like that.
But you must have definitely encountered headlines like these, displaying salary numbers, which could even make a successful entrepreneur feel envious. However, did you know that these numbers often hide reality? So few years back, one of the companies I was joining mentioned that man also will be 25 lakh. And guess what would actually come in my bank at the end of the month? Less than a lakh. When my dad retired from army and took his first corporate job, I remember him being baffled as well because behind these eye popping numbers lies a harsh and sad reality.
I’m Achina Mayya And in today's video I will break down some pressing questions like, Do companies inflate CTCs? Strategies used to show higher packages. What components are helpful for you and whats not? And educating you all on all things salary from an employee perspective as well as an employer perspective. Because you see, all of us were taught by our parents and schools to aim for a high salary package, but no one actually taught us how salaries work and the things we should look at to get a higher package. Not on paper, but in your bank. So let's start from the very roots, and in later parts I'll show you how my offer came up to 25 lakh, but I barely got anything out of it. You must have seen and heard the term CTC, but what the hell is CTC? If you're a college student who's never done a job before, all the more reason to understand this now.
So in simple words, CTC stands for Cost to Company, which is the total amount of money that a company spends on an employee or literally what it costs the company to keep you as talent. In fact, this is a number that we see in headlines that gets us all excited. But here is where things get a little murky. You see, when most of us see a number like this, We quickly divided it by the number of months and assume that the amount which comes is what we will get every month in a bank account. But the CTC is not what you get in your bank. What you receive is a very different number.
So the question is why do companies brand salaries as CTC? See, if you think that companies do this deliberately to fool you and get you for cheaper, then a little more to the eye than that. When it comes to CTC and salaries, you are not the only stakeholder who stands to benefit from a higher package, but also the companies, colleges, and even your parents. So from a company's point of view, a high CTC makes them look like the best paymasters in the business, which hence attracts top talent.
Think about it like this. If a company offers you a high CTC in college, it won't bring fame and publicity for you alone, but also to the company as higher CTC will make them seem super desirable. On the other hand, for your parents, it will give them bragging rights and social pride to flaunt in the social circles, while for the college or university it becomes an organic promotion strategy to capitalize on and hence increase its social reputation and standing Sir, the college wants a picture of our highest paying employee.
So let’s get Niggesh ready for a photoshoot. Niggesh Congrats on your first salary! But sir, I only got 4 lakhs credited in my account Hey! Don’t be ungrateful. Smile :) So it's actually a win-win for all except the person who's left disheartened when he actually receives his monthly pay.
Now, what is it that hits our bank per month? Let me show you. The components of a CTC can be broadly put into two categories. There's fixed component and there’s variable component. And there's one more component which is sometimes counted under variable.
That is your stock component. Now under fix components you have a bunch of things which we'll go over. First, let's look at basic salary. This is a fixed amount of money that you will get each month before tax deduction, and is usually 50% of your entire CTC.
Then under fixed you also have allowances, that's the extra benefits and perks I talked about that the companies give you to include things like HRA, travel allowance, internet allowance, some of which also enjoy tax benefits. Then is a variable component. So the variable salary is part of your pay that can change based on your performance and other factors. It can come in the form of bonuses, commissions and incentives. Variable though depends on the employee's target meeting ability, work completed, and company's performance as a whole. In simple words, the performance bonus or incentives you get are based on your performance and the targets you have achieved.
And here is something you should know, that the company is not liable to pay the full amount that's mentioned on your offer letter. Third is the stock component, that’s a portion of your compensation the company pays in its shares. Now remember that 25 lakh offer I got. Here is the rough breakup.
10 lakh was fixed salary. One lakh was the variable component and 14 lakh was ESOPs or the stock component. In fact, it's this stock component, which is where most people often end up taking the wrong decision. And that is a mistake. I want all of you to avoid. I will deep dive into this right after we finish learning about fixed and variable salaries. Let's start with fixed salary.
In fixed salary, you can have a laundry list of things first is your basic, HRA, then multiple allowances. Look at this example. Sounds like a lot of jargon I know, but you all should know what all of it means for your own benefit.
If you notice the biggest component apart from your basic pay in the CTC is house rent allowance or HRA. Now what is this HRA? Simply put, HRA is the amount of money your company gives you to help you cover your accommodation costs and can be up to 50% of your basic salary depending upon where you live. And you know what a part of the HRA is exempt from tax. But there's a catch. You see for that to happen, you need to be meeting three conditions.
First, you need to be living in a rented house. Second, receive HRA as part of your salary. And third, submit valid rent receipts and proof of rent payments. And as per the rules, the amount of tax exemption you claim from HRA is only the lowest among the following. The actual HRA, you receive 50% of your basic salary for those living in metro cities like Delhi, Calcutta, Mumbai, Chennai. And 40% of basic salary for non metros.
The third one being the actual rent you paid minus 10% of your basic salary. Now I know it's confusing. So here's a quick example. So the basic salary mentioned here is six lakh LPA. Since HRA is up to 50% of the basic salary here, it comes out to be three lakh per annum. Now let's say the city you live in is Delhi which is a metro and you submitted rent receipt of 3.6 lakhs. In this case, you will be eligible to get a tax exemption on this entire three lakh that you’ll receive as the HRA from the company.
As this three lakh is the lowest amount in all the three conditions I talked about before. Moving on from HRA, there's the leave travel allowance, food coupons, phone reimbursements, reimbursement simply mean getting the money back that you have already spent on food, telephone bills or travel for work. To claim these reimbursements, you simply need to present the bill for the expenses to the company. On the other hand, allowances like leave travel allowance, But when it comes to leave travel allowances, certain conditions need to be met to get a tax exemption. Here's what they are. First, you will only get an exemption if you travel within India.
Secondly, the expense does not include accommodation, food and shopping expenses. Third, the mode of travel must be bus, rail or economy airline and you need to submit a valid proof. So while these are part of your salary you don't get these if you don't submit proof. Now when are these useful and when should you opt for more allowances and lower basic salary? Let's say you're in the 30% tax bracket. And everything you get in your bank, you will have to pay, flat 30% earned, to the government as tax.
In these cases, if you are somebody, who let's say, actively travels or commutes to work in a cab or has phone expenses, it's better to opt allowances because they help you save tax. If you don't know what tax bracket you fall into, please have a look at this. By the way, did you know if you are in the 30% tax bracket, you can save up to 1.3 lakh tax with car lease finance as part of your salary.
Basically, if an employee opts to lease a car through their employer wherein the employer directly pays the car lease rentals to the leasing company, such rental payments would form a part of the CTC of the employee. However, as such rental payments are directly paid by the employer to the leasing company. The same would not be taxable in the hands of the employee, hence, the employers would be able to save the tax on the lease rental component.
Now there are a few more nuance us to it, but why I'm giving you this example is because I want you to understand the kind of salary you negotiate for all needs to depend on your personal lifestyle choices, your short term goals, your long term goals. And ’ll explain all of this in detail post we discuss ESOP’s. Now, let me tell you what provident fund and gratuity mean. So PF or Provident fund is a retirement savings scheme where both the employee and the employer contribute 12% of the basic salary. So that's literally a total of 24% of your salary.
Now the catch here is, that the 12% you contribute is directly submitted to the PF account, while the other 12% that your employer contributes is cut from a yearly pay. Now you might ask me, Acina how is the employer's PF contribution a benefit if it's essentially also deducted from my income? So here's the deal. You see, your company is putting in additional money exclusively for your retirement, and the laws ensure that this 12% is not optional. So it forces you to save for the future. And you know what? It's tax free at all stages.
To give an example of how PF can be beneficial. Let's say in an ideal world, your basic salary of six lakh LPA in our example has been bumped to 6.72 LPA. But instead of giving this additional 72,000 or 12% of 6.72 LPA as taxable income, which you could spend away, your employer is putting it in a retirement kitty that grows with time. Now there's also been some conversation around this where people are very unhappy about this I was reading an article with 30% of people out of 766 said, that they'd rather take the money in their bank rather than putting it in PAF, because half the people don't even know the purpose of it. And people argue that other pension instruments like National Pension Scheme has better returns.
But that being said, it is wise to be investing for retirement somewhere. You know in behavioral economics, there's a bias that's called hyperbolic discounting, which says that people choose smaller immediate rewards rather than larger later rewards, and this occurs more when the delay is closer to the present than the future. It's tough for our brain to comprehend a future reward. So we’ll always opt for immediate cash in bank. But this PF gives us no choice but to save for our future.
Next, let's talk about something called gratuity. In simple words, gratuity is a benefit paid by the employer when you, as an employee, complete at least five years in the company. Think of it like a loyalty or mini bonus.
Companies don't actually set aside funds for gratuity every year, but they include it in your CTC, sometimes as 4.81% of your basic salary every year. Now, here's something you should know. Gratuity should not be included as part of your CTC because it's only given after five years. So if your employer has included this in your CTC, you can call them out for it.
Although there is a benefit to gratuity if you do plan on sticking with the company for the long run, you can actually create a solid retirement fund. Considering that about 20 lakh of gratuity is exempt from tax under the current rule. So the next time you dismiss PF and gratuity as pointless inflators, remember this again. Next we have something called variable pay which is essentially your performance bonuses or incentives, which the company will give you based on how you perform. Now generally this variable pay or performance bonus can make up 10 to 20% of your base salary, depending upon the company you are working in and your job level.
While the sound of making an extra buck sounds appealing to everybody, you need to keep in mind that every bonus is dependent upon your employer and the way your company performs, and your company is not liable to pay you the full bonus. Yup. But there's also some good news a lot of companies do end up paying it. How do you figure out whether you will get your full bonus or not? Whenever you get an offer letter, you need to first check the bonus percentage and do some research to check if the company has historically paid its bonus 100% or not. Along with that, check how the company's performing financially.
Speak to some people who are already working at the company. But there's also some good news here. In some of the cases, it's not that you will only get a reduced bonus. There are companies which have even given bonuses of 110%, 200% and 300% of their employees, depending on how the company performs and how the employees have performed.
You know, in senior roles, these bonuses can literally go up crores. In our organization, whoever performs really well and sticks by for up to two years, we make sure they are really well rewarded end of the year because, if the company does well, so should the team, especially the ones who have worked hard and been loyal. So we have a thesis that we operate on okay. If you have enough drive, I feel like you will be able to pick up any skill.
But loyalty and longevity is tough to gauge and a quality most people lack. And I've been on both sides right. Now that I run a company, let me tell you, it takes time for a company to grow. If you keep playing shorter games, you’ll keep getting small-small returns.
But if you found your passion and you’ve bagged the role in the company, you enjoy working at, and you've got great teammates, founders and the company is doing well, try sticking around for a few years and you will see the returns. Also I’ll tell you what, on a very human level, right? When you've got folks working with you for this long, have gone through the ups and downs with you, they feel like more than just teammates and we all want our people to get rich, do well, feel proud of themselves. And you know what? This is the mentality with which a lot of founders operate.
So try taking a few long term bets if you've already found what you want to do long term in the right market and with the right team, I'm not exaggerating. There is no better feeling than building something with the people you genuinely love being around. Now, talking about long term, let's get to the very juicy topic of ESOPs. Now, this is one component that a lot of companies use to make their employees feel like they've also got skin in the game and make them stick by longer. Remember my 25 lakh offer?
That also had 14 lakh worth of esops. So let me break this down for you because it's important to understand this, because this can either make you a really, really rich long term or it can also really hurt the cash you make. And lately it's been the latter. Sir, there’s this new candidate. He asked for 1.5 crore. Did you give him Sodexo? Done sir.
Traveling expense? Done sir. Rent? Done sir. I even gave Insurance. What should I give him now? Give Slice. Give him CRED points and JUNGLY RUMMY scratch cards.
And even give him company’s stocks. Sir what would our valuation be? $15 billion. Wow sir, It adds up to 1.5 crore. You're a genius. So ESOPs simply put, are an option to buy your employer's stocks at a discounted price or for free.
For example, a company whose stocks are being traded at, let's say, ₹100, can offer each employee an option to buy 10,000 shares at ₹60 per share after three years, provided they're still with the company then. So the stock price then goes to ₹300. After three years, the employees will only have to pay six lakh to get shares that are worth 30 lakh rupees.
Honestly, this could be way over and above the annual salary that employees even get. Sounds amazing right? I'll not refute that. It has made a lot of people rich, but you need to be in the right company at the right time because there are a lot of risks involved with ESOPs. Now startup equity in general can be super complicated and confusing, and a lot of executives frequently take advantage of the fact by obscuring how equity works and is structured. So the average employee
has no idea how to value the equity they're granted. See when you're opting for these ESOPs, you are betting that the valuation of this company will rise. But there's always a risk of devaluation. In fact, as it happens with most startups, the company may even have to shut shop. Employees of companies that fail end up holding worthless stock.
And think about it 1 in 10 startups literally fail. So imagine if a company says that you are offering 25 lakh, but 14 lack of that is esops with no further details on it. On paper you feel like you're getting rich.
But tomorrow, if the company shuts shop, more than 50% of your offer just went bust. And there's more to this by the way. There's also something called vesting periods and cliff. So before accepting a startup job offer with equity, make sure you ask for company for all of these details. Let me explain.
So Cliff, period is the minimum period that an employee has to work for the company. Before any of the options start vesting. The vesting period is a schedule over which you gain ownership of these ESOPs and typically the vesting period is around four years. But it all depends on your company's ESOP policy. Then there's also something called the strike price.
The strike price is how much you will pay to purchase one share of your company when you exercise a stock option. Next, ask for liquidation preferences. So this liquidation preference is what determines who gets paid first and how much they get paid.
When a company must be liquidated, such as the sale of the company. Investors or preferred shareholders are usually paid back first, ahead of holders of common stock and debt. So having answers to all of these will allow you to calculate the percent of company you own and their value.
Lastly, in case a company does not go public, you will only make money from Esop. The company buys back the shares from you or gets acquired. And in all of these cases, you need to pay a capital gains tax. So Esops can actually sometimes be like a lottery ticket. I'm not saying that they are bad, but there's a risk involved and companies generally offer them as part of CTC. Because it's a way for them to attract top talent without burning money immediately.
See if you're a 30 year old with low risk capacity and a family. And let's say you’ve also taken a loan. You need immediate cash in the bank. So Esop could be a risky option for you in a startup.
But if it's a large company with great financials, it mitigate the risk a little and gives you the option to make solid money few years down the line. So whether you want ESOPs or not, if the decision that needs you to assess all of this where you are in your career right now, how much cash do you need to survive at this point in life? Your risk taking ability. Do you think the company is going to do well? Will you stick around them for the vesting period? Do you believe in the vision of the company? And how have some of the other companies performed in this space? Additionally, how old is the company? If the company is less than one year old with little to no revenue, no funding, taking Esops here becomes a lot more riskier for you. On the other hand, that are startups like Flipkart and Paytm who have made their employees millionaires with ESOPs. All I ask is get all the info before you take this call.
I want all of you to make big money and get rich, but I also want all of you to be smart about the risks you are taking in life. And the same fundamentals apply with your fixed and variable salaries as well. Assess your current financial situation and then come up with a pay structure based on your needs.
Whether you want higher HRA, high basic salary, if you use cabs to works, so if you want a higher convenience allowance. It's subjective to your needs, your situation and how much tax you can save. Now, along with these fixed, variable and stock components, there are also some additional benefits which you can use to pay less taxes. And there’s things like health insurance coverage. Some companies even offer gym memberships and vouchers.
I’ll give you a really interesting one that I was reading about recently. Also very amusing. So there’s this one diamond merchant from Gujarat who sent his employees’ parents on a 17 day trip to Haridwar and Rishikesh as part of the benefits provided to the employee.
So companies are literally coming up with super innovative ways to retain people now. And the last thing I'd like to touch upon is when you're applying for a job. Also understand the flow of the market and timing.
See, at present, we are facing massive layoffs and salary cuts across the world. Some countries are in recession, so don't expect employers to offer some insane money because this is not the heydays of Covid, when companies and investors were filled with liquidity to splash the cash. More importantly, remember to keep building leverage.
Whether it's your network, your skills, or anything that gives you a higher negotiating power. So, to summarize all that we have learned, firstly, understand all the three components fixed, variable, and most importantly ESOPs evaluate what tax bracket you fall in to evaluate your financial standing, goals, risk taking capacity, how much you need in bank to survive, and then negotiate your offer. Again on ESOPs, be smarter about it and get all the info you need before you commit. Lastly, if you’ve found your calling, play long term games. That is it from me today. Hope you liked the video.
If you want to learn more about skills, how to build leverage, and jobs, watch this video that we did earlier. Thank you so much for watching! Please don't forget to hit the subscribe button. Hello Sir we have a case, who have not paid tax. Okay I will check. Income tax department. Open the door! What? It doesn’t even have a lock.
Hey! White shirt. Why did you not pay the tax? But sir I don’t have anything left to give you. Then what is this? Day two.
2024-05-14 11:57
