Dear HR Professionals,
I have a couple of questions regarding the structuring of an offer letter for a Sales Manager position:
1. In the case of a compensation package with a 50:50 ratio for fixed and variable components, should the variable component (such as commissions or bonuses) be included in the Cost to Company (CTC) calculation?
2. If a third-party recruitment agency is involved in hiring for this role, and they charge a fee based on a percentage of the CTC, how would the calculation work? Specifically, if the agency charges 8.33% of the CTC as their fee, would the variable pay component be factored into the CTC for this calculation?
I would greatly appreciate your insights and expertise in clarifying these points.
From India, Bengaluru
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I have a couple of questions regarding the structuring of an offer letter for a Sales Manager position:
1. In the case of a compensation package with a 50:50 ratio for fixed and variable components, should the variable component (such as commissions or bonuses) be included in the Cost to Company (CTC) calculation?
2. If a third-party recruitment agency is involved in hiring for this role, and they charge a fee based on a percentage of the CTC, how would the calculation work? Specifically, if the agency charges 8.33% of the CTC as their fee, would the variable pay component be factored into the CTC for this calculation?
I would greatly appreciate your insights and expertise in clarifying these points.
From India, Bengaluru
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CTC means Cost to Company. It shall include all costs of employing a person. If you have 50% of total remuneration as commission, incentives, etc., the same shall invariably be part of CTC. But the recruiters cannot take advantage of this variable part because if the employee does not earn any commission or incentive, will the recruiter replace him with another person? No.
Again, the variable part of remuneration does not guarantee any payout. It shall depend on performance, which is linked to the market. Therefore, even if you put an unreasonable amount as variable, it is part of CTC. It is up to the employee to accept the offer or not, or to counter the structure by questioning, "Is this variable pay really going to accrue based on the existing market conditions?" You may say that it is real and you will earn it, but the employee should stick to the fixed part of the salary only. If they achieve the target, the variable pay will come, and that would be a bonus to them.
As such, only the fixed part of the salary would be the real salary, the salary on which statutory contributions will be based. This should be the salary on which the recruiters should get their service charge. If the recruiters charge on CTC, which is always inflated by unrealistic amounts, that is wrong.
From India, Kannur
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4482Again, the variable part of remuneration does not guarantee any payout. It shall depend on performance, which is linked to the market. Therefore, even if you put an unreasonable amount as variable, it is part of CTC. It is up to the employee to accept the offer or not, or to counter the structure by questioning, "Is this variable pay really going to accrue based on the existing market conditions?" You may say that it is real and you will earn it, but the employee should stick to the fixed part of the salary only. If they achieve the target, the variable pay will come, and that would be a bonus to them.
As such, only the fixed part of the salary would be the real salary, the salary on which statutory contributions will be based. This should be the salary on which the recruiters should get their service charge. If the recruiters charge on CTC, which is always inflated by unrealistic amounts, that is wrong.
From India, Kannur
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I would recommend that you split into Fixed Pay and Variable pay.
Work out the CTC component to the Fixed Pay and indicate to the employee that he/she will be getting variable pay based on his/her performance.
To the agency that supports you in your recruitment process, explicitly tell them that you will be paying a consultancy fee of 8.33% of Fixed pay only and not on the variable pay as it will neither be consistent nor constant.
As Madhu indicated, if your Fixed pay ratio to Variable pay is too low, it may not interest fresh recruits. You need to assess the market value of the candidates and then arrive at the ratio.
On the other hand, if the ratio is high, you may end up paying a high pay package without equivalent revenue generation for the Company.
Regards
MVK
From India, Madras
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Work out the CTC component to the Fixed Pay and indicate to the employee that he/she will be getting variable pay based on his/her performance.
To the agency that supports you in your recruitment process, explicitly tell them that you will be paying a consultancy fee of 8.33% of Fixed pay only and not on the variable pay as it will neither be consistent nor constant.
As Madhu indicated, if your Fixed pay ratio to Variable pay is too low, it may not interest fresh recruits. You need to assess the market value of the candidates and then arrive at the ratio.
On the other hand, if the ratio is high, you may end up paying a high pay package without equivalent revenue generation for the Company.
Regards
MVK
From India, Madras
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In the case of a compensation package with a 50:50 ratio for fixed and variable components, should the variable component (such as commissions or bonuses) be included in the Cost to Company (CTC) calculation?
Yes, you need to include the variable component in CTC. That is how you fool employees into thinking that this is a good deal for them. I have seen companies even include the cost of one-time training, and unplayable components, and gratuity in CTC. (I have seen this in the recruitment letter of an MNC bank to an MBA college). So it will not really be surprising if the recruitment fee is added to CTC.
Personally, though, I have always considered CTC as a fraud on employees.
If a third-party recruitment agency is involved in hiring for this role, and they charge a fee based on a percentage of the CTC, how would the calculation work? Specifically, if the agency charges 8.33% of the CTC as their fee, would the variable pay component be factored into the CTC for this calculation?
The agency fee would include all items on the CTC.
From India, Mumbai
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Yes, you need to include the variable component in CTC. That is how you fool employees into thinking that this is a good deal for them. I have seen companies even include the cost of one-time training, and unplayable components, and gratuity in CTC. (I have seen this in the recruitment letter of an MNC bank to an MBA college). So it will not really be surprising if the recruitment fee is added to CTC.
Personally, though, I have always considered CTC as a fraud on employees.
If a third-party recruitment agency is involved in hiring for this role, and they charge a fee based on a percentage of the CTC, how would the calculation work? Specifically, if the agency charges 8.33% of the CTC as their fee, would the variable pay component be factored into the CTC for this calculation?
The agency fee would include all items on the CTC.
From India, Mumbai
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VARIABLE PAY.doc
CTC CALCULATION SHEET.xls