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How Is Variable Pay Calculated – Learn how to decipher your CTC and negotiate better pay in 5 min of reading. Updated: 25 Aug 2019 18:55 IST Disha Sanghvi Premium
In his first job, Shreyansh Shukla, 25, assumed his salary would be the same as CTC. It took him time to fully understand the salary structure
How Is Variable Pay Calculated
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Bengaluru-based Shreyan Shukla, 25, was barely out of college when he got his first job offer in 2014. The Cost to Company (CTC) he received during his on-campus placement in the final year of his engineering course as mentioned in the offer letter. , pleased him. Like most first-timers, he began making plans for the new monthly budget he envisioned compared to the student budget he was using at the time. At that time, he did not realize that his salary would be much less than the CTC figure. “It was only after receiving my second month salary that I realized that my take-home pay does not include variable components and a lot depends on the various deductions and returns that I have to make for the fiscal year,” said Shukla. , software engineer.
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Like Shukla, many new entrants in the job market have little idea about the salary structure. In general, while CTC includes all the payments and benefits, fixed and variable, to which you are entitled, your take-home pay is what you get after all mandatory deductions such as Employees’ Provident Fund (EPF) contributions and various taxes. Deciphering your salary can be difficult, but once you do, it will give you an edge when negotiating with employers and help you plan your savings and expenses effectively. Here’s how to do it.
Look at the breakdown of your CTC and you will find fixed expenses like basic pay (normally 40-50% of CTC), house rent allowance (normally 40-50% of basic pay), gratuity, PF and allowances. such as car fuel and mobile phone bills, excluding variable components such as annual bonus and performance bonus. However, not all of these heads will appear in your monthly salary.
First, gratuity and PF contributions will be deducted from salary. The most confusing thing for Shukla was understanding how PF contributions work. If the employee is required to deposit 12% of basic pay and dearness allowance in the PF account, the employer is required to deposit the same amount. Generally, employers include their share of PF contributions in CTC. “It was difficult for me to understand why my salary was not what I expected,” Shukla said. To reduce base pay, some organizations introduce a specialization pay or similar component. “The higher the basic, the higher your EPF contribution will be, so you have to be careful of a very large basic component as it would mean less take-home pay. But a high basic also means you will be entitled to more gratuity (which is paid over time , when you’ve left the company if you’ve worked for the employer for five years), said Shweta Jain, a certified financial planner, CEO and Investography Pvt. founder. Ltd
Remember, PF money comes back to you with interest at the time of retirement and also helps you avail tax deductions up to ₹1.5 lakh – under Section 80C of the Income Tax Act.
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However, this may not cover variable costs, which is the second part, which may not appear in your paycheck depending on whether your employer pays it monthly, quarterly or annually. Employers are not required to pay all of the variable pay listed in the CTC because it is linked to your performance, your team’s performance or your company’s profits. “Understand that an employee is only eligible for full variable pay if all parameters are met. The variable part is paid monthly, quarterly, semi-annually or annually. It is essentially performance-based pay,” said staffing firm Teamlease Services Pvt. Ltd. vice president and co-founder Rituparna Chakraborty.
Even sales-related jobs, which might have a higher variable component because those jobs are primarily performance-related, can get lean during a slowdown, Jain said. A financial planner has seen many salespeople struggling on hard times and getting paid half their salary.
The reward portion or allowances that you can normally claim by presenting the relevant invoices and receipts may also not appear if you do not submit a claim each month. Some organizations even set up a separate account that credits the compensation component on a different date than your salary. But the good part is that most of the reliefs are tax-deductible. So even if it doesn’t show up on your paycheck, it will ultimately increase your paycheck, reducing your tax liability.
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If all this made your pay packet thinner, prepare more. If you have taxable income, you will pay a portion of the taxes each month. Usually, employers calculate the tax liability for the year and withhold it in installments throughout the year.
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Although you won’t be able to negotiate your first job due to lack of experience and understanding, you can make some course corrections when you change jobs. In his second job, Shukla was clever. The variable part of his CTC was as much as 20% of the basic pay. He agreed with the company to convert about 40% of the variable component into a joining bonus. “This (joining bonus) was added to the contingency amount that I would have to pay the employer if I resigned within a year,” Shukla said.
It’s a good idea to negotiate a higher take-home pay and a lower variable portion when you first start out. However, if you have a higher income and want to impress your abilities, negotiating for a higher variable pay could be beneficial for you. “It sends a signal that you’re someone who talks. It shows that you’re someone who is confident in her skills. In the long run, it would keep you more relevant and nimble to market dynamism,” Chakraborty said.
You can also agree on the same job during the annual evaluations. In the case of a hike, the total CTC is more often reviewed than just the components that make up your take-home pay. “Determine which part of your CTC has increased. If the increase is below the fixed components, you will definitely take home more money. However, if the hike is variable, you need to negotiate with your employer and ensure that your direct benefits like PF and gratuity go up,” said Basavaraj Tonagatti, Sebi-registered investment advisor and certified financial planner.
Understanding which salary components are right for you early on can help increase not only your monthly income, but also free up money for long-term investments. Shukla believes that if the employee contracts or CTC document can be more transparent, it can go a long way in helping newbies. Take the lead and understand your salary structure now.
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You are now subscribed to our newsletters. If you cannot find any email from us, please check your spam folder. Variable overhead is a term used to describe the variable manufacturing costs associated with an operation. As production increases or decreases, variable overhead changes in kind. Variable overhead is different from general overhead, which is related to administrative tasks and other functions that have specific budget requirements.
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A solid understanding of variable overhead is useful in helping companies correctly price their future products to avoid overspending that can erode profit margins.
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In order for businesses to continue to operate, they must spend money to produce and sell their goods and services. The total operating costs—managers, sales personnel, marketing personnel for production facilities, and the company office—are known as overhead costs.
There are two types of overheads, fixed and variable. Fixed overhead costs do not change as the level of production increases. Examples:
Variable overheads, as mentioned above, vary with the level of production. It can be more difficult to set and stick to a budget.
The main difference between variable and fixed overhead is that if production were to stop for a period of time, variable overhead would not exist, but fixed overhead would remain.
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Variable overhead costs can include wages for workers added as production increases. The additional hours paid for the increase in production would be a variable cost.
Equipment utility costs (electricity, gas and water) tend to fluctuate based on production capacity, new product introductions, production cycles of existing products and seasonal patterns. Additional factors that may be included in variable overhead are materials and equipment maintenance.
Manufacturers must include variable overhead costs
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