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How fresh graduates must structure their salaries for more cash in hand

Do not be swayed by a seemingly large gross remuneration package if conveyance reimbursement, variable pay and insurance premium make up a major part of it

July 30, 2021 / 10:05 AM IST
Source: Shutterstock

Source: Shutterstock

Consider this: Fresh out of college, you receive two job offers. One company gives a fixed annual salary of Rs 2.5 lakh, without any variable component. Another firm offers you a salary (CTC or cost-to-company) of Rs 4 lakh, including a signing bonus of Rs 1 lakh and performance-linked incentive of up to Rs 1 lakh. Which of the two companies would you join?

Such dilemmas are common. Here are some pointers to make the right choice.

Bonuses look attractive on paper

With information technology (IT) majors as well as tech start-ups, among others on a hiring spree, fresh graduates and junior-level professionals seem spoilt for choice at the moment. According to a Teamlease report, companies’ intent to hire fresh graduates has increased by 7 percentage points in the current quarter (July-September 2021).

However, the lack of experience could prompt you to make wrong choices while comparing offers. “Several fresh graduates make the mistake of not interpreting the salary structure correctly. Some companies do not explain the break-up in detail and merely quote the CTC. While a larger overall package seems attractive, offers with higher regular and fixed pay carry greater merit. For instance, a sign-on bonus is a one-time affair. Your pay in the subsequent year will be lower,” explains Aditya Narayan Mishra, CEO, CIEL HR Services.

This holds true for professionals at other stages of their careers as well. Make sure that your salary offer does not come with a large variable component of, say, 50 percent bonus linked to targets. “These are traps. As a fresh graduate, your ability to achieve these targets would be limited, given your lack of experience. Instead, be clear about the net take-home salary you require,” advises Kamal Karanth, Co-founder, Xpheno, a specialist staffing firm.

Focus on your take-home pay

And to ensure that you get the take-home pay – the actual amount credited to your bank account – that you think you deserve, you need to first arrive at a convincing figure. Meticulously calculate your monthly essential spends such as fuel, food, rent and EMIs. It will help you ascertain the minimum take-home salary that you would need every month. “Many times, authenticity helps. Explain how that amount is needed to take care of your living and other non-discretionary expenses. The clarity will help justify the figure you are quoting,” adds Karanth.

Higher basic salary good for your retirement kitty

A higher basic salary helps. Ideally, it should not be less than 50 percent of the total gross remuneration. This will ensure that a higher amount is directed towards your employees’ provident fund account. A higher basic salary means higher inflow into your retirement fund. Employers deduct 12 percent of your basic (and dearness allowance, if applicable) as your contribution to EPF every month. They also have to match the contribution, from which 8.33 percent goes towards the employees’ pension scheme (EPS). These measures act as forced savings for employees, helping them create a sizeable kitty for their retirement. It should matter more than other benefits offered.

“Do not be swayed by a seemingly-large gross remuneration package if conveyance reimbursement, variable pay and insurance premium make up a major part of it. However, it’s fair to include employers’ EPF contribution as part of your total salary while negotiating,” says Prashant Singh, Vice-president and Business Head-CPO, Teamlease Services.

As per the Code of Wages that is yet to be implemented, basic salary has to be 50 percent of your total CTC.

Factor in COVID-19-induced work-from-home setting

Check how conveyance expenses will be treated, particularly in the context of remote, work-from-home framework. “For example, in the case of sales jobs, employees could be entitled to daily allowances that are paid upon submission of bills. But due to COVID-19-driven restrictions, the number of field visits has gone down, affecting the reimbursement amount claimed,” explains Mishra. So, if your employment contract states that your reimbursement would be the lower of the limit specified or actual expenses incurred, your in-hand remuneration would stand reduced.

Similarly, check if the company will pay cash instead of the promised food reimbursement till you work from home. In the current environment, if reimbursements form a large chunk of your CTC, you could be at a disadvantage. “Some employers also offer a one-time benefit to facilitate a remote-working set-up at employees’ homes. Again, while negotiating your salary, you need to bear in mind that you will not receive this amount in the subsequent years,” says Mishra.

Evaluate insurance benefits, too

Many offices offer life and health insurance covers. You can’t bargain much on those, but it pays to know the benefits that the company may have to offer.

“Some fresh graduates can misinterpret this. The company officials tell them that the cover will pay for their medical expenses of up to, say, Rs 5 lakh, if they or their family members were to fall sick. Some tend to assume that the policy will cover their pharmacy bills, diagnostic test costs and doctors’ consultation fees too,” says Mishra. The fact is that a health insurance policy primarily covers hospitalisation and day care expenses. So, do not make the mistake of treating it as a kitty that you can dip into for funding routine medical expenses.

Preeti Kulkarni
Preeti Kulkarni is a financial journalist with over 13 years of experience. Based in Mumbai, she covers the personal finance beat for Moneycontrol. She focusses primarily on insurance, banking, taxation and financial planning
first published: Jul 30, 2021 09:35 am