Understanding CTC and B-school placement report
| February 29,2012 12:41 pm IST
As the placement season is coming to an end, websites are swarming with placement reports. These reports always accompany some type of hullabaloo.
I believe inability of both MBA aspirants and public at large to read between the lines results in flawed expectations and in worst cases annoying deliberations among netizens.
B-schools are not under any legal obligation to present reports in any specific way and one should not expect them to follow any norms voluntarily. Every B-school follows a different philosophy and in my opinion onus should be on the readers to decode the information provided by them. If we have a look at the ISB placement report, IIM-A IPRS, reporting standards of websites, each of them follow a different philosophy and its not easy to say one is superior standard to other.
CTC: cost to company is the basis of all the placement reports. Many people argue that CTC is misleading and in-hand component should be disclosed. However I believe its time one should understand how reward systems are designed.
Different companies define CTC in different ways but there is a general pattern which has to be understood. As per standard convention, any component which:
- Is paid every year & not one time
- Is paid to person & not to job
can be included in CTC. This essentially means component like insurance premium can be added in CTC but a laptop provided for performing obligations of job shouldnt be.
The menace of maximum earning potential: Many companies (mostly in fin sector) pay variable pay based on your performance. Though its debatable to include this component, I believe if a candidate has an idea of average variable pay earned in past years in that company, he can always make an informed choice. Not many companies include or even have such structure and hence there is not much effect on average salary in a B-school report due to this, however sometimes highest salary looks too glamorous to a nave reader. However people having some basic idea of the industry can always differentiate.
Another view on variable pay: some companies have policy of paying certain fixed amount for each year of work experience, now this creates a differential in CTC of different candidates selected; however this is totally just component to add in CTC. Many companies also have polices of annual bonus based of profits, however this is generally not added in CTC.
ESOPs & PF: employee stock options are provided by many companies, this component doesnt provide any cash in hand today, but pay for employee loyalty. One can encash them after a fixed period. Similarly PF is also a component which is like a long term investment. This essentially reduces cash in hand today but is a saving for future. All companies which provide ESOP include them in CTC, however including PF is discretionary.
The sundries: There are a lot of small miscellaneous components like Food coupons, Life insurance, medical and dental policies etc. which are included in CTC. We should understand the fact that even though they reduce cash in hand, but many of these are essential for an individual. In general Indians are severely under-insured, we loath the concept of cash going out and not coming back.
However one would realize the importance of these in times of trouble. As a B-school graduate one is a high earning member of family and its his responsibility to protect his family from any risk. More over these also provide tax benefits.
An illustrative breakdown of typical pay structure (different companies may have different structures)
- CTC 15 lakhs
- Typical cash component*12 lakhs
- Typical Tax deductions#1.8 lakhs
- Monthly income after tax~ 80, 000 pm
- Deducting the EMI of a 10 lakh education loan~ 55,000 pm
(*Remember a part of this deduction is really beneficial for individual as argued above)
(# this is something paid to government from your in hand salary & hence no involvement of your company, other than transferring the amount)
HR managers face a big challenge called post joining cognitive dissonance, in simple terms it means a dissent in employee after joining the company. It may result in high attrition and hence great emphasis is given on providing correct job description and salary beforehand.
Analyzing a B-school Placement Report
Equipped with above knowledge readers can analyze a B-school placement report in a better way. There are a few things one should keep in mind:
- Median is always better representation than mean
- Knowing Highest and lowest packages doesnt make sense because these are mere aberrations
- Profile of candidates can also skew averages a bit, since many companies have policy of paying extra for each year of pre-MBA workex
- On an average Fin packages are bit higher than marketing & operations, however campuses attracting good number of jobs in later category may have slightly less average
- For a candidate it doesnt matter if a company is paying 13.5 or 15.8 LPA, if he is getting a good profile, however he may or may not change his mind when thrown 4-5 lakhs extra. Such decisions also play a role in altering averages. . One should understand career is more important than CTC
- In case of multiple job offers B-schools include package with highest salary, irrespective of which offer candidate accepts and this also include any PPO offer
- For international placements generally they provide separate domestic and international average, however as mentioned earlier median takes care that international offers doesnt alter measure of central tendency
In Social forums you may encounter different people with different opinions on how to analyze a B-school reports, some do it on basis of average, others ask for lowest salary. Some people look for profiles while other just start ranking B-schools on basis of job offers from Mckinsey or BCG. Some people look for number of international offers, others ask for average salary for non-IITians. Each one of above thought-process is flawed in one way or another and some of them are even ridiculous. I would say if you have a good understanding of salary structures and you are clear about the field you want to enter, dont let these numbers amend your decisions or commitments.
As future managers you are supposed to have a Birds eye view of the whole scenario & a clear idea of pros and cons of each decision. Numbers help you but they are not defining commandments. Lastly to reiterate what I said earlier, dont praise or blame B-schools on the basis of what I said, but develop your own guiding principles based on solid logic!