SHRM Q & A

Q3. What is a long-term ripple effect?

Ans: The ripple effect is the notion that a single action has an effect over several
different entities. In business, we need to understand how the ripple effect can affect
our business and how the actions we take affect the businesses and people
connected to our company. Here long term ripple effects of minimum wage increase
or salary reduction could be decrease in productivity, demotivation of the employees
etc.

Q4. Diff between employee cost and CTC

Ans:

Employee Cost:

Employment costs fall into several broad categories:

A. Recruiting Expenses.

B. Basic Salary.

C. Employment Taxes.

D. Benefits.

E. Space.

F. Other Equipment.

G. Other Approaches.

Cost To Company:

A. The CTC can include many elements in addition to salary/wages, such as

health care, pension and allowances for housing, travel and entertainment.
Tax is also deducted from the cash amount the employee receives directly.
B. The term CTC is used by companies to more accurately reflect the
incremental spend per employee (the concept of Direct Cost) from the
perspective of an organisation.
C. Another way to look at CTC is: all the money that wouldn't be needed to be
spent if the number of employees is reduced by one.
D. Obviously, the indirect cost like the cost of facility, the support teams like HR,
IT, Management, etc would still be incurred and hence not included in CTC.
E. Therefore, the CTC should not include any component that cannot be
attributed directly to the employee. A hypothetical breakdown of CTC is given
below:
SHRM Q & A

Q5. Is salary a cost or investment?

Ans: An employee is a company asset and compensation is an investment in that

asset. Even for hourly employees, businesses aren’t paying for time—they’re paying
for value.

For Example: If I were to invest Rs 5,000 in a new asset for my business—say an

online marketing account— I would have to make Rs 5,000 in sales to justify the
expense. Unfortunately, it doesn’t quite work that way. Since my business expenses
aren’t just limited to what I spend on marketing, it turns out that the account would
have to make me at least 3 times my investment (Rs 15,000) just to break even.

If the asset started producing 4 or 5 times more money than I put into it, then it would
really be profitable. In fact, I’d be willing to invest more if I knew my payoff would be
that good.

The same goes for employees. If I’m going to invest in people, I need to know that
having them around will make my company at least 3 what I’m paying them. The
more revenue an employee drives for my business, the greater their value and the
more I’m happy to pay to have them as an asset.

So to conclude employee salary is an investment and not cost to the company.

SHRM Q & A
Q6. Is profit inversely/ directly proportional to the cost?

Ans: A company's total cost is equal to the sum of its fixed and variable costs, which
include things like storage, shipping, rent and other similar expenses. The
relationship between cost and profit is usually straightforward/ direct. For example,
for every Rs1 of cost that a company can reduce, it can also increase its profits by
Rs 1. In this scenario, cost and profits have a 1 to 1 relationship.