Cost to Company

What cost to company means

Cost to company (التكلفة الكلية للموظف), or CTC, is the total an organisation bears in a year for filling a role with an employee: what is paid to the employee in cash, what is paid on their behalf to other parties, and what is set aside for an obligation to them that falls due later.

It is a figure for the employer, not for the person in the role. The employee looks at what reaches them; the organisation looks at what leaves it. The gap between those two figures is structural, and no statement or explanation makes it disappear. Presenting the total to an employee as “what the company pays you” puts in front of them a sum they will never see and never spend, and that can strip the figure of its use.

The cost to company items that never reach the employee

• The employer’s share of social insurance contributions. It is paid to another body and calculated on the contribution wage (الأجر الخاضع للاشتراك) under the rules that govern it. Those rules are set out under GOSI contributions and in our guide to the GOSI contribution wage.
• The medical insurance premium. It is paid to the insurer. The employee benefits from the cover but does not receive the premium.
• Government fees linked to employing workers, where they apply. Their rules and amounts are a separate subject, and none of them is carried into the calculation below.

A fourth item is of a different nature: amounts set aside for deferred obligations, the clearest being the provision for the end of service award and the provision for accrued leave. The award itself is explained under end of service benefits. These are costs of the year in which the employee worked, even when they are paid out in a year far ahead. Leaving them out makes the figure smaller than it is every year, until the sum is paid in one go and looks like an unexpected expense.

Building cost to company for a single employee

Take an employee with a basic wage of SAR 10,000 a month, a housing allowance of SAR 2,500 and a transport allowance of SAR 800. Monthly cash pay is SAR 13,300, and annual cash pay is 13,300 multiplied by 12, or SAR 159,600. Whether each of these items counts toward the basic wage (الأجر الأساسي) or the actual wage (الأجر الفعلي) is a separate question with provisions of its own, and the calculation does not settle it.

The items that do not reach the employee are then added. The amounts below are illustrative, chosen only to show how the total is built. None of them is computed from a contribution rate, a premium schedule or a fee, and none of them should be taken as a reference amount. The contribution figure in particular is not what the GOSI employer rates give on this wage:

• The employer’s share of contributions: SAR 16,000 a year.
• The medical insurance premium: SAR 9,000.
• The end of service provision for the year: SAR 6,650.
• Workspace, equipment and training: SAR 8,000.

The total is 159,600 plus 16,000 plus 9,000 plus 6,650 plus 8,000, which comes to SAR 199,250 a year.

The cost to company multiplier depends on the divisor

The total can be expressed as a ratio: how many times the wage the full cost amounts to. That ratio can be taken over two different bases:

• Over the annual basic wage of SAR 120,000: 199,250 divided by 120,000 gives about 1.66.
• Over total annual cash pay of SAR 159,600: 199,250 divided by 159,600 gives about 1.25.

An organisation that says “we cost one and a half times the wage” and another that says “one and a quarter times” may be in exactly the same position. The difference lies in the divisor, not in the cost. So a multiplier cannot be carried from one organisation to another, or compared between them, until the wage it was calculated on has been stated.

We found no published measurement of the cost to company multiplier for the Saudi market on which to base a reference figure. The multiplier can vary with the sector, with the composition of the workforce and with what the organisation has committed to, and every figure in the two calculations is an assumption that shows the structure of the sum and supports no estimate.

Equal wages, different cost to company

Take a second employee with the same basic wage of SAR 10,000 and the same allowances, so annual cash pay is the same SAR 159,600. What is added after it differs, and the amounts are again illustrative, the contribution figure included:

• The employer’s share of contributions: SAR 7,000.
• The medical insurance premium: SAR 11,000.
• The end of service provision for the year: SAR 6,650.
• Annual air tickets, where the organisation is committed to providing them: SAR 4,000.
• Government fees linked to employing workers: SAR 9,600.
• Workspace, equipment and training: SAR 8,000.

The total is SAR 205,850, which is SAR 6,600 a year more than the first employee, while the wage shown in both contracts is the same. The two employees have the same basic wage and housing allowance, so the gap in the contributions line does not come from the wage. It stands for a difference in the employer rate that applies, which can depend on the employee’s nationality and on the date they were first registered with GOSI. Those rules sit with the contributions themselves, as does the rule for each of the other items added. When each item is due, who bears it and on what base it is calculated are questions for that item’s own sources, and the definition of cost to company answers none of them.

This is where the whole figure earns its place. A decision based on the visible wage alone sees two identical roles. A decision based on cost to company sees SAR 6,600 a year between them. If that gap held steady, it would reach SAR 33,000 over five years, and it multiplies with the number of people in the role.

Where the cost to company sum goes wrong

• Counting an item twice. The housing allowance is already inside monthly cash pay, so adding it again under “benefits” raises the figure without a riyal having been spent. The remedy is to build the total on a single source, the payroll as recorded in the payroll statement, and then add only what the payroll does not contain.
• Mixing monthly and annual figures. An item with an annual premium added to monthly items without first multiplying the monthly items by twelve produces a figure that describes neither a month nor a year. The rule is to convert everything to an annual basis, because items such as an insurance premium can be priced by the year.

A third point sits alongside them. A role that is not filled full time is costed on its share of full time hours, which is what full time equivalent (FTE) measures. Adding up the cost of four employees working half time as if they were four full time employees doubles some items and leaves others unchanged.

From annual cost to company to an hourly cost

The annual figure cannot be used to price a piece of work or to estimate a project until it is divided by the hours actually available. The divisor is where the error lies.

Take the first employee, whose cost is SAR 199,250, and assume a nominal schedule of 8 hours a day and 5 days a week over 52 weeks, or 2,080 hours. The statutory limits on working time are a separate matter; the 2,080 hours are an assumption for the arithmetic, not a legal standard.

• Over the nominal hours: 199,250 divided by 2,080 gives about SAR 95.8 an hour.
• Suppose the paid days of absence in the year, made up of leave, public holidays and other days the organisation is committed to paying, come to 40. At the assumed 8 hours a day that is 320 hours, which leaves 1,760 available hours. Dividing by those gives about SAR 113.2 an hour.

The second rate is about 18% higher than the first, and a gap of that size can turn the price of a job or the estimate for a project from a profit into a loss. The organisation pays the cost for the whole year but receives work only in the hours in which the employee was present. Dividing by hours that were never available hides spending that appears on no line.

The cost to company of the next hire is not the team’s average

When the question is what one more employee will add to an existing team, one answer is to take the team’s average cost. That answer can be wrong in either direction.

Some items do not move with one more person: a subscription to a tool licensed for the whole team, or rented space that still has empty seats. Others jump in a single step at a threshold: one seat beyond the capacity of an office built for twenty can require an expansion that costs several times the price of one seat.

So the question is answered by building the figure from the start for that particular employee, not by dividing a total by a headcount. An average describes what has already happened; it is not a sound basis for estimating what is about to be added.

What cost to company does not measure

Cost to company describes one side only, what goes out. It says nothing about what comes back in return. Two employees with the same cost can differ in what they produce by more than the gap in cost between any two employees.

For that reason the figure is not, on its own, a basis for a decision about a person. Preferring the cheaper of two candidates is a sound decision if they are equal in everything else, but that equality has to be established rather than assumed. The figure is useful where the other side of the comparison is known or stated openly as an assumption, not where it is left unsaid.

There is a further misuse: presenting the figure to an employee at a pay review as what the organisation spends “on” them. The employee compares what they receive with what a counterpart receives elsewhere, not with what the two organisations spend. Setting a total cost against a cash figure compares two unlike things, and it can leave the employee feeling underpaid rather than persuaded.

How cost to company differs from total rewards, cost per hire and net pay

The axis is whose side of the ledger a figure stands on, and when it is incurred.

• Total rewards presents the package from the employee’s side: what they receive in cash and in benefits. Cost to company is a calculation from the organisation’s side: what leaves it. A single item can enter the first at the value the employee places on it and the second at the cost the organisation pays, so the two totals need not match.
• Cost per hire is the cost of acquiring the employee, incurred once at the point of hiring. Cost to company is the cost of keeping the employee, and it recurs every year. Combining them in one figure makes the first year’s cost impossible to compare with the years that follow.
• Net pay is lower than cash pay, because deductions come out of it. Cost to company is higher than cash pay, because items that never reach the employee sit on top of it. The two figures lie at opposite ends of the wage, and the distance between them is the whole subject of cost to company.

Where cost to company is used

The figure is needed in three settings: pricing a role before it is approved in the headcount plan, estimating the cost of a project to which people’s time is charged, and comparing whether a piece of work should be done by an employee or through another arrangement.

In the third setting above all, the wage alone can mislead. The competing offer carries its full cost in a single line, while the organisation measures itself against it with a wage that leaves out everything above it. So the question to ask before any comparison of this kind is whether the two figures are measured with the same ruler, or whether one is complete and the other is only part of the cost.

This is an explanation of the concept, not legal advice.

Related terms

• Social Insurance (GOSI)
• GOSI Contributions
• Human Capital ROI
• Employee Lifetime Value
• Cost per Hire