It’s every business leader’s dream to have employees who work for free while the company profits, but it’s just that: a dream.
When signing up for a job, people want to be paid for their services to afford living expenses, and they need to know the basic salary before making a decision.
For this reason, a competitive salary can be a crucial factor in attracting and retaining the right kind of employees, especially in today’s ruthless dynamic market.
To get it right, you must first understand what people expect from their wages and how much you should pay your employees without costing you too much.
That’s what this article is for!
Discover the secrets of managing your finances correctly to create a competitive and transparent compensation package.
What is a Basic Salary?
Definition
A basic salary is a regular amount of money a salaried employee earns in exchange for working for a company.
You calculate the base salary without including extra compensation such as employee benefits or bonuses to which the worker might be entitled.
In a nutshell, the basic salary is the remuneration an employee can expect to receive for working the agreed hours without any other monetary additions.
Employees can obtain bonuses on top of their base salary under special conditions, such as qualifying for promotion.
Companies set base pay at either an hourly rate or as a weekly, monthly, or annual salary, but there’s a difference between the two.
A salaried employee receives a fixed amount for the expected number of hours worked during the pay period. Usually, an employee works around 35-40 hours per week.
Meanwhile, hourly employees track each hour worked and get paid for them. You can find hourly-paid employees in industries with shift work, such as hospitality.
The only difference between the two is that hourly-rate employees qualify for overtime pay, such as when working on evenings and weekends. At the same time, it might be difficult for salaried employees to track the extra hours.
But let’s move on and talk a bit about gross pay.
Basic Salary vs. Gross Salary
The main difference between basic and gross salaries is the separate calculations and factors.
A basic salary is the total amount of money a company pays an employee working regular hours, excluding any deductions, fringe benefits, or other bonuses.
The following factors affect the base rate for the salary:
- Labor laws: A country’s regulations directly influence an employee’s base pay and establish the minimum wage, which protects workers from low income.
- Education and skill sets: A job’s requirements might include the knowledge and abilities needed to perform the job, especially in industries such as medicine or IT.
- Geographic location: The company’s site influences its structure and pay grade. For example, places with a high cost of living might need a higher base salary than less-expensive areas.
- Personal profile: The personal qualifications of a candidate can determine the initial sum an employer is willing to pay. The applicant must have relevant work experience to get a higher base salary.
On the other hand, gross wage refers to the total compensation before deductions, which includes perks added to the basic annual pay, such as health insurance, payment for special projects, or reimbursement.
The remaining portion of the gross salary after legal deductions, like income tax, is called net salary.
For example, if your company offers you basic pay of $20,000 plus a bonus of $5,000, your gross salary is $25,000.
Now let’s expand a bit on the financial benefits gross salary can include, such as:
- Allowances – these could include an employer’s contribution toward the cost of internet service at home.
- Bonuses – Usually received for reaching milestones and objectives.
- Reimbursement – Employers can cover business-related travel or work-from-home expenses.
- Commissions – Often found in the sales industry, employees can earn commissions and add them to the base salary.
- Overtime – Employees who exceed the 40-hour workweek qualify for overtime pay.
Now that you better understand the difference between the two terms, let’s discuss how to calculate basic salary.
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Calculation of Basic Salary
Since base pay doesn’t include additional income, how is basic salary calculated?
You can refer to the employee’s payslips to calculate their base pay since they help you distinguish regular payments from additional compensation.
As a result, you can use this method to determine the basic salary:
Base salary = [Regular pay amount per payment period] x [number of payment periods in a year]
For employees receiving hourly pay, you can use the following:
Base pay = [number of hours worked in a week] x [number of weeks in a year] x [hourly wage]
To make it easier to understand, here are the steps you can take to calculate the basic salary:
- Determine the pay schedule: It’s essential to figure out the number of times you pay employees a year. A monthly income means they receive 12 payments per year, while people working bi-weekly receive 26.
- Consider what type of employee you have: Salaried employees earn a fixed annual salary, while hourly employees receive payment for the hours they work. Check in with the human resources department to obtain specific details about your employees’ remuneration.
- Assess if you can afford overtime hours: Some companies allow overtime pay while others don’t, as outlined in the Fair Labor Standards Act (FLSA), so it’s up to you whether you have the budget to pay overtime.
- Calculate the basic pay: After figuring out all the details about your employees’ compensation, you can calculate the base salary, without allowances, bonuses, or overtime, using the formulas above.
While additional benefits don’t affect base pay, some events can influence the base amount, such as the increasing cost of living or global economic shutdowns like the pandemic.
Moving on, follow us into the next section to ensure you manage basic wages correctly.
Key Tips for Managing a Basic Salary
An excellent annual basic salary structure ensures you consistently pay your employees for their service while motivating and encouraging their loyalty.
Moreover, having a competitive salary range ensures you attract and retain the best talent, which is often a headache for HR professionals, and increases your retention rate.
But aside from making employees stay at your company, a base salary is a safety net that provides financial security and peace of mind, especially during economic unrest.
So let’s dive into the secrets of managing your employees’ basic salary.
Make it fair
Any compensation plan should be fair and equitable, meaning that you pay employees the same amount as another person working the same job.
You should impartially and objectively determine the salary based on merit rather than on other factors that can introduce unfair bias.
Companies who base their compensation plan on a thorough analysis of specific performance results rather than a subjective evaluation can expect:
- Higher quality talent
- Reduced absenteeism
- Improved employee engagement
Ensure competitive compensation
Competitive pay means you offer compensation equal to or higher than the average salary for similar positions elsewhere to ensure you secure top talent.
Businesses often compete for top talent, so understanding what makes a salary competitive can reap long-term benefits that build a committed and successful team of skilled employees.
To determine competitive wage ranges and efficiently manage a basic salary, you should conduct market research for different roles within your industry and location.
Regularly reviewing and adjusting salaries based on market trends will ensure you:
- Build a positive company culture
- Limit employee turnover
- Foster productivity
Be transparent
Most companies hide employee salaries and even ban colleagues from discussing wages.
But that never stopped employees from whispering.
A lack of transparency often creates friction between management and employees, but even knowing what everyone earns might create animosity, especially if one worker believes they bring more value to the company.
In this case, you should clearly communicate how you determine someone’s basic salary, which might include factors such as experience, qualifications, and performance.
Doing this fosters trust and helps employees understand the value they bring to the organization.
Review pay in line with the cost of living
The cost of living rapidly increases every year, with monthly inflation peaking at 9.1% in June 2022 and annual inflation reaching 8%; a multi-decade high.
With the price of food, real estate, and healthcare going up each month, it’s hard for an employee to live on an average monthly wage.
Flexibility is critical in such scenarios; otherwise, you risk high turnover rates.
To emphasize this point, offering competitive wages is even more critical, especially with the average cost-per-hire being around $4,700 (according to SHRM).
What you can do is follow the trends and ensure employees can maintain their standard of living, by offering a fair and livable wage.
Maintain compliance with labor laws
We’ve mentioned earlier in the article that a country’s labor laws influence an employee’s base pay and establish the minimum wage.
We also want to add that when managing a basic salary, staying updated on labor laws and regulations related to employee compensation is essential to ensure compliance.
This guarantees your salary structure adheres to legal requirements regarding minimum wage, overtime pay, and other relevant regulations.
Non-compliance often leads to legal issues that stain an organization’s reputation.
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Now Over to You
A competitive salary is what keeps your team members in the company.
Ensuring a fair basic salary range can sustain an employee’s lifestyle and increase engagement – which greatly serves you in the long run.
With these ideas in mind, would you like to learn even more about HR and how enhancing your HR management can benefit your business?
If it’s a resounding “YES!” and you’re eager for more, check out our HR glossary.