Glossary of Human Resources Management and Employee Benefit Terms
Basic salary, also called base salary, is the amount of money a salaried employee regularly earns before any additions or deductions are applied to their earnings.
Additions and deductions to basic salary can significantly affect the size of an employee’s paycheck. These adjustments may include such things as added bonuses or deductions for the employee’s company health insurance premium.
Salaried workers receive the same fractional amount of their annual basic salary every payday. To determine the amount, their annual basic salary is divided by the number of pay periods in a year at that company. For example, if the company pays workers twice each month, there will be twenty-four paydays in a year and the employee will receive one twenty-fourth of their annual basic salary on each payday.
Employees who are paid a basic salary receive a fixed amount each pay period regardless of how many hours they work. In contrast, employees who receive hourly pay are compensated for the number of hours they work. Unlike most salaried workers, hourly workers are generally also entitled to overtime pay if they work more than 40 hours in a week.
Each of these terms tells a different part of the story of an employee’s compensation. Unlike basic salary, gross earnings and net wages take into account additions and subtractions to an employee’s standard rate of pay:
Gross earnings include the basic salary plus all additional money earned, such as sales commissions and bonuses.
Net wages means take-home pay—the amount on the paycheck after the employee’s gross earnings have been totaled and all taxes and other deductions have been subtracted from that figure.
For example, Jamal is hired by a company that agrees to pay him 4,000 dollars per month. That is his basic salary. When he receives his first monthly paycheck, he sees that he has also been paid a 1,000-dollar hiring bonus, so his gross earnings for the month total 5,000 dollars. After his employer withheld federal, state, and local taxes on that amount, along with Jamal’s share of the cost of his employee benefits, the remaining amount shown on his paycheck is 3,950 dollars. That amount is his net wages.
Basic salary may go up or, in some cases, be reduced. Many jobs have a salary range—a minimum and maximum amount that a company is willing to pay to fill a position. The salary range is based on market rates for that work as well as the experience and skills of the employee. A new hire with little experience might be paid the minimum amount in that salary range as their basic salary. As the worker gains more experience and improves their skills over time, they may receive raises in their basic salary and eventually reach the maximum pay for their position.
Reductions in basic salary are less common. They may result from company belt-tightening in difficult economic times. Companies are free to reduce an employee’s basic salary unless there is a formal employment contract that requires a specified salary to continue. But in the absence of a contract, employees are also free to leave the company instead of accepting a lower basic salary.
You don't have to publish every employee’s salary publicly to have pay transparency. Learn the stages of pay transparency and how you can implement them to increase performance.Watch Now
Everything we as HR and compensation professionals try to accomplish within an organization hinges on effective communication.Download Now