Your basic salary is the foundation of your total compensation package. It’s the fixed amount you receive before taxes or other deductions are taken out, and before any bonuses or overtime pay are added in.
Understanding exactly what a basic salary is — and how it differs from your gross or net pay — is essential for both employees and employers.
In this article, we’ll cover the definition of a basic salary, the factors that influence it, how it compares to gross and net salary, and how employers typically determine it.
What is a basic salary?
Let’s break down the definition. A basic salary is the fixed amount your employer pays you before adding bonuses or deducting things like taxes and insurance payments. Think of it as your base compensation.
Your basic salary is the foundation of your compensation package. Employers often use it to calculate things like overtime pay and contributions to retirement accounts.
Keep in mind that your basic salary is part of your gross income and is subject to income tax.
What factors influence basic salary?
A number of factors, both internal and external to the company offering the job, go into determining basic salary.
Internal factors
- Job role and responsibilities. The more complex the job and the greater its scope, the higher the basic salary will likely be.
- Education and skill sets. If the job requires higher education or specialized skills, you can usually command a higher base pay.
- Experience. As a general rule, the more relevant experience you have, the higher your basic salary will be.
External factors
- Geographic location. The cost of living and the conditions of the local job market will affect salary levels.
- Industry benchmarking. You can expect to be paid the market rate for similar roles in your industry.
- Labor laws and minimum wage. Labor laws set a floor for the basic salary you can be paid.
Basic salary vs. gross salary vs. net salary
When you’re negotiating a job offer, you’ll want to understand the differences between basic, gross, and net salary.
What is gross salary?
Gross salary is the total amount you’re paid before taxes, insurance, and other deductions are taken out. Gross salary may include your basic pay, as well as compensation for overtime, commissions, bonuses, and other benefits.
What is net salary?
Your net salary is what’s left after all the deductions are taken out of your gross pay. Taxes, insurance premiums, and retirement contributions are examples of common deductions.
Key differences
Think of your basic salary as the foundation, your gross salary as the whole building before landscaping, and your net salary as the amount you get to move into your bank account each pay period.
For example, if your basic salary is $3,000 a month, your gross salary might be $7,500, and your net salary—after deductions for taxes and insurance—might be $5,000.
Calculating your basic salary
Your basic salary is often calculated as a percentage of your gross salary, or your total cost to the company (CTC). It’s a good idea to understand how your basic salary is calculated, as this figure is often used to determine other components of your compensation package.
Percentage of gross salary
Many employers calculate basic salary as a percentage of gross salary, with percentages typically falling between 40% and 60%.
Here’s an example: If your gross salary is $7,500, and your basic salary is 40% of that amount, your basic salary would be $3,000.
Percentage of cost to company (CTC)
Basic salary can also be calculated as a percentage of the total cost to the company. Percentages here typically fall between 30% and 50%.
For example, if your CTC is $115,000, and your basic salary is 50% of that amount, your basic salary would be $57,500.
How HR Determines Basic Salary
Human resources professionals consider multiple factors when determining a basic salary. These include:
- Market Research and Benchmarking: HR departments often consult resources like Salary.com, Glassdoor, and the Bureau of Labor Statistics to understand what other companies are paying for similar roles in the same industry and geographic location.
- Job Evaluation: HR needs to understand the requirements of a specific role to set the salary. Job evaluations help determine the relative worth of different roles within the organization.
- Internal Equity Analysis: Companies also perform internal equity analyses to ensure pay fairness by comparing salaries for similar roles within the company.
- Total Compensation: HR also evaluates an employee’s experience and qualifications. Then they consider total compensation, including benefits, perks, and other incentives.
Compensation Strategy and Best Practices
When it comes to salary, it’s important to:
- Make sure that it’s in line with your budget and financial goals.
- Think about total compensation, not just base pay, to attract and retain employees.
- Use data to see how your salaries compare to your competitors.
- Consider what you offer beyond base pay to attract good talent.
Wrapping Up
Understanding your basic salary is key to understanding the value of your work.
Your education, skills, experience, job title, industry, and location all play a role in determining your base pay.
And it’s up to HR to establish fair and competitive basic salary structures that attract and retain talented people.