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Basic Pay

Basic pay is the dollar amount a salaried employee agrees to receive from their employer. Basic salary differs from hourly pay in several aspects. The most crucial difference is that it is a fixed payment, usually month-to-month throughout the year.  

Basic Salary Meaning and Payment Schedule

Basic salary means the paycheck the worker agrees to receive each payment cycle regardless of hours worked. Employers usually set a range for the basic salary they are willing to pay for a position. The negotiations between a candidate and employer during the job interview determine the exact amount of the basic pay. The most direct formula to calculate a basic salary is to divide the annual pay by the number of payment cycles throughout the year. For example, if a worker receives a yearly compensation of $48 000 and is paid bi-weekly, their basic salary is $2000.

Payments on Top of a Basic Salary

The basic salary doesn’t include all cash compensation for the employee. It excludes additional pay like:

  • Performance bonuses
  • Agreed Overtime
  • Commissions paid on sales
  • Tips
  • Expenses
  • Allowances related to work-from-home arrangement
  • Non-monetary extras (gym membership, company car, work phone)

These bonuses can significantly increase the paycheck a salaried employee receives.

Deductions from the Basic Pay

The basic salary is not the net pay a worker gets. It is the base on which various deductions are calculated. They may include:

  • Federal, state, and local taxes
  • 401k and other pension contributions
  • Salary sacrifices schemes like share options and vouchers
  • Repayment against loans
  • Court order deductions such as childcare payments
  • Health insurance premiums
  • Union subscriptions

The employer has the right to make additional deductions in certain situations. For example, retail businesses may reduce an employee’s basic pay due to stock deficiencies or cash shortfalls.

Basic Salary vs. Hourly Pay

Employees who receive basic pay earn a fixed amount each payment cycle. The hours they work don’t affect the amount, except in certain extreme situations. For example, a salaried employee may receive a bonus for substantial overtime. These bonuses, however, are subject to an agreement between the employer and the employee. In contrast, an employee on an hourly wage receives payment for each hour they work. Note that employees receiving an hourly payment usually have to contribute more toward health insurance and pension plans. These expenses are shared between the salaried employee and the employer. This means a person with a basic salary in their contract may collect more than an hourly worker who has worked the same hours as them in a given period.

Basic Salary Meaning in OTE Situations

On-target earnings (OTE) is the basic salary someone expects to receive if they mean fixed sales targets or other workplace obligations. OTEs are typical for sales jobs like those in real estate or retail. The commission may come on top of a fixed, often low, basic pay. It is common for employers to offer a commission-only payment structure as well.

An employee can see the actual amount they earn weekly or monthly in their payslip. The employer is obliged under federal law to detail all payments there. The payslip is a document that shows your basic pay. All bonuses and deductions, along with tax and insurance are in there as well.

Does Basic Salary Increase?

The basic pay is a fixed regular work compensation, but it can increase or decrease over time. Cases of reduction of the basic salary are uncommon. A troubled economy may force a company to try to reduce expenses, which can be a reason for a decrease. It isn’t against the law for a company to reduce the basic salary they pay an employee. If you want to protect yourself against such a case, you need a clause in your contract that says the company won't take such measures.

Typically, companies may increase the basic salary when an employee:

  • Gains experience
  • Exceeds their contractual obligations
  • Spends a year or more with the company

Negotiate your basic salary range during the job interview. That will give you an idea of what increases to expect.