Basic Salary

Specifying a clear and fixed basic salary in the employment contract ensures that the employee receives fair compensation that reflects their role and importance within the company. So, what is basic salary, and why is it important? What is the difference between it and net pay? And what benefits are calculated based on it?

What is the basic salary?

The basic salary is the monetary amount agreed upon by the employee and the employer in the employment contract in exchange for performing the required duties. The basic salary is characterized by the following:

• Fixed: It does not change except in specific cases such as promotions, changes to the job structure, or pay raises.
• Basic: It serves as the basis for other calculations, such as allowances, the salary subject to social security contributions, and deductions.
• Non-substitutable: It cannot be converted into in-kind benefits such as housing or in-kind compensation.

The Labor Law defines the basic salary in Article 2 as: “Everything given to the worker in exchange for his work under a written or unwritten employment contract, regardless of the wage or method of payment, plus periodic bonuses.”

How is the basic salary calculated?

The calculation of the basic salary depends on the agreement between the employee and the employer in accordance with the employment contract, whether written or verbal, and in accordance with Article 95 of the Saudi Labor Law "If the employment contract or work regulations do not specify the wage to which the employer is bound, the estimated wage for work of the same type in the establishment shall be taken, if available; otherwise, the wage shall be estimated in accordance with the custom of the profession in the area where the work is performed. If no such custom exists, the Labor Dispute Settlement Authority shall estimate the wage in accordance with the requirements of justice."

The basic salary for individuals in the government sector is determined according to the official pay scale issued by the competent authorities, whereas the basic salary in the private sector is often based on individual agreements between the employee and the employer, or on the wage policy set forth in the establishment’s internal regulations. The method of calculating the basic salary is influenced by several factors, such as:

• The minimum wage set by the government: The basic salary must not be lower than this amount. In Saudi Arabia, a ministerial decision has set the minimum basic salary for calculating the wages of Saudis in the private sector under Nitaqat program at 4,000 riyals. A Saudi worker whose monthly salary is less than 3,000 riyals is not counted in the Saudization ratio, and is counted as only half a point if their salary ranges between 3,000 and 4,000 Saudi riyals per month.
• Nature of the Job: Jobs requiring high skills and experience often come with higher basic salaries. Similarly, positions involving significant responsibilities—such as managerial roles or rare specializations—command higher basic salaries compared to routine jobs.
• Academic Qualifications: Basic salary is linked to an employee’s academic qualifications; the higher the employee’s academic degrees or the more prestigious their professional certifications, the greater the chance of receiving a higher basic salary.
• Work experience: Years of experience play a major role in determining basic salary; employees with extensive experience in their fields receive higher salaries compared to those at the beginning of their careers.
• Geographic location: Basic salary may vary depending on the region where the employee works. Companies in certain areas, such as major cities, typically offer higher salaries due to the high cost of living in those regions.
• Special Agreements: Basic salaries in the private sector may vary based on individual negotiations between the employee and the employer, or they may be determined based on collective agreements between management and unions.
• Supply and Demand in the Labor Market: The supply and demand for jobs is a factor in determining the basic salary; when there is a large number of available jobs and a shortage of qualified workers to fill them, basic salaries rise to attract the necessary talent.
• Company Size: Large companies tend to offer higher basic salaries than small companies due to their greater financial capacity, larger workforce requirements, and their desire to attract the best qualified employees.

Why is it important to specify the basic salary in an employment contract?

Specifying the basic salary in an employment contract is of utmost importance for several reasons related to employee rights and ensuring fairness within the company. This importance is highlighted in the following points:

• Basis for Calculating Benefits and Compensation: The basic salary is the amount used to calculate other financial entitlements, such as bonuses and overtime pay, as well as deductions like the salary subject to social insurance contributions, making it a fundamental pillar for ensuring that employees receive their legal entitlements.
• Ensuring Fairness and Transparency: The basic salary serves as a benchmark for evaluating a position’s value relative to others within the company. Companies typically assess each role and determine the basic salary based on the employee’s duties and responsibilities within the company’s organizational structure. This evaluation helps establish a fair salary for the employee based on their role and performance.
• Comparing Salaries Across Different Companies: When a company seeks to hire new employees or retain its current staff, it must compare its salaries to prevailing market rates. The basic salary provides a benchmark for comparison and ensures the company offers competitive compensation to attract and retain talent.
• Enhancing the employee’s standing: Determining the basic salary in a fair and accurate manner ensures not only the protection of the employee’s financial rights but also recognition of their standing and importance within the company. Employees in key positions or sensitive roles receive higher basic salaries, reflecting the company’s reliance on their skills and abilities, and helping to motivate them to continue delivering outstanding performance.
• Determining Standard of Living: The basic salary helps determine an employee’s standard of living and their ability to meet basic needs. It is the basis for an employee’s decision to accept or reject a job by assessing whether the basic salary is sufficient for their needs, especially since most financial supplements to the salary are based on it.

What is the difference between basic salary and net pay?

Understanding the difference between basic salary and net pay is important for both employees and employers to ensure clarity in financial transactions and avoid any confusion that could lead to financial disputes. The basic salary is the amount determined for the work performed, excluding periodic increases such as allowances and incentives, or deductions owed by the employee, such as loan installments or social insurance contributions.

Net pay, on the other hand, is the final amount an employee receives after adding all amounts due to the employee, such as allowances, bonuses, and job-related payments, and deducting all financial obligations such as social insurance, taxes, advances, and other deductions. Thus, the net salary includes the basic salary plus allowances and incentives, minus any legal or other financial obligations.

Article 2 of the Saudi Labor Law defines net salary and lists the increases added to the basic salary: “Actual wages are the basic salary plus all other due increases granted to the employee in return for the effort expended at work or the risks incurred in performing their duties, which are granted to the employee in exchange for work pursuant to the employment contract or labor regulations.”

Are allowances calculated based on the basic salary?

The Saudi Labor Law and its implementing regulations do not specify fixed amounts or percentages for the allowances that an employer must grant to a worker in the private sector. This differs from the Civil Service Law governing government employees in the Kingdom, which precisely stipulates the allowances that must be granted to government employees.

Therefore, allowances in the private sector are calculated in several ways: some are provided to the employee as a percentage of the basic salary, and some are a fixed amount regardless of the basic or net salary. The allowances are then added to the basic salary. The calculation of the percentage of allowances relative to the basic salary and their amounts varies depending on the type of allowance, the nature of the work, and its conditions. Some allowances are mandatory according to the latest amendment to the Labor Law, specifically Article 61, such as the housing allowance if the employer does not provide the employee with suitable housing, and the transportation allowance if the establishment does not provide transportation for its employees. The amounts of these allowances are determined by agreement between the employer and employee and the internal policies of each establishment.

Is end-of-service pay calculated based on the basic salary?

In Saudi Arabia, the end-of-service benefit is calculated based on the employee’s last salary. The Saudi Labor Law stipulates that the end-of-service benefit shall be calculated as follows: half of the monthly salary for each year of service for the first five years, and a full month’s salary for each subsequent year of service.

In other words, the end-of-service benefit is calculated based on actual wages rather than the basic salary. Note that all or part of the commissions and percentages of sales paid to the employee—which are by nature subject to increase or decrease—may be excluded from the wage components used to calculate the end-of-service benefit, in accordance with Article 86 of the Labor Law.

Are social security contributions deducted from the basic salary?

Insurance contributions to the General Organization for Social Insurance (GOSI) are deducted from the contributory salary, not the basic salary. The contributory salary includes the basic salary, allowances, and commissions, if any, and the deduction is made according to the following rates: 

• Pension Contribution: 18% of the contributory wage, with the employer paying 9% and the employee paying 9%.
• Occupational Hazards Branch: 2% of the contributory wage, paid in full by the employer.
• SAND Unemployment Branch: 1.5% of the contributory wage, with the employer paying 0.75% and the participant paying 0.75%.