Fixed Salary vs Base Salary – The Difference and Its Importance

Fixed salary and basic salary are two important concepts in labor relations that many employees and businesses often confuse. Understanding the difference between these two concepts helps employees protect their rights and businesses build effective human resources policies. 1C Vietnam will guide you on how to distinguish between these two types of salaries in the article below. Find out now!

1. What is fixed salary?

Fixed salary is a fixed income that employees receive every month according to the agreement in the labor contract. This is the salary that is committed to be paid to employees regardless of business results or work performance. Fixed salary plays an important role in ensuring financial security for employees, especially during difficult business periods of the enterprise.

Unlike fluctuating income such as commissions or bonuses, fixed salaries are stable and certain, helping employees plan their personal finances effectively. For businesses, determining a reasonable fixed salary is also important in managing personnel costs and building competitive compensation policies.

1.1. Components of fixed salary

Fixed salary usually includes the following components:

• Basic salary: This is the core part of the fixed salary, determined based on the regional minimum wage and job position.
• Fixed allowances: Include allowances paid regularly every month such as gasoline allowance, lunch allowance, phone allowance.
• Position allowance: Applied to management positions or special positions in the enterprise.
• Seniority allowance: Based on the number of years the employee has worked at the company.

Fixed salary does not include the following:

• Performance Bonus
• Commission based on sales
• Project bonus or performance bonus
• Other non-fixed allowances

1.2. Advantages of fixed salary

Fixed salary brings many advantages to both employees and businesses:

• Create financial stability for employees, ensuring regular monthly income regardless of business fluctuations.
• Helps employees easily plan personal and family finances.
• Create a sense of security and trust in the business, helping employees feel secure at work.
• For businesses, fixed salaries help control personnel costs effectively and forecast operating budgets.

However, if the base salary is too low and the income volatility is too high, employees may have difficulty maintaining financial stability, especially during unfavorable market periods.

2. What is basic salary?

Basic salary is the minimum wage agreed upon in the labor contract, used as the basis for calculating employee benefits such as social insurance, health insurance, and unemployment insurance. This is the core component of the employee's salary structure, and often accounts for a certain percentage of total income.

Basic salary plays an important role in ensuring insurance benefits and other welfare regimes for employees. According to Vietnamese labor law, basic salary must not be lower than the regional minimum wage prescribed by the Government for each region.

2.1. Characteristics of basic salary

Basic salary has the following main characteristics:

• Lower than base salary: Base salary is only a part of base salary, not including fixed allowances.
• Used to calculate insurance: Basic salary is the basis for calculating social insurance, health insurance and unemployment insurance contributions.
• Fixed over time: Basic salary usually remains unchanged throughout the contract term, unless there is an addendum or new contract.
• Minimum wage prescribed by law: Basic salary must not be lower than the regional minimum wage prescribed by the state.
• Is the basis for calculating overtime pay, vacation pay, holidays and other benefits.

Basic salary is often clearly stated in the labor contract and is the legal basis to protect the rights of employees.

2.2. Limitations of basic salary

Along with its positive features, basic salary also has certain limitations. The main limitations of basic salary include:

• Does not fully reflect the actual income of employees, because it does not include allowances, bonuses and other variable income.
• It may not be enough to meet basic living needs in high cost of living areas based on the regional minimum wage alone.
• If the basic salary is set low by the enterprise to reduce insurance costs, employees will be disadvantaged in terms of future benefits and pensions.
• Creates a large gap between actual income and the income used to calculate insurance and welfare benefits.

Many businesses tend to declare basic salaries lower than actual income to reduce insurance costs, which negatively affects the long-term benefits of employees.

3. Distinguish between fixed salary and basic salary

To be able to negotiate effectively about salary and protect their rights, employees need to clearly understand the difference between fixed salary and basic salary.

3.1. Income components

Understanding the components of each type of salary will help distinguish them accurately and completely.

Fixed salary and basic salary are closely related, in which basic salary is a part of fixed salary. Determining a reasonable ratio between basic salary and fixed allowances in fixed salary is important for both employees and businesses.

3.2. Role in employment contracts

In an employment contract, fixed salary and basic salary have different roles:

• Fixed salary plays a decisive role in determining the stable income that employees receive every month, serving as a basis for comparing and evaluating the attractiveness of the job. For example, an accounting position with a fixed salary of 15 million VND/month will be more attractive than a similar position with a fixed salary of 12 million VND/month, even if the second position may have a higher bonus.
• The basic salary plays a decisive role in determining welfare and insurance policies, directly affecting the long-term interests of employees. In the event of a labor dispute, the basic salary is also the basis for determining compensation and severance pay.

When negotiating a labor contract, employees should pay attention to both types of salary, not only paying attention to total income but also considering the salary structure to ensure long-term benefits.

3.3. Impact on total income

The distribution between fixed salary and basic salary has a big impact on employees' income and benefits.

Base salary and base salary affect an employee's overall income in different ways. The higher the base salary, the more stable an employee's income is and the less dependent it is on fluctuating factors such as sales or business results. This is especially important for employees who need financial stability to pay off loans or have large financial responsibilities.

Meanwhile, the higher the ratio of basic salary to total income, the greater the insurance and welfare benefits that employees enjoy. This has important implications for the long-term social security of employees.

Example: An employee has a fixed salary of 15 million VND/month, in which the basic salary is 10 million VND and the fixed allowance is 5 million VND. In that case, the insurance benefits will be calculated based on 10 million VND, not the entire 15 million VND fixed salary. If the basic salary is only 7 million VND and the allowance is 8 million VND, although the fixed salary is higher (15 million VND), the insurance benefits will be lower because they are calculated based on the lower basic salary.

4. Formula for calculating fixed salary and basic salary

Mastering salary calculation formulas will help employees self-check and ensure their rights.

4.1. Formula for calculating fixed salary

Fixed salary = (Negotiable salary / Total number of working days in the month) × Actual number of working days

In there:

• Negotiable salary: Is a fixed salary according to the labor contract
• Total number of working days in a month: Number of working days according to regulations (usually from 22-26 days depending on the month)
• Actual number of working days: Number of days the employee actually worked in the month

For example: An employee has an agreed salary of 15 million VND/month, there are 22 working days in a month, but the employee only works 20 days (2 days off without pay). Fixed salary will be calculated as follows: Fixed salary = (15,000,000 / 22) × 20 = 13,636,364 VND

4.2. Basic salary calculation formula

Basic salary = Regional minimum wage × Salary coefficient + Training allowance (if any)

In there:

• Regional minimum wage: Regulated by the Government, varies by region
• Salary coefficient: Depends on job position, qualifications and experience of the employee
• Training allowance: Applicable to highly qualified employees

Currently, the regional minimum wage is divided into 4 regions with different levels. Enterprises are not allowed to pay a basic salary lower than the regional minimum wage corresponding to the area of operation.

5. The role of fixed salary and basic salary for employees

Understanding the role of each type of salary will help employees have appropriate personal financial strategies and protect their rights.

5.1. Ensuring labor rights

Fixed salary and basic salary play an important role in ensuring legal rights for employees.

Basic salary plays a decisive role in ensuring employees' rights through the following mechanisms:

• As a basis for calculating social insurance contributions, helping workers enjoy retirement benefits and old-age benefits.
• Is the basis for calculating health insurance, ensuring the right to health care of employees.
• Used to calculate unemployment insurance, helping workers have a temporary source of income when they lose their jobs.
• Basis for calculating overtime pay, leave pay, and holiday pay according to the provisions of law.
• Is the basis for calculating severance pay and unemployment benefits upon termination of a labor contract.

Fixed salary, with high stability, helps employees to plan their finances and ensure basic monthly expenses without worrying too much about income fluctuations.

5.2. Personal financial strategy

The way salary is allocated between base salary and base salary directly affects the employee's personal financial plan.

Employees can build effective personal financial strategies based on their salary structure. With a stable fixed salary, employees can:

• Plan for fixed monthly expenses such as rent, utilities, and children's tuition.
• Determine the ability to borrow money to buy a house or car based on stable income from a fixed salary.
• Allocate a portion of your salary to savings and long-term investments.

Practical example: An employee with a fixed salary of 15 million VND/month can plan fixed expenses of about 10-12 million VND, and set aside 3-5 million VND for savings or investment. Variable income such as bonuses or commissions can be allocated to long-term financial goals or irregular expenses.

Employees should also regularly review their salary structure and negotiate with the company to ensure a reasonable basic salary rate, avoiding disadvantages in terms of insurance and long-term benefits.

6. The role of salary in corporate governance

Not only important for employees, the reasonable allocation between fixed salary and basic salary also has strategic significance in corporate governance.

6.1. Human resource cost management

Salary policy has a great impact on the cost management and operational efficiency of the business.

Building a reasonable salary structure and basic salary helps businesses:

• Control fixed personnel costs, helping businesses maintain stable operations even in difficult business conditions.
• Accurately forecast operating budgets and plan finances effectively.
• Optimize costs of social insurance, health insurance and other mandatory insurances.
• Allocate financial resources efficiently between fixed and variable personnel costs.

Businesses need to carefully consider determining the ratio of fixed salary and basic salary to both ensure compliance with legal regulations and optimize operating costs.

6.2. Create motivation to retain employees

Reasonable salary policy is an effective tool to attract and retain talent in the enterprise.

Businesses can use base salary and bonus policies as a tool to motivate and retain employees through:

• Build competitive base salaries compared to the market to attract talent.
• Design a reasonable basic salary structure to ensure long-term benefits for employees, thereby increasing their commitment to the business.
• Build a clear salary increase roadmap based on work performance and seniority.
• Combine stable salary and flexible bonus programs to motivate work.

Real-life example: A technology company in Hanoi applied a high fixed salary policy (accounting for 80% of total income) and had a clear salary increase roadmap, which helped reduce the employee turnover rate from 25% to 10% per year. This helped the company save significantly on recruiting and training new employees.

Fixed salary and basic salary are two important concepts in labor relations, directly affecting the rights and obligations of both employees and businesses. For businesses, building a reasonable salary policy is an important tool in human resource management and optimizing operating costs.