Definition of Annualized Salary
An annualized salary is the amount you anticipate spending on a specific position each year.
What is an annualized salary?
When you’re preparing your projected annual budget, one factor you need to be able to anticipate is the total annualized salaries for your staff. But how do you get to that figure when you have people who are hourly or salaried but work fewer than a 40-hour work week? Is that actually an annual salary amount?
An annualized salary is simply the amount you anticipate you will spend on a specific position each year. To calculate an annualized gross salary, multiply the position’s hourly rate times the number of scheduled hours the job is expected to work per week times the number of weeks the position will work in a year.
Note: It is essential to recognize that overtime, bonuses, merit increases, and benefits are typically separate budget line items. Therefore, they are not part of this calculation.
The calculation would look like this:
Examples of how to calculate annualized salaries
|Position Type||Hourly Rate||Scheduled Weekly Hours||Scheduled Number of Weeks to Work Per Year||Projected Annualized Salary|
|Part-time Hourly Seasonal Worker||$17.00||18||16||$4,896|
|Full-time Hourly Worker*||$19.50||40||52||$40,560|
|Part-time Salaried Worker||$35.00||26||52||$47,320|
|Full-time Salaried Worker*||$38.50||40||52||$80,080|
*Note: A 40-hour per week, full-time worker’s annual hours = 2,080 (40×52)
Why is it important to your business that you know what an annualized salary means?
There are several components that go into your annual HR (Human Resources) budget. Your total annualized gross salary expense is a significant portion of that figure. This is important to know because most of the other components of your HR budget will be based on this figure.
The following items are generally a rough percentage of your total gross annualized salaries:
- Merit increases
- Bonus payments
- Benefits expenses (including retirement contributions)
- Total employment tax liabilities
- Facilities expenses
- Office supply expenses
- Employee enrichment
You will have much more accurate budget line items for each of the above categories if you begin with your total annualized gross salary amount.
What is the difference between annualized gross salary and total annual compensation?
Total compensation involves the complete employment package from which an employee benefits. Not only does the total compensation include the annualized salary amount an employee is paid for their base salary, but it also includes:
- Anticipated overtime
- Merit increases
- Bonus payments
- Medical benefits expenses (including life and disability insurance payments)
- Paid vacation, sick leave, and holidays
- Tuition assistance or reimbursement programs
- Employee assistance programs (mental health, legal aid, weight management assistance, and other services)
- Employee enrichment such as gym memberships, child care assistance, paid parking
- Profit sharing and stock programs
- Retirement plans and contributions
When sharing information with employees, it is not only beneficial to make sure that your company is paying market competitive rates for their annualized base salary. It is also a huge eye-opener when employees get a glimpse of what the company invests in them from a total compensation perspective.
Other resources similar to annualized salary that you will find helpful:
- Compensation management: Salary benchmarking and beyond
- People operations guide to compensation management
- Salaries 101: Creating your company’s compensation plan
- Why is compensation planning a critical HR process?
- Why benefits benchmarking is important for employers
- Should I give employees a total compensation statement?
Summary of the definition of annualized salary
Understanding your total annualized salary expense not only helps you with your budgeting but also lets you communicate clearly with prospective new hires. When you bring on part-time or seasonal help, it’s critical that you can express how much they have the potential to earn from a minimal base salary perspective.
Explaining that base amount opens the conversation to additional earning potential the position may allow in forms of overtime, incentives, bonuses, or perks. Being able to have clear discussions with employees demonstrates to them that you are a trustworthy organization that values employee contributions.
Similar glossary definitions you should know
Bonus: A bonus is a non-guaranteed payment given to employees outside of their regular pay.
Gig workers: Contingent workers, such as independent contractors and freelancers, who normally perform temporary work for multiple clients.
Golden handcuffs: Most often used in executive compensation to tie valuable employees to the company. Usually expressed in stock options that vest over time. If the employee leaves before the stock’s vesting date, they lose the benefit.
Incentive pay: Additional pay earned on top of a base salary based on attaining documented goals.
Market pricing: Using the information gathered during the job evaluation process to determine how comparable jobs are paid. Typically independently published market studies are used for this process.
Total compensation/total rewards: Encompasses all of an employee’s compensation. Comprises not just salary but also benefits, recognition, incentives, development, and well-being perks.