Increase allowances, not basic pay ?


Increase allowances not basic pay

“Why do some organisations only increase allowances not basic pay at salary review ?”. This question was asked recently on LinkedIn, and even though the person asking is based in India, I thought I would answer for my readers based in the GCC.

Review of the allowances

At the company level, most often, there is an annual review of the allowances to ensure they are still in line with the market. Companies pay either a single, lump sum allowance or the traditional multiple allowances. Whichever the method, the main allowances being compared to market are housing, transportation, furniture and education (sometimes paid separately form the single lump sum) as they are traditionally the largest allowances, and compose the main reference points for the establishment of the single allowance.

So – the company compares allowances to market. They may decide to review some upwards, others downwards and leave yet some others at the same level. For instance, in the past year, housing costs continued to fall in Dubai and Abu Dhabi, but at the same time, education costs rose over 30%. Yet companies only increased the education allowances by 8% on average.

The changes in allowances apply to all employees eligible for the allowance, no matter their performance and pay level. So all eligible employees would receive the potential increase in allowances.

Review of basic pay

The allowance analysis is, however, independent from salary review, which touches employees at an individual level most of the time.

A company may decide not to spend any money on salary increases and have no budget for salary review, for any number of reasons :

  • The employees are already paid above the target position to market (eg : average employee pay is at 65% of market, while the company targets the median). This impacts production costs and needs to be contained if the company is to maintain or improve its competitiveness.
  • The company is suffering losses or strongly reduced profit and decides on a salary freeze in order to contain costs.
  • The whole industry (or the global economy) is suffering and no-one is providing increases on basic pay.

In those cases, no-one sees a change on their basic pay. Some companies may decide to freeze basic pay but provide lump sum payouts or bonuses, as these do not increase the long-term costs of the company yet still reward employees for their performance.

For companies that do have a salary review budget, there are again multiple scenarios :

  • The company provides cost-of-living or general increase (or any other name of an increase that applies equally to all employees or whole categories of employees). In that case, all eligible employees receive an increase on basic pay.
  • If the company does not have a policy of cost-of-living, then only individual increases apply. They are usually called merit increase. There are 2 cases where an employee may not get an individual raise on their basic pay :
  1. The person is not having a good enough performance rating, and the sanction is to not get an increase on the basic pay.
  2. OR the person is a high performer with an already high salary in which case basic pay may be frozen and instead a lump sum may be paid out. No increase on long-term costs, while at the same time the employee receives the same amount recognising their performance.

In both cases, only the allowances change and there is no change of basic.

In conclusion, as you can see, there are a number of situations where a company may decide not to increase the basic pay while they review the allowances. It can be either linked to an overall company decision affecting all employees, or to a decision linked to an individual employee’s situation.

Can you think of other situations in which an employee would get an increase on allowances but not on basic pay ? Please feel free to share them in the comments !
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  1. Generally increasing allowances and not changing basic could also reflect

    a) Company will pay less Gratuity when employee leaves the company (after 5 years)’
    b) Less payment of Paid Leave encashment (if it is based on basic salary)
    c) Less payment if company plans to layoff employees (as they need to pay one months basic salary).


    • You are right, there are sometimes such financial considerations as well, in view of not increasong expenses. As it depends on the country law as well as the company practice and policies, this may not always apply.
      Thanks for your contribution Prashant !

  2. Hello Sandrine! Between these two, which should we apply as “general increase” to basic pay- cost of living index or inflation rate? For allowances, can we apply one increase rate across all allowances (example, using inflation rate) or is that method too conservative/ simplistic? Thanks in advance and more power to your gem of a blog!

    • Hi Marie,

      There is no pre-definite for defining the basis of “general increase”. I’ll assume you’re in a country where there is no legally-defined general increase.

      I believe a lot of companies use inflation rate (CPI) if only because it is usually easier to compile, and from multiple sources, than cost of living index. But, I haven’t seen general increases applied much in the past few years, as companies were trying to go towards full individualisation of salary reviews (ie merit increases). And personally, I believe that if inflation is less than 5% per year, most companies don’t implement general increases.

      Regarding allowances. In the GCC, most companies set allowances based on an analysis of market trends with respect to allowances specifically, as allowances are typically defined as a set amount per grade (sometimes also linked to family composition and/or nationality in the case of housing allowances). In our markets, housing prices can go up or down quite significantly from one year to the other, while education cost increases might be (semi)controlled by the government. Applying a percentage across all allowances therefore doesn’t necessarily maintain competitiveness, so I wouldn’t recommend it.

      Of course, your organisation may not be participating in salary surveys every year and getting relevant information. You can still enquire on school fees at the schools most used y your employees, and read property rental reports to figure out market movement over the past 12 months to see if you should increase or stabilise your housing allowance. This will likely result in decisions that are more aligned to the reality of the market.

      Keep in mind that when rental prices go down, your employees tend to try and take advantage of it, but when rental prices go up, they may stay in their current location and be protected by the maximum rent increase that may be allowed by government (for example 5%). In which case, you might not have to fully align your housing allowance to market levels, especially if you are not hiring many new joiners (if your are, you will have to take that into consideration).

  3. Dear Sandrine,
    Many thanks for this instructive article.
    Although we will start revamping the whole reward system in my current company, our current practice is to divide the salary review increase by 60-30-10% as in 60% base increase, 30% home allowance increase and 10% car allowance increase. Hence, less graduity pay in case of resignation 🙁
    I know it sounds like this will take loads of work for me to rectify but this is how it is at the moment. It sound sound so promising right?
    Thank you Sandrine

    • Hi Irmak,
      This approach can work in an organisation where allowances are set as % of basic pay, not as a set amount per grade (and/or other criteria that may be related to nationality of family composition in the case of housing allowance for example). Yes, it is designed to increase less on basic and therefore less End of Service payment. As long as the overall balance of package is about 60/60 or 50/50 between basic and allowances, you shouldn’t need to worry from a legal point of view.
      If you want to get away from this salary review practice, you will have to get away from having a package design where people on the same job and grade may receive not only a different basic pay, but also different allowances. I suppose all internal equity decisions are based on analysis the monthly gross, and so are promotion decisions.
      This approach can make it difficult to really compare your packages to the market in the GCC, as you will have to make all your analysis on monthly gross (guaranteed) package, not basic pay, and then deduct a target basic pay based on your company pay structure
      All the best for transitioning your practices, if that’s what your company is looking to do !


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