Annual Increment

What an annual increment is

An annual increment (العلاوة السنوية), also called an annual salary increment, is a rise added to an employee’s pay once a year under a rule known before it falls due. It lifts the base on which the pay of the following months is built. It is decided once and then remains, and it does not have to be earned again in every cycle.

The annual increment and Article 2 of the Labor Law

In the Saudi Labor Law (نظام العمل) we found no definition of an annual increment under that name. What Article 2 of the Labor Law defines is the basic wage (الأجر الأساسي): everything given to the worker in return for their work, under a written or unwritten contract, whatever the kind of wage or the method of payment, plus periodic increments (العلاوات الدورية).

Under Article 2 of the Labor Law, then, periodic increments sit inside the basic wage, not on top of it. Where an annual increment in a particular establishment is granted on a periodic basis, the definition places it there, and the form of the contract makes no difference, since the opening of the definition covers written and unwritten contracts alike. Where a rise is granted once, by a decision that is not repeated, Article 2 of the Labor Law does not name it as a periodic increment, and its placement follows the contract and the work regulation (لائحة تنظيم العمل).

Describing an annual increment as an addition above the basic wage therefore runs against the text of Article 2 of the Labor Law. The consequence does not show in the label. It shows the first time an entitlement calculated on the basic wage falls due.

Article 2 of the Labor Law also defines the actual wage (الأجر الفعلي) as the basic wage plus the other due increases that the article describes, and it provides that wage, where the Labor Law uses the word without a qualifier, means the actual wage.

An annual increment and the cost of living increase in Article 2 of the Labor Law

Article 2 of the Labor Law names increases that may be granted according to the standard of living, or to meet the burdens of a family, among the items included in the actual wage, not among the periodic increments. So Article 2 of the Labor Law places the two in different parts of its text. Calling every yearly rise a periodic increment joins together what the article keeps apart. How that item is worded, and where it sits, is set out under cost of living allowance.

Why the placement of an annual increment changes the calculation

The Labor Law calculates some entitlements on the basic wage and others on the actual wage. Article 107 of the Labor Law calculates the 50% overtime uplift alone on the worker’s basic wage, so described. Article 84 of the Labor Law calculates the end of service award on the last wage, with no qualifier, and by Article 2 of the Labor Law an unqualified wage is the actual wage.

An increase that enters the basic wage raises both bases together, because the actual wage is built on the basic wage by its definition. An increase that enters the actual wage alone leaves the basic wage where it was.

So the question of where an annual increment falls is a question about the calculation, not about the name.

Forms an annual increment can take

• A uniform rate. One percentage is applied to the pay of every employee in the establishment.
• A rate linked to the appraisal result. It varies with the rating each employee receives.
• A rate linked to progress within the grade range. It becomes smaller as pay approaches the ceiling of the range.
• A rise to meet a change in the cost of living. Its position in Article 2 of the Labor Law is the one described above, among the items of the actual wage.

The amount spent on all of these in one cycle is shared out in a salary review, where the budget is set on the wage base rather than on headcount.

Why a uniform annual increment can widen pay gaps

A percentage rise applied to an unequal base widens the difference in riyals year after year instead of closing it.

So a uniform annual increment is neutral on its face, but its cumulative effect is not. The remedy lies in the base itself, before any rate is applied to it, because differences in pay need a reason connected to the work, as described under internal pay equity. A practical way into the base is the compa ratio, which divides an employee’s pay by the midpoint of their grade range and shows their position within the range in one figure. How the span of that ratio depends on the width of the range is explained under range spread.

What makes an annual increment explainable

• A written rule that comes before entitlement. It states who qualifies and by what measure.
• A documented performance record, where the increment is linked to performance. A rating that has not been calibrated across appraisers carries the differences between managers into pay, which is the problem performance calibration is designed to address.
• Each range in the salary structure with a known ceiling. Building pay ranges follows job evaluation, and without a known ceiling pay can drift out of its grade range through accumulation without anyone noticing.
• A known date. It does not move with the cash position of the month in which it falls.

How an annual increment differs from variable pay

Variable pay is a part of an employee’s income that changes with a particular result, as against fixed pay, which is due whatever the result. An annual increment raises the fixed base, so it is not earned again in every cycle.

Variable pay is earned time after time, but an annual increment is earned once and remains. An establishment that writes its increment rule in the language of a bonus has created a permanent commitment in wording that was designed for a temporary reward.

The annual increment and the amendments of Royal Decree M/44

Royal Decree M/44 of 1446H amended Article 2 of the Labor Law by adding other definitions. That decree did not change the definitions of the basic wage and the actual wage in Article 2 of the Labor Law, and it did not amend Article 84 of the Labor Law. Royal Decree M/44 amended Article 107 of the Labor Law to allow paid compensatory leave in place of overtime pay with the worker’s consent, and that decree left the 50% uplift on the basic wage in place.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.