What do we actually mean when we talk about salary?

When someone tells me that they earn DKK 60,000 per month, I almost always ask the exact same question:

What is included in that figure?

Is it base salary? Is pension included? What about optional holiday savings (fritvalg), fixed allowances, variable allowances, bonuses, employee benefits, overtime, or a car? And is the amount based on full-time, part-time, or another number of hours?

It might sound like details. But it is actually one of the most important things when working with salary and pay transparency. Because salary is rarely just a single number.

One of the biggest challenges of pay transparency is that the concept of "salary" is often used very imprecisely.

For some, salary means base salary. For others, it means base salary plus pension. Some include bonuses. Others do not. Some include optional holiday savings, employee benefits, or allowances. Others only look at the amount at the very top of the payslip.

Therefore, many salary negotiations and pay analyses end up with people talking past each other.

Not because anyone is necessarily wrong. But because they are comparing on different bases.

If one is talking about monthly salary excluding pension, and the other is talking about total compensation including pension, bonuses, and allowances, they are not comparing the same thing.

And if the basis is different, the conclusion will also be skewed.

Before we can talk about pay gaps, we must define the basis

To assess whether someone is underpaid or overpaid, you first have to define a common basis for comparison.

It is not just about finding a number. It is about understanding what the number consists of.

An employee could, for example, have a higher total salary because they work many evenings, weekends, or overtime hours. Another might receive a higher payout because they have commission or bonuses based on specific results. A third might have a temporary allowance because they have taken on leadership responsibility for a period.

This does not necessarily mean that there is unfair pay involved.

If the allowances follow a clear pay policy, and the same rate applies to the same work, the difference can be objective and explainable.

The problem arises when the company cannot explain the difference. Or when parts of the salary are used differently without clear criteria.

Hours are often the first thing to understand

One of the first things you need to get a handle on is working hours.

A monthly salary only makes sense if you know the number of hours it covers.

Is the employee full-time or part-time? Is the standard working time 37 hours, 35 hours, or something else? Has the employee worked extra hours during the period? Has overtime been paid out? Is there absence, leave, or partial salary during the month?

Two employees can easily have the same monthly salary but different hourly rates if their working hours are not the same.

Conversely, two employees can have different monthly salaries but the same hourly rate if one works part-time and the other works full-time.

Therefore, normalizing working hours is an important part of the payroll calculation. You must be able to convert salary into a comparable basis, for example, a full-time monthly salary, annual salary, or hourly rate.

Otherwise, there is a risk of concluding that there is a pay gap, even though the difference is actually due to working hours.

Overtime can distort the picture

Overtime is a good example of a salary component that can quickly cause confusion.

If an employee has received overtime pay in a month, the payslip will show a higher amount than usual. This does not necessarily mean that the employee has a higher fixed salary.

It means that the employee has worked more hours or received payment for previously accumulated overtime.

Therefore, one must distinguish between fixed salary and payment for extra work.

If overtime is included in a pay analysis without being handled correctly, you might end up comparing one employee's temporarily high payout with another employee's normal fixed salary. This does not provide an accurate picture.

In some analyses, it may be relevant to include overtime. In others, it should be kept separate. The most important thing is that you know what you are doing and that you are consistent.

Allowances must be understood individually

Many payslips contain different types of allowances. For example, these could be:

• inconvenience allowance

• evening allowance

• night allowance

• weekend allowance

• seniority allowance

• personal allowance

• responsibility allowance

• temporary allowance

• availability allowance

• qualification allowance

They cannot necessarily be treated the same. Some are fixed amounts. Some are hourly-rated allowances and vary based on working hours.

An evening allowance or weekend allowance might be payment for working at specific times. If the rate is the same for everyone, and the allowance follows a clear policy or collective agreement, it is typically an explainable pay difference.

A seniority allowance may be based on how long the employee has been employed. This can also be objective if applied consistently.

A personal allowance is often more complex. It can be historically determined, individually negotiated, or given as compensation for something specific. Therefore, it requires a more thorough assessment.

A temporary responsibility allowance might be relevant if an employee temporarily assumes extra responsibility. For example, if a manager is sick and an employee temporarily acts as manager.

In a pay analysis, you should therefore not just add up all allowances uncritically. You need to understand why they exist, what they compensate for, and whether they should be included in the comparison.

Not all allowances say something about the pay level

An important principle is to distinguish between pay for the job and payment for special circumstances.

If an employee gets an allowance because they work at night, this does not necessarily mean that the job is higher paid than a corresponding day job.

It means that the work is performed at a time that triggers an allowance.

If an employee receives a temporary allowance for handling an extra function, it also does not necessarily say anything about the employee's normal pay level. It says that the employee has had a different responsibility for a period.

It is therefore important to be able to break down the salary into salary components.

• What is the fixed pay for the role?

• What is payment for working hours?

• What is payment for special conditions?

• What is temporary?

• What is variable?

• And what is personal or historically determined?

If you cannot answer that, it becomes difficult to explain pay differences.

Bonus is a good example

Another good example is the payslip line "bonus".

At first glance, a bonus might look like a regular variable salary component. But to understand it correctly, you need to know what the bonus covers.

Does it come every month, every quarter, or once a year? Is it linked to specific goals? Is it individual or collective? Is it based on performance, sales, company results, or something else entirely?

Or is it actually a replacement for another pay component, such as pension?

The answer is crucial for how the bonus should be included in a pay analysis.

A monthly bonus that effectively functions as fixed salary might need to be treated differently from an annual performance bonus. And a bonus that compensates for a lack of pension cannot simply be compared one-to-one with a regular bonus scheme.

So, bonus is not just bonus. It must be understood in context.

Leave can significantly change the pay picture

Leave is an area that often makes salary calculations more complex.

This applies especially to parental leave, but also to other forms of leave.

Some periods of leave are with full pay. Others are partially paid. Some are unpaid. Others are covered by maternity/paternity benefits, reimbursement, or special schemes.

An employee on parental leave may, for example, have a period with full pay and then a period where they only receive parental leave benefits. If you look at the payslip without understanding the period, it might look like a drop in pay.

But it is not necessarily an expression of a changed pay level. It is an expression of a specific leave situation.

Therefore, it is important to understand whether the payroll data reflects normal salary, partial salary, absence, reimbursement, benefits, or unpaid leave. Otherwise, you might end up analyzing a temporary situation as if it were the employee's normal salary.

Retroactive adjustments and errors must be handled separately

Errors can also occur in payroll.

An employee may have been underpaid or overpaid in a previous period. This can be corrected in a later payroll run through a retroactive adjustment.

On the payslip, this can mean that a month looks unusually high or low.

If you do not identify the retroactive adjustment, it can distort the analysis.

The same applies to one-off payments, back-payments, corrections, holiday pay, severance payments, or other special items.

They might be completely correct payroll entries. But they do not necessarily say anything about the employee's normal pay level.

Therefore, you must be able to separate salary that reflects the current role from corrections and historical adjustments.

Personal allowances and historical agreements require special attention

Personal allowances are one of the areas where companies often need to pay extra attention.

A personal allowance can be given for many reasons.

It can be a historical agreement. It can be a retention bonus. It can be compensation for changed terms. It can be the result of individual negotiation. Or it can be a way to increase an employee's salary without changing the salary band or job level.

This does not mean that personal allowances are wrong.

But they must be explainable.

If two employees perform the same work or work of equal value, and one has a significant personal allowance, the company must be able to explain why.

Are there objective criteria behind it? Is the allowance temporary or permanent? Is it linked to skills, responsibilities, or special conditions? Are corresponding allowances granted to others under the same principles?

These are the kinds of questions you need to be able to answer if you want to work seriously with pay transparency.

Seniority can be relevant — but must be used consistently

Seniority is another variable that often affects salary.

In some organizations and collective agreements, seniority is a fixed part of the pay structure. In other companies, seniority plays a more indirect role.

Seniority can be an objective criterion if it is clear how it is used.

But it can also create problems if it is used inconsistently.

If seniority explains pay differences for some employees but not for others, it becomes difficult to use as an objective criterion.

Therefore, the company should be clear about when seniority affects pay, how it affects pay, and whether it applies across comparable groups.

Wage types are not just technical codes

In many payroll systems, pay is categorized by wage types (lønarter).

It may seem technical. But the wage types are crucial for the pay analysis.

A company can have hundreds or thousands of wage types. Some cover base salary. Others cover pensions, bonuses, allowances, absences, holidays, overtime, reimbursements, corrections, or one-off payments.

If the wage types are not categorized correctly, the analysis becomes unreliable. Therefore, mapping the wage types is an important part of the work with pay transparency.

• Which wage types are included in base salary?

• Which are included in fixed salary?

• Which are variable?

• Which are allowances for specific working hours?

• Which are corrections?

• Which should be excluded from certain analyses?

It is not enough to pull a total salary payroll out of the payroll system and call it salary. You have to understand what the total sum consists of.

Pay transparency requires precision

Pay transparency is not about publishing the salary of all employees.

It is about being able to explain salary in a clear, fair, and data-driven way.

To do this, companies must have a handle on which salary components are included in their analyses and why they are included. They must also be able to explain which salary components are not included.

This requires going a step deeper than the base salary.

You need to understand wage types, allowances, bonuses, pension, standard working hours, overtime, leave, absence, temporary functions, retroactive adjustments, and employment conditions.

Otherwise, you risk comparing employees on a skewed basis. And if the basis is skewed, the conclusions will be too.

My advice: start with the basis of comparison

My general advice is simple:

Start by defining the basis for comparison.

Before you analyze pay gaps, you must decide what "salary" means in your organization.

Is it base salary? Fixed salary? Total compensation? Hourly rate? Annual salary? Including or excluding pension? With or without bonus? Should overtime be included? How are evening, inconvenience, and weekend allowances handled? What do you do with leave, absences, and retroactive adjustments?

There isn't always one right answer. It depends on the purpose of the analysis.

But there must be a conscious answer. When you communicate about pay, employees and managers must be able to understand what is included, what is not, and why.

Salary is complex. But the work becomes much easier when you can break down the salary and speak precisely about the individual parts. Only then can you compare salaries in a way that is fair, explainable, and useful in practice.