What Is Base Pay and How To Calculate It?
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Last Updated: 10/25/2022
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The ability to compensate employees competitively as part of an effective talent acquisition strategy is top-of-mind for hiring teams and HR professionals who continue to grapple with today's labor shortage struggles. To meet these challenges, many HR leaders are offering remote work and other incentives to encourage candidates to accept job offers, according to the 2022 Paychex Pulse of HR Survey. Among the most effective tactics that HR leaders have deployed includes offering higher pay as a component of a competitive offer.
With these factors in mind, it's important to understand base pay as part of overall compensation packages when employees consider a job offer at your business or negotiate a raise.
What Is Base Pay?
Base pay, also commonly referred to as base salary or basic salary, is a fixed amount that an employer agrees to pay an employee in exchange for time and services agreed upon before the employee begins working. Base compensation is most often expressed as an hourly rate, monthly income, or annual salary. It doesn't include benefits or additional earnings, such as commission, tips, overtime pay, or bonuses. With this in mind, base pay may only be one part of an employee's total compensation.
What does base pay mean to job candidates and potential new hires? A job offer may include base salary as well as other details about future wages, such as potential commission for a sales job. But it's typically determined by the employer based on a set workweek and a variety of additional factors including the individual's experience, job duties, and skills. Base pay is often a starting point for salary negotiations, and may increase over time based on employee performance or other demonstrations of an employee’s value to the company. And in times when recruiting and hiring are especially challenging, employers may raise base pay to compete for top talent.
Who Receives Base Pay?
While some employees receive a base annual salary distributed across pay periods, others may receive base compensation paid as an hourly wage. More specifically, base salaries are typically paid to employees who meet the criteria for exemption from minimum wage and overtime pay requirements outlined by the Fair Labor Standards Act (FLSA). Other employees may receive their compensation on a per-hour, shift, or day basis. These are typically non-exempt employees under the FLSA who are owed minimum wage for all hours worked and overtime for hours worked over 40 among other protections. If you aren't already familiar with the distinctions between exempt and non-exempt employees, it's important to understand each of these worker classifications. The Department of Labor has created materials to help you classify employees correctly, adhere to these federal standards, and properly pay employees for time worked. Keep in mind that your business may also be subject to state and local wage and hour laws.
Base Pay vs. Gross Pay
Having a firm understanding of base pay vs. gross pay is of utmost importance, especially when negotiating employee salaries. As previously stated, base pay is the hourly rate or salary that an employee earns before any additional payments are added. On the other hand, gross pay includes base earnings plus overtime pay (if applicable), commissions, bonuses, tips, etc. before deductions are taken. In most cases, base pay is a set amount that changes infrequently (e.g., annual performance reviews, market adjustments, etc.), while gross pay may fluctuate based on additional incentives.
In addition to base pay vs. gross pay, you should also keep in mind net pay, which is the amount an employee “takes home” each pay period. This is gross pay minus taxes and other deductions.
How Is Base Salary Calculated?
Variables such as the employee's experience level, certifications, and market value for employees in similar roles can all help an employer establish an appropriate base rate while taking into consideration the number of hours the employee will work per week, typically 40 hours for a full-time employee. You may also want to look at salary research data from the U.S. Bureau of Labor Statistics (BLS), which offers information across professions, industries, and geographic areas.
To calculate base pay, you can use one of the following calculations, depending on the employee's classification:
[Regular pay amount per payment period] x [# of payment periods in a year] = Annualized base pay
[# of hours worked in a week] x [# of weeks in a year] x [hourly wage] = Annualized base pay
Base Salary Calculation Examples
Using the basic calculations above, let's take a look at how base salary and base pay can be calculated, along with basic calculations for bonuses and overtime:
Example 1: Base Salary
[Regular pay amount per payment period] x [# of payment periods in a year] = Base salary
[$2,000 bi-weekly salary] x [26 pay periods] = $52,000 base salary (annually)
Example 2: Base Pay
[# of hours worked in a week] x [# of weeks in a year] x [hourly wage] = Base pay
[30 hours worked per week] x [52 weeks] x [$25 per hour] = $39,000 base pay (annually)
Example 3: Bonus as a Percentage of Annual Salary
[Employee's annual salary] x [Percent bonus rate] = Bonus amount
[$52,000 annual salary] x [3% bonus] = $1,560 bonus
Example 4: Overtime Pay
[Regular pay rate] x [1.5] x [number of overtime hours] = Overtime pay
[$20 an hour] x [1.5] x [5 overtime hours] = $150 overtime pay
Factors Impacting Base Pay
It's ultimately up to the employer to determine base pay, but new hires and employees may negotiate for a higher base pay, pointing to any number of factors. While businesses need to ensure they provide pay that meets applicable wage and hour law requirements, base pay can be negotiated or determined by variables such as:
- The employee's experience, skillsets, education, and specialized knowledge
- Any professional certifications that relate to the job
- Amount budgeted for the position
- Geographic location
- How much competitors are paying for similar roles based on market data
- How much current employees in similar roles are compensated
- How long a position has been unfilled
- Whether other forms of compensation are offered, such as equity
- Cost of living adjustments
Whether you're trying to bring a new hire on board or are in negotiations with a current employee, consider how important a standardized compensation formula and well-designed salary structure are for cultivating a fair and equitable workplace — in addition to the base pay variables mentioned above. Designed to help businesses recognize a position's value in the overall labor market as well as its internal value to the company, these tools can help businesses take a formulaic approach toward eliminating bias and developing more equitable pay practices.
Align Your Base Salary With Industry Standards
To recruit and retain top talent, employees' total compensation packages — a large percentage of which may be base pay — need to be competitive yet also reasonable and fair. Partner with experts in HR to help you effectively find and retain great talent, offer salaries that make sense for your business and industry, and keep you in compliance with applicable wage and hour laws and regulations. Working with an expert payroll provider can also help you pay your workforce accurately and on time, every pay period.