Base pay is a term used to describe the primary salary that a business offers an employee before other payments like benefits or additional earnings are calculated.
This level of compensation is usually referred to as an annual figure but is likely to be paid in monthly or weekly installments in return for work completed by employees. However, if the employee works overtime or earns commission on the sales they make, these additional payments would be considered as external to base pay.
Calculating Base Pay
So, how can you calculate base pay as an employer? There are many different factors that go into working out the base pay for the workers you employ.
One key consideration is to look at the legal framework of the country that you’re operating in, wider industry standards, the role and experience of your employee, and the competitive market rates.
Every country has labor laws that set the minimum wage requirements for employers, and it’s illegal for your salary packages to fall below this figure.
If you’re unsure of a competitive base salary to offer candidates, it’s worth researching what other businesses in your industry and region are paying for similar positions. Additionally, using tools like salary surveys and reports from consultancies can offer high-quality insights into the market trends of the moment. One example of this is Gartner’s Global Talent Monitor report, which is released annually and provides salary trends throughout key industries on a global scale.
Why Base Pay is Different to Total Compensation
Base pay can be used as a key metric in calculating total compensation, but the two sums will be fundamentally different for employers and employees alike.
The base pay of a worker is the core amount of money an employee receives for their work before any additional payments. This figure is generally fixed and takes the form of an annual sum or hourly rate. This is calculated before any benefits, bonuses, or variable compensation packages are added, meaning it refers to the guaranteed pay an employee receives.
Whereas total compensation combines the base pay of an employee along with all other forms of financial remuneration received. This means that performance related bonuses, health insurance, retirement contributions, accrued holiday payouts, and even stock options can be included as a total compensation package.
Non-monetary benefits like hybrid work can also be included as total compensation, underlining how this consideration is more about the complete value of the remuneration that an employee receives over a predetermined period of time.
Minimum Wage Considerations
For many employers, your base pay will be influenced by regional minimum wage obligations. In the United States, the federal minimum wage is $7.25 per hour, but most states and some local jurisdictions have set up their own higher minimum wage rates that need to be abided by as opposed to the federal rate.
Additionally, for tipped employees, the federal cash minimum wage is $2.13 per hour. However, the total earnings of the worker must still be equal to $7.25 at least.
FAQs
If you fail to meet the federal minimum wage for your employees, either by accident or deliberately, the worker can recover underpaid wages through the Department of Labor and is entitled to receive liquidated damages as well as recoup attorney’s fees and court costs, potentially. Employers could also face civil money penalties.
To work out the base pay for hourly employees, you can multiply their hourly rate by the total number of hours your staff member worked annually.
In a nutshell, the base pay of an employee excludes any payments that aren’t fixed earnings. This means that you should exclude any bonuses, commissions, or employer-paid benefits from your base pay calculations.
In practice, this means that if your employee earns a salary of $70,000 and makes an additional $20,000 in performance-related bonuses, their base pay is still $70,000, even if they’re taking home $90,000 over the year.
Other forms of compensation don’t impact the underlying number, no matter how much they transform the take-home pay of an employee annually.