Base Pay

>> HR Glossary/  Compensation & Benefits / Base Pay

What is base pay?

Base pay, also called basic salary or base salary, is a fixed amount that employers pay their employees in exchange for services performed and time spent working on the premises. This pay is agreed on before the start of the employment contract. The compensation is often expressed as an hourly rate, monthly or annual salary.

Most employment contracts include additional benefits and earnings, such as overtime pay, commissions, tips, bonuses, or vacation payments. These are not included in the core pay. Therefore, it is safe to say that the basic pay is only a part of the employee's total compensation.

When looking at remuneration for a job, base pay is the minimum that the employee expects from the position. In most cases, the company will explain the number of hours the candidate is expected to work and other terms they should meet to receive the basic pay.

Base pay vs. gross pay

Here are the differences between base and gross pay.

Gross pay

  • Gross pay is the total salary that you get after adding all benefits and allowances to basic pay
  • The components of gross pay are itemized for easy review
  • The figure includes all the taxes and deductions due
  • It is likely to be the maximum amount you get for the position
  • Some elements of the gross pay may change as time goes by.

Base pay

  • This is the fixed component of the salary
  • It does not include any allowances, benefits, or other remuneration
  • Base salary differs with experience and the requirements of the position, even when other benefits are similar for all employees
  • Usually, a part of the full remuneration for the position in question
  • It is the minimum amount an employee gets for the position.

When looking at remuneration, it is important to differentiate the basic pay from the gross salary. The former is usually based on the position, while the latter includes other benefits that may be available to all workers. Most workers first look at the base pay when determining if the position is lucrative before determining what other benefits they are likely to get.

How is base pay calculated?

Most companies calculate base pay on a yearly basis. However, it is usually broken down to the smallest working unit, such as the hourly rate, and multiplied by the number of working units that are in the specified pay period.

To calculate the base pay, you can use the following formula, depending on the pay periods:

[Regular pay amount in a payment period] x [# of payment periods in the time under review] = base pay.
The annualized base pay is calculated as [# of hours worked in a week] x [# of weeks worked in a year] x [hourly wage].

Example of annual pay that uses the above formula:

  • 30 hours a week x 52 weeks x $20 an hour = $31,200 a year

Here is an example of the basic pay calculation for each pay period.

  • $30 an hour x 30 hours a week = $900 a week

Factors impacting base pay

Base pay is affected by several things, either internally, position-related, or by the labor market. Here are some of them.

  • Market position: The position the organization wants to fit in the labor market to attract qualified talent.
  • Geographic differentials: The job location often determines the pay. Companies want to pay amounts that cover the basics of living.
  • Current market: The current market rates for the advertised position determine the basic pay.
  • Pay mix: The structure of the pay determines how much would be allocated for the basic pay. Some companies increase allowances and lower the basic pay.
  • Compensatory factors: Issues such as experience, certifications, and the level of education play a part in determining the basic pay.
  • Internal equity: Internal equity revolves around giving equitable pay among workers to spur performance among the workers.
  • Pay grade: The pay grade of the said position creates a framework within which the basic pay is determined.

What HR should know when determining base pay 

HR practitioners should ensure that base pay is equitable, competitive, cost-effective, and suits the organization's as well as the employee's needs. Here are a few things that HR should know when determining basic pay.

  • Salary benchmarking: HR should conduct salary benchmarking to ensure that the basic pay meets the industry standard, location, and job type. They should review what other companies are paying for similar positions and determine the highest pay against which to set their own.
  • Hourly wages versus salary wage: Determine the type of pay method to use. Each has specific cases where it is most effective, as well as the dynamics that determine the maximum pay.
  • The organization's strategy: Align the basic pay to the organization's needs and strategy (e.g., a scaling start-up may not be able to offer the same base pay as an enterprise organization)
  • The required expertise and experience: The salary should be based on the expected experience and expertise in the said field if the company intends to attract the right talent. Highly specialized positions attract a higher base salary and other bonuses.
  • Current market: A tight labor market might mean having to offer higher pay to attract top talent. Economic uncertainty or recession may mean that the organization is not willing to offer higher core pay.

HR teams should set the base salaries to meet the expectations of possible candidates and meet their objectives. The guideline above provides the tools they need to set the ideal basic pay.

Download Free Resource:

Go to Top