What is Base Pay?

Base pay is the minimum compensation earned by a worker in exchange for their labor and/ or time. It is the amount earned before any taxes are applied, or any form of benefit or other compensation is awarded.

Base pay can be offered at hourly, weekly, monthly, or annual rates. How much an employee should be offered as base salary will vary between industry, profession, and so on, but it must be equal to, or greater than, the federal or state minimum rate.

Who receives base pay?  

Base pay is typically offered to employees, but companies may also choose to compensate their contractors and freelance workers with a set minimum amount as well.

The amount that an employee will receive as their base pay is usually agreed upon before they start working with your company. But it may change over time, with promotions or inflation, for example. 

Different types of base pay

How people refer to base salary usually depends on the type of work that they do and what their contractual commitments are. 

Hourly wage

If workers bill their time by the hour, base pay is commonly known as the hourly wage or rate. Hourly wages are predominant in shift work, in industries such as hospitality and retail, since staff members are hired on a temporary basis, or work is requested at short notice. In this case, base pay is calculated as hourly wage times the number of hours worked.

Annual salary

Annual or monthly salaries tend to reflect long-term commitments, such as permanent contracts. Whether full-time or part-time, this type of work usually involves a comprehensive set of responsibilities that the worker fulfills during the agreed-upon number of working days. The base pay, in this case, is an annual or monthly figure that you and the employee negotiate at the start of their contract, and does not vary with the number of hours worked.

Base salary example

A person is interviewing for the position of junior software developer at a design agency. The employer wants to attract them with a compensation package that is higher than average, so they offer a base pay of $40,000 per year, which does not include any bonuses, overtime pay, or other benefits.

Base pay vs gross pay

Base pay is the minimum amount a worker is entitled to before any deductions for tax, or additions of compensation or benefits, have been made.

Gross pay includes base pay, and, in addition, can comprise overtime pay, bonuses, and other types of monetary compensation.

What to consider when determining base pay?

When you are making an offer of employment or offering someone a promotion, it can be tricky to get to the final number for base pay. Here are some of the most important factors you should consider when doing the calculation. 

The job market

Macroeconomic factors determine how businesses interact with their market, and that includes labor needs too. For example, high unemployment rates indicate a high labor demand from workers and a low supply of jobs from employers. This situation could result in workers being willing to accept a lower base salary than risk not having a job at all.

Job growth in a particular sector or specialization may also impact what you offer as base pay. For example, as more roles become available across software engineering, you have to compete for talent by offering more attractive compensation packages, including higher base pay.

Lead, meet or lag the market

As part of your hiring strategy, you need to decide if you should lead, meet, or lag the market. You lead the market if you offer higher base pay than the average competitor, you meet it if it’s average, and you lag it if your employees’ base pay is lower than the market average.

Your departmental budget

You can’t offer the highest base pay among your competitors if you don’t have the budget for it. What you can afford to spend can matter as much as external market conditions.

Hiring budgets are often decided on a departmental basis, depending on how vital a business area is to overall business success. For instance, in a financial services firm, the banking team may have a higher hiring budget than the IT team.

Geographical location

The employee’s location and the cost of living in that location can also impact the base pay that they may be offered. Workplaces in metropolitan areas tend to have higher base pay than those in smaller towns, partly because they need to compete harder for talent, but also because they bring in more income through a broader pool of customers.

The job seniority

The level of skill and responsibility involved in the job itself will probably be the decisive factor when determining base pay. For example, managing a large team, solving complex problems, and operating well under pressure are factors that could warrant a higher base pay.

A job’s seniority level is also defined by its impact on the company’s bottom line. In a small team, for example, an employee may not have managerial responsibilities, but if their actions directly influence company sales, they may get a higher base pay than an equally skilled manager in a bigger company.

The employee’s qualifications

Finally, a candidate’s background can affect the base pay they’re being offered. Usually, the higher the educational qualification, the higher the pay. Non-academic professional qualifications, such as project management certifications, may also increase base pay if they’re relevant to the job.

When does base pay not apply? 

In most situations, even when you hire contractors on zero-hour contracts, you still need to pay a minimum amount for a set time period that’s equal to or higher than the federal minimum hourly wage. 

However, some contracts specify commission-only payments, so workers get paid a percentage of what they sell to a customer. In such cases, base pay does not apply, but the commission percentage is usually much higher in jobs comprising both base and commission payments.

Conclusion

Base pay is what workers must get as a minimum in exchange for doing their jobs. It must be equal to or higher than the federal minimum wage and does not include overtime pay, bonuses, or other forms of compensation. Base pay can be expressed as a monthly or annual salary, or as an hourly wage.

A variety of factors should be taken into consideration when deciding someone’s base pay, from the job market and your departmental budget to the seniority of the job and the employee’s qualifications.