Base pay is the amount you pay workers for their worked hours. It does not include extra compensation, like bonuses, commissions, or benefits.
Base pay is really the starting point for employee compensation. Workers look for this amount when deciding between companies to work for, often giving it more weight than benefits and other types of compensation.
Why?
Base pay doesn’t fluctuate like other forms of pay can. It’s a straightforward amount that an employee can depend on receiving in exchange for the time they work. If you set it too low, you’re probably not going to attract quality workers.
On the other hand, setting base pay high doesn’t necessarily work either. Doing so leaves less room for benefits and performance-based pay that also matter to employees.
If the total for your employees’ base pay comes super close to your payroll budget, you’re not going to have any room left for all those extras, like paid time off, incentive bonuses, and health insurance.
Profitable companies with low turnover find a good balance between setting an attractive base pay and staying under budget when designing their compensation and benefits packages. In return, employees want to work there and feel good about their pay.
How Base Pay Works
Base pay is how much pay an employee receives in exchange for their working hours. It’s typically given as an hourly wage, or the amount an employee earns per hour worked, or a salary, which is the annual amount an employee earns.
For example, an hourly wage could be $25 per hour, while a similar salary might be $52,000 per year.
Base pay doesn’t include other forms of pay, like performance bonuses, commissions, tips, referral incentives, or sign-on bonuses. It’s strictly the base amount given for the employee’s time worked.
Companies typically calculate base pay as an annual amount, even if they pay an hourly wage. This gives them an annual amount to include in job descriptions for hiring purposes. The calculation is a bit different if using salary versus hourly wage.
To calculate base pay for a salary, multiply the amount a worker will earn for each pay period by the number of pay periods per year. For example, a person making $3,000 biweekly receives a base salary of $78,000 ($3,000 x 26 pay periods).
For hourly base pay, multiply the number of hours worked per pay period by the hourly wage and the number of pay periods. So, a person making $30 per hour on a biweekly pay schedule with 80 hours per pay period makes $62,400 for their base pay ($30 x 80 hours per two weeks x 26 pay periods).
Base Pay vs. Gross Pay
While base pay is the foundational amount an employee earns without considering extra forms of pay, including bonuses and benefits, gross pay is the total amount an employee earns. In other words, gross pay includes all forms of additional compensation, like overtime pay and tips.
Companies sometimes include gross pay rather than base pay in job descriptions to attract new talent. This is acceptable, but you should still highlight base pay separately for full transparency to prospective employees.
Additional compensation can be an attractive bonus for applicants, but they still want to see what they can expect to earn for base pay.
Base Pay vs Take-Home Pay
Take-home pay is the actual amount of money an employee takes home after taxes and deductions are removed from their paycheck. If a person earns $2,000 but gets $500 withheld from their paycheck for taxes, health insurance, and 401(k) contributions, their take-home pay is $1,500.
This differs from base pay, which includes all earnings from hours worked. Using the previous example, the employee’s base pay is $2,000, as it includes what they actually earned before tax and deduction withholding.
Take-home pay is also referred to as net pay.
How to Determine Base Pay
Several factors influence base pay for particular roles, including:
- Experience and skills needed
- Current market value
- Internal equity
- Pay grades
- Location
- Payroll budget
- Additional benefits for the role, like bonuses, tips, and paid time off
- Compensation strategy
Companies usually use salary data to determine the base salaries for specific roles. Salary data gathers pay information from competitors, allowing organizations to determine a midpoint on which to base their salaries.
Salary data can be tailored to an organization’s specific needs, like searching salaries within a geographic area, industry, or similar company size, to have the most relevant data for their compensation structures.
Benchmarking tools like Payfactors and Salary.com can really help save some time by aggregating the data you need quickly. They can also be a great place to start with your annual salary data pull, which is a must for yearly compensation reviews.
However, I personally don’t believe they should be your only source. At best, you’ll find real data straight from HR teams. However, datasets from not-so-common roles are usually limited, leaving you to look elsewhere for the most accurate statistics.
Plus, these tools can be pricey.
It’s best to use various sources to pull salary information from. The Bureau of Labor Statistics and Payscale offer free data information for common roles. HR can also monitor job descriptions from competitors to see what other companies offer for base pay.
Employees Cost More Than Their Base Pay
In 2023, the average employee at a private company costs $41.03 per hour but actually earns an average wage of $28.97, making an employee cost more than their base pay.
Remember that base pay doesn’t include any additional forms of pay or benefits. Therefore, the employee’s cost to the employer is more than the employee’s base pay. An employer also has to account for other costs, such as:
- Paid Time Off (PTO): Any leave that the company pays employees for, like PTO, bereavement leave, or family leave, is included in an employee’s total pay.
- Performance Bonuses: Bonuses can significantly increase the cost per employee, especially if a company is generous with its performance-based incentives.
- Retirement Plans: Company costs include 401(k) and other retirement plan contributions and the costs involved in maintaining the plans.
- Health Insurance: Health insurance for employees is becoming more commonplace in the workplace, but the amount the company pays for its plan must be accounted for in total employee costs.
- Commissions, Tips, Etc.: In addition to base pay, some workers may receive commissions, tips, and other forms of pay that add to their total costs.
Some of these costs are required by the law, like overtime pay or paid leave for states that require it. Others aren’t legally required, but they’re still worthy of being included in an attractive compensation package.
Typically, additional benefits cost about 25%-30% of an employee’s total cost at a private company. So, private companies should consider base pay to be about 75% of total compensation, while benefits account for the other 25%.
An employee making $30 per hour is going to have a total cost of at least $40.
When you think about base pay, it’s important also to factor these other costs into your payroll budget. Base pay is certainly a large portion of your budget, but it’s not the only factor, especially with healthy compensation packages involved.
Using a payroll service can help you keep everything organized and make the right calculations to stick to your budget.
Keeping Base Pay Under Budget
To sum up, base pay isn’t the only type of compensation a company has to think about, but it is one of the most important.
You want to have a competitive base pay as part of your compensation package. Quality candidates know what they’re worth and won’t apply for less. A competitive base pay is a good sign that the company also knows the worth of its employees.
Of course, your base pay for each role has to align with your budget. When you figure in all your benefits in addition to your base pay, your total compensation has to fit into your budget.
The easiest way to do this is to use a 25% shortcut. Basically, take your employee’s base pay, calculate 25% of it, and use that number to account for the employee’s benefits in your budget.
So, someone making a base salary of $60,000 a year would have $15,000 added to their base salary in your budget to compensate for additional benefits, bringing their total to $75,000.
It’s a quick and convenient way to help you calculate the total yearly cost of a particular role and help you stay within your payroll budget. Use our free payroll budget template to keep everything organized.
Remember to leave room in your budget for annual raises to help you maintain competitive base pay. As your business grows, your budget should continue growing to accommodate your employees.
