What is a Base Salary?

A base salary is the initial rate of compensation that an employee receives from their employer, excluding any extra benefits, bonuses, overtime, or incentives. 

It is released in return for work performed, typically expressed as an annual figure but often disbursed in monthly or biweekly installments. 

The base salary is determined by various factors such as the industry standard, the role’s level of responsibility, the employee’s experience, and geographical location. Essentially, it serves as the foundation upon which additional elements of an employee’s total compensation package are built. 

This helps employers provide a stable income that the employee can rely on, regardless of fluctuations in work volume or performance. 

How Does Base Salary Work?

Employers determine based salary, depending upon various factors, such as market conditions, the candidate’s education, and the company’s pay ranges.

Suppose someone has a base salary of $72,000 annually and is paid monthly. Their monthly salary before deductions would be $6,000.

Please note that a base salary is just one component of the overall compensation package. Other benefits, like health insurance, stock options, and retirement plans, contribute to the total compensation. These additional perks are crucial to consider when evaluating a job offer. 

Understanding the Eligibility 

Some employees receive a fixed base salary, while others get paid based on an hourly wage. The Fair Labor Standards Act (FLSA) in the United States ensures that most employees are paid the federal minimum wage. They are paid overtime for any hours worked beyond 40 per week.

The minimum wage and overtime regulations do not apply to exempt employees, who are generally paid a salary. To be eligible, they have to fulfill requirements such as having a fixed salary that is not affected by changes in work. 

Nonexempt employees are hourly workers who must adhere to minimum wage and overtime pay regulations. They must maintain a record of their working hours.

There are some exceptions, such as teachers, lawyers, and high-income individuals who hold executive, administrative, or professional positions. 

How To Calculate the Base Salary?

Base salary can be determined with the help of your pay stubs, salary slips, or W-2 from the prior year. These documents clearly distinguish the regular payment from any extra compensation. 

Following is a simple formula –

Base Pay = [Regular pay amount per payment period] x [number of payment periods in a year]

To put it in words, base salary is calculated by multiplying the regular pay amount per payment period with the number of payment periods in a year.

On the other hand, base pay for hourly employees is determined by multiplying the number of hours worked in a week by the number of weeks in a year. The result is then multiplied by the hourly wage, as mentioned below –

Base Salary = [# of hours worked in a week] x [# of weeks in a year] x [Hourly wage]

Suppose Sarah works 25 hours a week at an hourly rate of $30.75. In this scenario, her estimated base pay for the year would be $39,975.

It is advisable to use the W-2 to calculate base pay since factors like vacation and sick days have an impact on actual hours worked. It is also affected by variables, such as changes in the cost of living, market standards, job losses, and recession, among others.

Hence,

Base pay = ([Total compensation in a year] – [Bonuses, Commissions, Overtime, etc.]) ÷ [# of hours worked in a year]

How is Gross Pay Different From Base Pay?

Base pay is just the fixed regular salary an employee gets, while gross pay includes that salary plus any additional income earned from overtime or bonuses.

Gross pay is the initial figure calculated based on the terms of an employee’s contract or the total hours worked within a pay period multiplied by their hourly rate, along with any additional earnings. 

Hence,

Gross Pay = Base Pay + Overtime Pay + Bonuses + Any Other Additional Earnings

Consider an employee with a base pay of $70,000 (annual salary). In addition to their base pay, they receive a $4,000 annual bonus and earn an extra $3,000 through overtime.

In this case, their total gross pay for the year would be $77,000 ($70,000 + $4,000 + $3,000).

Remember, both base pay and gross pay are subject to taxes.

Ways To Maintain Competitive Base Pay

Ensuring that your base salaries remain competitive is important for a company’s success. Employees usually evaluate companies based on fair compensation, along with factors like company culture, growth opportunities, diversity, and representation.

To make sure your salary packages align with both employee expectations and market standards, consider the following:

• Regularly conduct market research, at least twice a year, to stay informed about salary changes in your industry and locations.
• Build a compensation strategy into your pay structure, which guides how you determine and adjust salaries.
• Implement company-wide engagement surveys to measure employee morale, work-life balance, and potential flight risks.

Experience Seamless Payroll Management With Tarmack 

Whether you are expanding your team internationally or seeking top-notch talent, Tarmack offers comprehensive solutions. From efficient employer of record services to expert recruiting, Tarmack has got you covered. Get in touch with us to understand how we can assist you.