Table of Contents
Easier full-service payroll for small businesses with Eddy
Table of Contents
What Is Base Pay?
Base pay is the minimum hourly wage or salary earned by an employee in exchange for their work. Base pay is usually referred to by the hour, pay period, or year, depending on the type of base pay the employee is earning. For example, salaries are usually referred to as an annual salary and wages by the hour.
Base Pay vs Total Compensation
Total compensation, sometimes called the compensation package, is everything of value that the employee will receive from their employer. Under the umbrella of compensation, there are two broad categories: monetary compensation and non-monetary compensation. Base pay is one kind of monetary compensation that an employee can earn in exchange for their work.
Factors Affecting Base Pay
How do you know how much to pay an employee? Although many answer this question by simply browsing websites like Indeed or Glassdoor, many factors affect an employee’s base pay.
1. Workload, Difficulty and Qualifications
Workload, difficulty and qualifications all impact base pay. These factors are often considered in job evaluations, which are carried out to help companies determine how much to pay employees.
Workload
Workload is calculated in terms of full-time equivalents, or FTEs. If a position is a full-time position that requires 40 hours of work a week, the workload is 1.0 FTE. If the position is a part-time job that requires 20 hours of work a week, then the workload is 0.5 FTE.
Difficulty
How difficult a job is also impacts base pay. Difficulty is measured by considering the duties, responsibilities and required qualifications of the position.
Qualifications
Qualifications include knowledge, skills, and abilities. Qualifications help you determine how difficult a position is and how valuable an employee is. A particular candidate or employee’s qualifications also impact base pay. All candidates should meet the minimum qualifications for a position, but they may also meet certain preferred qualifications.
For example, if a required qualification for a position is that the candidate holds a bachelor’s degree, then a preferred qualification might be that the candidate holds a master’s or terminal degree. In this case, a candidate with a master’s degree would likely receive a higher base pay than a candidate with a bachelor’s.
2. The Company’s Compensation Strategy
A company’s compensation strategy should be aligned with the company’s business strategy. Business strategy may include increasing market share, releasing a certain number of new products, or creating efficiencies in certain departments. Below are a few strategic factors to consider.
Lag, Lead or Meet Market Strategies
Your company may pay more than average, average or less than average salaries. These three strategies are called the lead the market, lag the market, and meet the market compensation strategies, respectively.
Other Forms of Compensation
Your company may provide great benefits and other forms of non-monetary compensation strategy. If this is the case, you’ll likely allocate less money towards base pay for your employees. Or, you may create strong incentive pay plans, which can also lower an employee’s base pay.
Because there are many kinds of compensation, there are also many strategies you might implement that will impact how much your employees earn in base pay.
3. Job Location
The cost of living in the city or region where your employees live and work impacts how much you allocate towards base pay. Base pay will go towards living costs like rent or mortgage, utilities, and food. Now that remote work is becoming more and more popular, however, job location may begin to have a different impact on pay.
4. Status of the Current Job Market
If there is a high demand for employees, base pay will likely be higher as companies compete for talent. On the other hand, if there is a large supply of employees and not as many jobs, companies are more likely to lower base pay (and overall compensation) because they don’t need to compete as much for the employees they want.
If you consider all four of these factors, your base pay budget will be successful. But once you have a strategy in place, how do you set the amount?
How to Know What Base Pay is Right for the Position
Here are a few steps you can follow to figure out what base pay is best:
Step 1: Understand the Value of Your Total Compensation Package
To calculate an employee’s base pay, you’ll want to know what the total compensation package for that employee will be. If your company provides large incentives and other kinds of compensation, you’ll want to consider this other compensation to get the “big picture” of what you’re paying your employee.
10% higher base pay is associated with a 1.5% increase in the likelihood an employee will stay
Step 2: Decide Whether to Pay Your Employee Hourly Wages or a Salary
Whether you pay your employees by the hour or on a salary will depend on a few factors, including your industry, the makeup of your workforce, and your business strategy.
For example, if you run a production facility or a factory, hourly wages will most likely be the best way to pay employees because hourly wages are flexible enough to match changes in demand. Factory positions are also typically FLSA non-exempt positions, which means that you will need to make sure you comply with overtime wage-and-hour laws.
Step 3: Consider Completing a Job Evaluation
A job evaluation can help you determine base pay by giving you a better understanding of your workforce, the position itself, and your compensation budget. There are many kinds of job evaluations, some of which require more effort and research than others.
Using Salary Surveys for Job Evaluations
One type of job evaluation is a market job evaluation, where you use market salary data collected from other comparable companies. This external data can help you determine what level of compensation is competitive.
Easier full-service payroll for small businesses
Reduce payroll errors, stay compliant with complicated laws, and meet deadlines with Eddy Payroll.
Questions You’ve Asked Us About Base Pay
Still have questions? Send them here – we promise we’ll answer them.
Natasha is a writer and former labor and employment attorney turned HR professional. Her experience as a litigator and HR trainer inspired her to begin writing about anti-discrimination laws in the workplace. As a writer at Eddy HR, she hopes to provide helpful information to both employees and HR professionals who need help navigating the vast world of human resources. When she’s not writing, you might find her cheering on the Green Bay Packers or hiking in the Northwoods of Wisconsin.
Want to contribute to our HR Encyclopedia?
Other Related Terms
Posts You Might Like
The Top 4 Reasons to Change Your Payroll Provider
When it comes to choosing a payroll provider, there is so much more than just running payroll. Unfortunately, many business owners rush to choose the provider without considering many alternatives. Learn more about the four reasons you should consider making a change.
6 Keys to Manage and Calculate Employee Bonuses
Administering and calculating employee bonuses effectively is a great way to motivate and reward employees. Here are 6 keys to doing it well.
