What Does Base Salary Mean and How Is It Calculated?
Base salary is the foundation of a worker's overall salary and is typically presented as a yearly, monthly, or hourly rate. Understanding how base pay is established requires taking into account criteria such as industry standards, job duties, experience, and geography.
To understand what does base salary mean and its difference among other types of salary, including its calculation and examples, this guide discusses the relevant information.
What does base salary mean?
The base salary, which is also referred to as basic salary or base pay, is the predetermined amount that an employee is required to receive for doing their job, as determined during the hiring process.
Frequently, it is denoted as an employee’s annual salary, monthly income, or hourly wage. In essence, it is the sum of income that an employee receives prior to the inclusion of other rewards or deductions to their salary.
In general, companies can establish a compensation strategy to set up their employee’s base salary, and these can be determined by factors such as:
Geographical location,
industry standards,
level of experience, and
the tasks associated with the job.
It is important to achieve a balance between internal equity and external competitiveness. With the use of Compensation Software’s salary structure feature, you can establish an effective compensation strategy for your company.
Who receives base salary?
Some employees are compensated with a yearly wage split over pay periods, while others receive an hourly income. Salaried employees receive a predetermined base salary each pay period, irrespective of the number of hours worked. On the contrary, hourly employees are supposed to get paid for every hour worked.
At the end of every pay period, the employer calculates the compensation for hourly employees by multiplying the total hours worked by the employee's hourly wage. Certain hours are compensated at a higher wage if they meet the criteria for overtime or holiday compensation. The hours worked could differ, which leads to hourly employees not receiving consistent income each pay period.
Base salary vs gross salary vs total salary
Recognizing the differences between base salary, gross salary, and total compensation is important for both companies and employees in managing salary expectations and financial strategy.
Base salary
This is the predetermined compensation that an employee earns as compensation for their work, excluding any supplementary earnings or benefits. It is the cornerstone of a worker's salary and is not affected by variable pay, incentives, or overtime.
Base pay constitutes the minimum wage a worker will earn and comprises the largest portion of their overall income. Numerous benefits, including medical insurance, pension, and compensated time off, utilize basic salary as a reference for computation.
Gross salary
Gross pay constitutes the entirety of the monetary compensation an employer pays to an employee. It is the total earnings of an employee before all deductions, including taxes, insurance payments, and retirement contributions, are made. Along with an employee's base income or hourly compensation, it includes components such as bonuses, overtime pay, commissions, paid time-off, and reimbursements.
Total salary
The total salary, also called the total compensation package, includes the gross pay and the value of all supplementary benefits offered by the employer. Employee’s compensation package includes all forms of payment and incentives that an employee obtains from their company. This includes both financial and non-financial advantages. These benefits may include:
Medical insurance
Pension
Additional bonuses
Employ management software to provide a comprehensive total compensation statement for your current and potential employees, offering a consolidated overview of their salary. This is a crucial component of any comprehensive HR and recruiting strategy for attracting and keeping skilled workers.
How is base salary calculated?
Employers set base pay based on experience, credentials, market value, job duties, and full-time hours. In calculating the base salary, it will depend on the classification of the employee.
The formula to calculate salaried employees: Base salary per year = (regular salary amount per pay period) x (number of pay periods in a year)
Here’s how to calculate base salary for salaried employees per year:
Find out how many pay periods there are in a year. For example, the company pays their employees biweekly, therefore there are 26 pay periods, or on a monthly basis there are 12 pay periods.
Determine the regular pay amount, not including the additional compensation or other financial benefits. For example, an employee receives a total of $3,000 base pay plus $20 per commission, only include $3,000 in the computation.
Multiply the regular pay amount, excluding the additional incentives like commission, bonuses etc., to the number of pay periods there are in a year. For example, an employee is paid $3,000 each pay period, excluding additional incentives. If their company has 26 pay periods, multiply by $3,000. So, $3,000 x 26 = $78,000 base salary per year.
Here’s how to calculate base salary for hourly employees per year:
Determine the total number of hours worked in a week. For example, the employee works 4 hours a day. There is a total of 5 working days, therefore, 4 hours x 5 working days = 20 hours worked in a week.
Find out how many weeks there are in a year that the employee worked. For example, if the employee worked in the same company for the whole year every day, then there is a total of 52 weeks per year.
Multiply all of these to the hourly wage of the employee. For example, if the employee earns $20 per hour. Then, (20 hours worked per week) x (52 weeks) x ($20 per hour) = $20,800 base salary per year.
The formula to calculate: Base salary per year = (number of hours worked in a week) x (number of weeks in a year) x (hourly wage)
Here are some other sample calculations on how to calculate base salary per year:
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Example 1: Salaried employees
An employee receives a total compensation of $10,050 in a company. With $10,000 as the regular pay and $50 for commission. The company pays their employees biweekly, therefore there are 26 pay periods.
To find the annual base pay use the formula: Base salary per year = (regular salary amount per pay period) x (number of pay periods in a year)
Calculation: ($10,000) x (26 pay periods) = $260,000 base salary per year.
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Example 2: Hourly employees
A company pays their employees per hour $40. An employee works four hours per day with five working days a week for the whole year. Therefore, 20 hours worked per week.
Use the formula to calculate: Base salary per year = (number of hours worked in a week) x (number of weeks in a year) x (hourly wage)
Calculation: (20 hours worked in a week) x (52 weeks) x ($40) = $41,600 base salary per year
FAQs
Here are some common questions about base salary:
Is base salary net or gross?
Base salary is distinct but part of both gross and net salary. Base salary is fixed pay excluding bonuses and incentives. Gross salary includes base pay plus bonuses, overtime, and commissions before deductions, while net salary is the final take-home pay after taxes and deductions.
How important is the base salary?
Base salary provides stable and predictable compensation for employees. It serves as the foundation for bonuses, benefits, and other earnings.
Providing fair and competitive compensation helps companies stand out in the job market and attract highly skilled professionals. It ensures that salary offerings align with industry standards, making the organization more appealing to top talent.
What does it mean by base salary?
As mentioned above, base salary, also called basic salary or base wages, is the fixed amount an employee earns as agreed upon during hiring. It is typically expressed as an annual salary, monthly income, or hourly wage. This amount is received before adding bonuses or applying deductions.
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