Definition of Base Salary
When creating an employee’s overall compensation package, their base salary will make up a significant portion of their take-home pay. It’s important to understand the various elements that make up total compensation — one significant part being base salary.
An employee’s base salary is the amount of money they are paid by an employer in return for their services. It does not include anything outside their annual rate.
Within your small business, you may have both salaried and hourly workers. Both types of employees would be entitled to their base pay. Typically, a base salary is expressed as an annualized value, which is broken down into biweekly or semi-monthly payments each month.
This article will discuss everything you need to know about a base salary.
Base salary: A basic definition
An employee’s base wage, or salary, is the amount of money that an employee and employer agree upon for the employee’s pay rate. It is the minimum amount that the employer will pay the employee at a specified frequency each month for services rendered.
TYPICALLY, A BASE SALARY IS EXPRESSED AS AN ANNUALIZED VALUE, WHICH IS BROKEN DOWN INTO BIWEEKLY OR SEMI-MONTHLY PAYMENTS EACH MONTH.
This rate excludes non-base salary-related compensation like:
Anything outside the employee’s annual/hourly rate is not considered base pay.
Employees with an annualized base pay salary are typically not entitled to overtime unless they earn less than $35,568 a year.
Base compensation is usually negotiable during the recruitment process. Employees with highly specialized and competitive skills may demand a higher base pay than those just starting their careers in less technical roles.
Why is base salary important to HR leaders?
Base pay is an integral part of your overall employee compensation strategy. Here are 4 reasons small businesses and HR leaders need to have consistency and understanding around the base pay levels in their organizations:
Creating salary bands or ranges
As an HR leader, you’ll often use base compensation to create salary bands or ranges for the different roles in your company. This will help by:
- Keeping consistency regarding what your employees get paid
- Maintaining pay transparency
- Developing pay practices based on the employee’s seniority
Without a base compensation strategy, you can’t create salary bands or ranges.
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Benchmarking your base salary against industry standards
Base salaries also help you benchmark your roles against other companies in the industry. Knowing what you pay as a base salary will help you compare your pay practice to what the market bears.
Suppose you’re trying to hire for a competitive role. In that case, you’ll want to ensure that the base salary you’re offering is near what the market in your industry is paying. Otherwise, you’ll have difficulty attracting and retaining your employees.
HAVING A CLEAR BASE SALARY FOR YOUR EMPLOYEES HELPS YOU PLAN AND MANAGE YOUR BUDGET AND HEADCOUNT.
Planning your budget
Having a clear base compensation amount for your employees helps you plan and manage your budget and headcount. Without having this number in mind, you’ll struggle to meet your budget and may end up with headcount problems.
For example, if you head into a hiring spree without a clear base pay in mind for each of your new hires, you may realize halfway through the recruitment process that you can’t actually afford what you’re offering.
Creating compensation packages
Understanding what you can offer employees as a base pay will help dictate what other benefits you want to include in your overall compensation package. For example, what can you offer in terms of benefits and commission if you can’t afford a strong base wage?
Conversely, if your base wage is high, you may not need to include high commissions. Other considerations in your overall compensation strategy should consist of the following:
- Health benefits
- Education benefits
- Bonus payouts
What is the history of the base salary?
Prior to the 20th century, benefits like health insurance, paid vacation time, and retirement funds were uncommon and considered to be “fringe benefits.” Employees only received compensation based on their services. After the great depression, these practices began to change, and compensation packages became more sophisticated.
The creation of labor unions, the influence of social security legislations, and the introduction of the Fair Labor Standards Act have all influenced the pay structure in America (for the better!)
Other terms of relevance that can assist you
Beyond your employees’ base pay, you should have a good understanding of the different kinds of bonuses you can offer as part of an overall compensation package.
You should also get familiar with commissions and identify which roles in your organization should have variable pay attached to their base salary.
Finally, you’ll want to become familiar with payroll and payroll processing.
Base salary is one part of your total compensation strategy
Compensation strategies continue to evolve as businesses compete to retain and attract top talent. Make sure you’re continuously evaluating your base salaries and staying competitive in today’s market