Base salary: what is it, how to calculate, what to offer

A base salary, also known as base pay, is the initial compensation amount or wage employers agree to pay an employee at the start of a job before taxes and other deductions. Base salary does not include benefits or additional earning opportunities.

How does a base salary work?

Employers determine base salary on a variety of factors including the market landscape, a candidate’s education level, the availability of talent to perform a job, as well as predetermined company pay ranges assessed in pay bands or salary ranges.

For salaried employees, the base salary is agreed upon in the hiring contract in addition to the cadence at which payment is distributed. For example, if an employee makes a $60,000 base salary, and the payment period is monthly, their salary payment, or gross pay, will come out to $5,000 a month. Gross pay is the amount of your base salary, distributed within a payment period and calculated before taxes and other deductions. After taxes and deductions, that amount is then called the net pay .

It’s important to recognize that base pay does not make up the entire compensation package. However, benefits are often key appeals for joining a company or organization and should be taken into consideration alongside base pay. Company benefit plans or compensation packages may entail one or all of the following:

  • Health, dental or vision insurance coverage
  • Vacation time and paid time off
  • Stock ownership plans
  • Retirement plans
  • Commission, bonuses, or merit increases

Who receives a base salary (and who doesn’t)?

While some employees receive a base salary distributed across payment periods, other employees may receive compensation based on an hourly wage. In an effort to protect workers’ rights and assure adequate compensation across compensation types, the Fair Labor Standards Act (FLSA) requires that “most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek,” though some employees are exempt from these standards.

Exempt employees

With some exceptions, salaried employees are typically considered exempt from minimum wage and overtime requirements. Under the FLSA, the Department of Labor recently defined an exempt employee as “any employee employed in a bona fide executive, administrative, or professional capacity” who is therefore exempt from minimum wage and overtime pay requirements. Three tests determined by the Department of Labor must be met to qualify someone as exempt from overtime requirements:

  1. The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in quality or quantity of work performed (the “salary basis test”).
  2. Effective January 1, 2020, the amount of the salary paid must meet a minimum specified amount of $684 per week (the “salary level” test).
  3. The employee’s job duties must meet certain criteria – primarily involving executive, administrative, or professional duties as defined by the regulations (the “duties” test).

There are several exceptions to this classification per state and job title. For example, in California, salaried employees earning less than $54,080 must be compensated at a higher hourly rate for any hours worked over 40 hours in a week, even though they are a salaried employee.

Nonexempt employees

Nonexempt employees, conversely, are subject to minimum wage requirements and compensation for overtime hours and are thus responsible for tracking hours worked. Many hourly employees are considered non-exempt, with a few notable exceptions. For example, while teachers, lawyers, and employees in computer-related fields may be paid hourly, they are still considered exempt under the professional exemption. Further, those who are considered “high earners” making more than $107,432 and performing executive, administrative, or professional duties are also exempt. The FLSA provides a full list of how to determine if your employee is exempt and nonexempt.

How to calculate base salary (examples)

As a reminder, base pay does not include additional income such as bonuses. To determine your base pay, you can refer to your pay stubs or W-2 from the previous year, if relevant to your current position. These documents will distinguish your regular payment from any additional compensation.

If using the number on your paystub, leave additional compensation aside and follow this simple formula:

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

Example of how to calculate hourly base pay

To calculate your projected base pay as an hourly employee, follow this formula:

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

For example, Trevor works 20 hours a week every week, he’s projected to work 1,040 hours in a year. If his hourly wage is $36.50 an hour, his projected base pay is $37,960.

Realistically speaking, people take vacation, federal holidays, and sick days, which will alter the actual amount of hours worked in a year. And, depending on the employer’s policies or a worker’s status as an employee or independent contractor, some workers may not receive payment for days taken off.

To calculate actual base pay with this in mind, it’s best to look at your W-2 and follow this formula:

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

Does base pay ever change? As mentioned, base pay is not affected by additional pay amounts or benefits throughout the time at an organization, however there are a few events that will change the base pay amounts. Cost of living increases, often provided at the discretion of the employer, as well as market standard increases will result in a higher base pay amount. Decreases in base pay may come from a job demotion and global economic downturns as seen in the 2020 pandemic year. Merit increases may also affect base pay if they are paid as incremental additions to your gross pay, but not if it is a lump sum payment.

Know the difference: base pay vs. gross pay

We briefly touched on gross pay above. Gross pay (or gross salary) and base pay are both initial payment amounts a company or organization agrees to pay an employee before any required or voluntary deductions take effect, but there are important differences in when and how the terms are used.

Read more: What is gross pay?

Gross pay is the distributed amount of your base pay, based on the company’s payment period. In short, gross pay is the number listed at the top of each payroll statement, while base pay is the number listed on a hiring contract.

For example, if an employer says, “I’ll pay you $120,00 a year on a bi-weekly payment cycle, with a $2,000 end-of-year bonus,” the employer has agreed to pay a base pay of $120,000, a gross pay of $4,800 twice a month, and a separate and additional $2,000 bonus benefit.

How to keep base salaries competitive

Fair and competitive compensation is becoming an increasingly notable aspect of a company’s success as past and current employees rank their organizations online based on this aspect alone, in addition to company culture, growth opportunities, and attention diversity and representation.

As mentioned, companies will determine their salary offers based on available talent, industry, location, and a candidate’s experience and education levels. To assure your salary packages are meeting both employee and market standards, here are a few recommendations:

  • Conduct bi-annual market research on salary changes in your industry and location(s)
  • Integrate a compensation strategy into your pay structure
  • Facilitate a company-wide engagement survey to assess employee morale, work-life balance, and possible flight risks

What base salary to offer potential candidates?

Outside of requirements by the Department of Labor, there is no one “right” salary to offer potential candidates. However, there are certain parameters to fit within that will help companies stay competitive, fair, and attractive to new talent.

At Payscale, we offer compensation software and extensive resources for HR professionals looking to assure their company pay competitively within the market range. Further, the U.S. Bureau of Labor Statistics (BLS) offers wage and salary data for specific positions.