Income Artist

What is Base Pay?

Author: Adam
Published:December 4, 2021
15 mins 2 secs
What is Base Pay?

Pay is the incentive given to employees of organizations. The term base pay refers to the minimum payment that an employee should earn from rendering services to the company.

Base pay is the most negligible salary paid to an employee from rendering service to the company or firm. Base pay means the fixed sum payable to an employee for a job done.

Base pay is not the full payment earned by an employee.

The compensation accrued to an employee transcends the Base pay as it does not include overtime pay, bonuses, insurance, or other benefits that are expected to be benefited by the employee for the job well done.

The going rate of payment can be earned hourly, weekly, monthly, or annually.

Base Pay vs. Total Gross Pay

Gross pay in this context refers to the full complement of compensation payable to an employee by completed jobs.

It is the inclusion of Overtime pay, bonuses, benefits, pension plan, insurance, etc., while Base pay, on the other hand, is the static salary made to an employee after the completion of a task.

The base pay is different from other elements of a company’s payment plan in that it tends to vary from year to year depending on the improvement in the company’s earning capabilities which runs as a result of factors such as improved corporate profitability, the performance of division in which the employee operates, evaluation of employee performance, etc. especially when it comes to bonuses and unique benefits enjoyed by the employee.

Good pay tends to improve the level of delivery and commitment displayed by the employee as he understands that he is capable of earning more if his performance level improved; he would then tend to deliver his optimum.

Break Down of Gross Pay 

Gross Pay
  • Base Pay
  • Overtime
  • Bonuses
  • Insurance Benefits 
  • Retirement Plans
  • Base pay: This is the minimum payment that an individual is entitled to, which is included in their offer letter for the position. Therefore, This can be improved upon with good negotiation by the employee
  • Overtime pay: it is not unusual for some employees to work beyond the hours stated in their offer letter, which makes them entitled to extra payments for the spare time the employee spent working on a firm, e.g., a factory worker might be required to work extra hours too merry a production targets. These payments are not specified in the company’s offer and, as such varies unless a system where the company uses an hourly rate of pay making the price easier to calculate.
  • Bonuses: This payment of compensation to employees tends to improve their morale as it is an acknowledgment of a job well done. Dividends tend to vary over time based on the company’s performance and profitability. Some companies make bonus payments to their employees at the turn of each year when financial statements are released, and the estimated profit has been declared. Some bonus payments can also be made due to the excellent performance; this fosters hard work and commitment in the organization.
  • Insurance Benefits: Every employee wants to feel that the organization in which they operate is concerned about their well-being, and this is evidenced in the insurance plans that the company has arranged for members of its staff. These benefits could range from health insurance, car insurance, etc., and they ensure that the employee is aware that his general well-being matters to the company.
  • Retirement benefits: An employee is not expected to be around forever as age would eventually set in, and he would have to retire; most businesses have a pension plan in place for the members of its staff as this would help galvanize the team to commit to the organization knowing fully well that their future is secured. 

Total Gross Pay = Base Pay + Overtime Pay + Bonuses + Insurance + Benefits + retirement benefits + others

Benefits of A Good Base Pay 

Base Pay 

Human capital is one the most important contributors to the success of any organization, therefore.

There is an excellent reason to ensure that they are well paid to ensure that the best results are obtained from them; below are the benefits of a reasonable pay rate. 

  • Improved commitment to the job: High pay serves as an incentive to employees who would then commit to doing the job right. High income would guarantee the employee’s desire to continue working for the firm and seeing it as their own, making entrepreneurs out of them.
  • Ability to attract the best candidate for the job: To get the best candidate, the company needs to put up the best possible remuneration for the position. Individuals with a high IQ and a high sense of worth would most likely be enticed and retained by companies that offer a good pay for the perceived benefit to be derived from the employment of such candidates.
  • Motivation to work harder: Nothing motivates staff members like the incentives. Employees who are comfortable with their income level are more tipped to work harder to get the requisite results. When an employee feels well compensated for his efforts, he would be more willing to commit his very best to the organization’s success.
  • The attraction of more competent and productive workers: High pay would ensure that you get the best hands for the job. An increased base rate tends to increase the productivity of the employee who would put in their beat to achieve the desired result for the firm. Having competent staff would also enhance the customer’s belief in the organization’s ability to provide for its needs and meet its demands.
  • Reduction in rate of turnover and costs of training new staff: The rate of attrition in most firms could be a function of different factors, which could be qualitative; in terms of healthy working space, room for self-development, sense of value amidst others. Or could be Quantitative in terms of pay, companies who pay less are most likely to experience high attrition rate as employees would be seeking alternative due to current salary base not being sufficient to meet their everyday needs. Therefore, to keep staff members in an organization, there is a need to ensure pay is proportional to the effort. Another reason for the lack of a firm to ensure that it pays well to retain good hands is the cost of training new staff. Most organizations spend hugely on training to ensure that they get the beat out of their employees, which could all go to waste if the employee has to resign for a better job leading to the news to train new staff and incurring more expenditure.
  • Enhance quality and customer service: Good base rates make for happy employees, and happy employees make for satisfied customers; employees are most likely to treat customers better when they are happy at their job. Leasing to the ripple effect of good referrals for the goods and services the organization has for sale and, by extension, improving the company’s revenue as good customer service is set to guarantee business continuity.
  • Reduction in disciplinary problems and recurrent absenteeism: Poor pay makes for grumpy staff. Employees have been known to become reticent when they are unable to cater to their basic needs, and this could lead to a poor attitude to work. Poor pay could lead, or disciplinary problems as the Human Resources team would have to deal more with poor work attitude such as absenteeism
  • Reduction in the staff monitoring: Staff who are well paid tend to self-regulate with little or no supervision, therefore, freeing up their supervisor to take on additional tasks that would guarantee organizational success.
  • Increased job satisfaction: The level of satisfaction employees are likely to derive from their job could arise from the sense of value, sense of responsibility amidst other factors. But employees who are paid more are most likely to feel more satisfied at their job.
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Disadvantages of Poor Base Pay 

  • Low morale: Poor pay is guaranteed to reduce the morale of employees towards their jobs as it would lead to a reduced commitment to the job, breeding disgruntled employees who would not put in their best to achieve the objective of the company in the long run.
  • Anger: Reduced pay would lead to irritation at the job, which would lead to reduced desire to carry out their duties to the maximum result. Lack of proper employee welfare could result in anger transferred to the customers, leading to poor customer service and making the business suffer.
  • Stress: This arises when employees are not paid a wage commiserate to their perceived effort resulting in them feeling underworked and underpaid, leading to pressure.
  • Unemployment: An organization that employs disgruntled staff would result in low profitability as staff would not be able to commit the right energy to the work, which would result in lower revenues for the company and, by extension, would lead to laying off f staff as the bottom line of the company grows thinner.
  • Reduced productivity: A company with aggrieved staff and underpaid staff is bound to experience a dip in production levels and result in low performance and low profit.

High Base Pay vs. Low Base Pay

High Base Pay vs. Low Base Pay

Base pay is the fixed income that an employee earns from doing a job, which may vary from organization to organization.

However, because base pay is not necessarily the total gross amount accruing to an employee, it is possible for some organizations to less base pay while increasing the other income elements that make up gross income.

A low base pay might ensure that the employee enjoys tax incentives as bonuses and other benefits are not tax-deductible income, meaning that there is room for tax savings; therefore, a low base rate might translate to low gross income and vice versa.

Example

An employee who gets an annual salary of $25,000 plus a bonus of $10,000, insurance, and other benefits up to $8,000. In a case like this, the base pay of the employee is $25,000.

It is the least amount accruing to an employee before the tax charge that the employee is to release based on an employment contract.

However, the employee’s gross pay is the total sum of all the employee pay for the year ais $45,000 after factoring in the other items.

When faced with a choice of choosing a higher base pay and lower percentage bonus and benefits (variable pay) versus a lower base pay and higher percentage bonus and benefits (variable pay), it is essential to look at the expected values.

In a situation where there are two different remuneration contracts, with the first contract paying a base pay of $50,000 without bonus nor benefits of any kind and a second contract with a base pay of $30,000, but the probability of earning an additional bonus of $30,000 is 50%.

This means that the values of the contracts of both scenarios are $50,000 and $45,000, respectively.

The fact that the first contract doesn’t yield bonus pay makes it any less viable than the second due to the probability of earning the $30000 not being 100% guaranteed.

If the possibility were to be in the 80% range, the second contract would then yield an improved sum of $54,000, making it more viable than the first contract by $4,000.

Therefore when selecting an arrangement of choice, it is essential to consider its feasibility and the level of risk aversion that you have as the risk level would help to guide your decision about earning a secured fixed sum of income or a salary that has variable elements to its earning.

This can lead to not getting the required benefit or getting more than you ever bargained.

Factors Affecting Base Pay

  • Level of education and skillset: The offer of payment for an employee service is often determined by the applicant’s level of experience; therefore, base rates vary significantly and depend on the market situation when seeking employment. An employee with a high level of technical ability and whose functionality is based on a career that requires specified and specialized knowledge and skill set would naturally guarantee a higher base rate than jobs that require little to no required skill set, such as administrative and manual labor jobs. By extension. Companies tend to offer good benefits to individuals with high career attainment than for individuals of which high educational qualifications are required. Jobs such as Doctors. Lawyers and other jobs that require professional certifications would command a higher base rate due to the high level of technical expertise required.
  • The geographical location of supply and demand in the labor market: The location of market forces of labor (demand and supply) are two critical determinants of the dynamics of the need for labor. The area of demand and supply plays a role in the determination of the base rate to be offered by a company. It is expected that a company where its activities are situated within a location where the cost of living is high with attendant high inflation rate should naturally commit more funds to the Betterment of the well-being of its staff than locations where there is a lower cost of living and low inflation rate.  
  • Furthermore, the labor market condition at a particular time could also significantly influence the base rate level for the industry. There is always a reduced supply of labor for the professional fields as the requirement for labor to become specialized enough to perform on the job is not present, therefore leading to high barriers to entry. However, this is not the same for jobs that do not require specialized skills of any kind.
  • Availability of labor: in a market structure where there is a Monopsony of services for the demand of work, where there is high availability of labor, there would arise a situation where the company with this power would be able to offer a low base rate to the employees because it is aware that as the sole employee of labor, there is a bad market situation leaving labor with no choice. However, in a market where the demand for labor outstrips supply, such as in the medical field; a low number of doctors, labor always can charge a high base rate that would be commiserating to its efforts and due to the knowledge that the company isn’t faced with many options from which to select.
  • Government policies: The system of government also plays a significant role in determining the base rate that would be offered to labor. A capitalist economy would naturally be inclined to pay lower base rates which could also vary drastically due to its zeal to make an abnormal profit. At the same time, a socialist economy would pay a rate that would ensure that almost every employee is on a level playing field. To ensure that labor isn’t being exploited, some governments set a minimum wage level that should be offered to employees to ensure that shark capitalists do not mistreat them.
  • Negotiation power of the employee: Depending on the level of experience and the skill set of an employee, he might be able to control the base rate and dictate specific rates and benefits he expects to accrue to him. In a saturated market, a prospective employee might be unable to achieve this. Still, in a call with a shortage of personnel with his particular skill set, he might be able to pull this off successfully. Therefore, negotiation could also play a significant role in determining the base pay offered to an employee by an entity.
  • Applicant’s profile: When it comes to getting high pay, lots of factors play significant roles in achieving this aside from the market factors discussed earlier, so, therefore, an applicant with a near-perfect resume would be perfectly poised to ensure secure a high base pay; The information relevant to the prospective employer includes, but not limited to: years of experience, education, skill set, good referrals, and an excellent performance review, etc. all of this and more qualitative factors would poise the applicant to secure a higher base rate than counterparts. The number of years spent on education, the work experience acquired over the years have been known to be directly impactful on the base pay that companies are willing to pay their employees. More so, an applicant who has a record of good performance evaluations and excellent referrals is most likely to secure a higher base salary when teed against an applicant with poor assessment, which would result in little room to ensure a good bargain.
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Conclusion

The importance of good pay to employees of any organization cannot be overemphasized; therefore, any organization that intends to continue operation to the nearest foreseeable future must understand the import of this and ensure that adequate care is made of her human capital.

This implies that the contract terms should reflect favorable payment terms that would attract the best talent to the organization.

The base pay, which is the minimum payment that an employee should earn from rendering services to the company, should therefore be given the utmost attention by the company. Being the most negligible salary that an employee earns from getting the job done.

Many notable names have argued in favor of the importance of a reasonable rate affecting the desire to work and participate in the development of an organization.

The going rate for payment can be earned hourly, weekly, monthly, or annually; however way it is; it should be sufficient to enable the employee to feel appreciated for the work done and lead to higher commitment, increase productivity and development of a sense of ownership which would ultimately translate to an organization where the best hands are employed with a limited rate of attrition and improved belief in the capacity of the entity to protect their interests; and to quote

Alfred Marshall, the renowned economist who said that an entity that exists in a capitalist economy who seek to better the lives of an employee rather than seek the abnormal profit that comes with reduced pay is bound to reap the long term benefit of excellent human capital management.