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.

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.

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.

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 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.

How difficult a job is also impacts base pay. Difficulty is measured by considering the duties, responsibilities and required qualifications of the position.

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.

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.

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.

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.

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.

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?

Here are a few steps you can follow to figure out what base pay is best:

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.

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.

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.

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.