A salary is a form of compensation whereby an employee is paid a fixed amount at regular intervals no matter how many hours they work. Salary is normally expressed as an amount paid per year, but those payments are broken into regular pay periods. The most common pay periods for salaried employees are weekly, biweekly, bimonthly, or monthly.
For example, an employee may be offered $42,000 per year, to be paid at a rate of $3,500 per month. These payments will be the same no matter how many hours the employee works each month of the year.
Salary is part of an employee’s gross wages. Your payroll team will need to include additional compensation, such as bonuses, and deduct benefits and income taxes before reaching the employee’s take-home pay amount.
Salary Versus an Hourly Wage: Pros and Cons
Paying an employee by salary versus an hourly wage has its pros and cons for both employers and employees. Consider these factors when weighing which works better for your business.
- Simpler budgeting. A salary payment is constant throughout the year. This makes it easier for you to estimate how much a role will cost your business.
- Increased pay certainty. Just as set payments make business budgeting easier, employees also benefit from knowing what their pay will be throughout the year.
- Increased loyalty. When employees receive an annual salary, they may be more likely to make a long-term commitment to a company.
- Willingness to work more hours. According to a Bureau of Labor Statistics study, the average American full-time worker in 2021 worked 42.1 hours per week. The same study found 6% of study respondents worked 60 hours or more per week. All U.S. states require overtime pay for hourly workers who work more than 40 hours in a week.
- Higher benefits expectations. Many employers provide more benefits to their salaried employees than to hourly wage employees. Employees may prefer a salary if it means greater benefits. However, you may wish to limit your benefits costs by assigning the role to hourly wages instead.
- Some positions must track their hours by law. The Fair Labor Standards Act (FLSA) requires all non-exempt employees to be paid overtime. You can still pay an employee as salaried non-exempt, but the employee must still track their hours and be paid overtime. Otherwise, you risk violating the FLSA or state wage and hour laws.
- Compensation costs cannot be cut easily. In a pinch, you can ask an hourly employee not to report to work and save costs for the time they don’t work. Salaried employees are owed the same amount whether they work or not.
- Less flexibility in work hours. Hourly employees are more common in roles with shifts throughout the day, and sometimes on the weekends or at night. Employees seeking to balance other commitments, such as schooling or childcare, may prefer the flexibility of trading or dropping shifts.
Tips for Setting Salary Rates
Once you’ve decided that a role should be compensated on a salaried basis, you’ll need to determine what budget to allocate. Getting budgets right is critical to attracting and retaining the employees your business needs. These tips will help you identify the correct salary for each role in your business.
Evaluate your compensation budget
Start by considering the overall compensation budget and compensation strategy for your business. From there, you can allocate budgets to each department and then to individual roles. Keep in mind that your overall compensation budget will include a budget for salaries and employee benefits. On average, approximately 30% of an American employee’s total compensation comes from employer-paid benefits.
Benchmark salary data
Analyzing salary data from within your organization and across your industry is a valuable step in setting your budget. Salaries paid within your organization help to set expectations for what your business has historically paid for similar work. External data on what your competitors are paying or what is expected in your industry gives you insight into what candidates may expect to receive.
Conduct a job evaluation
A job evaluation sets out salary ranges by role. These evaluations seek to identify similar roles, remove pay inequities, and set guidelines for salary budgets across the organization. While several methods exist to complete a job evaluation, at a minimum you will need to evaluate current salaries and compare job descriptions to align the new salary with existing roles.
Determine your compensation strategy
Businesses use three main compensation strategies. For all three, you need to start with an understanding of the market rate for each role. From there, you must decide whether you want to meet that market rate, lag behind that market rate (paying lower), or lead the market rate (paying higher).
Companies that choose to lag the market risk losing out on talent who can achieve higher rates elsewhere. This strategy is most often used successfully by businesses who offer a higher-than-average benefits package or whose brand reputation attracts employees even with lower salaries.
Most companies attempt to meet the market to provide fair compensation without overly expanding their budget.
Companies that choose to lead the market may have an easier time attracting and retaining talent. This strategy is often employed by businesses that are still developing their brand reputation, or who are hiring for roles with low job security.
Quantify total rewards
It’s also important to think about the value of your other employee benefits. For instance, offering a generous healthcare benefit could help attract job candidates even if your pay rate isn’t top of the market.
A salary is a useful compensation method that provides the same payments across regular pay periods. Not all roles are appropriate for salary payments and may still be subject to overtime calculations. How you pay an employee will require you to look at each role individually before choosing the best method.
Remember that salary is just one part of your overall compensation strategy. By evaluating your budget, comparing market rates, and quantifying your total compensation offer, you will be well on your way to attracting and retaining quality employees.
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