And what really is the difference?
You have a lot of decisions to make when you hire an employee. One of the biggest decisions is whether to structure the role as a salaried or hourly employee. How you pay an employee, in addition to how much, could determine whom you can attract to the role and how the employee impacts your business’s finances long-term.
Recently, while working with a client, I was talking with one of their employees. This employee was struggling to understand the difference between being paid a salary versus an hourly rate and what would be the best arrangement for them.
This isn't exactly a unique situation as the terms salary and wage are often used interchangeably. While they both describe an employee's pay, the way employers calculate and schedule that payment is different. Salary employees usually earn a specific amount over an entire year, whereas waged employees earn by the hour.
So what is the difference?
A wage is the employee remuneration based on the number of hours worked, multiplied by an hourly rate of pay. Any hours that are additional to the contracted hours must be paid for, and if there is an overtime rate written into the contract, at the higher rate specified. This is often to incentivise waged employees. It also means that an employees pay can fluctuate from week to week depending on the hours they work and provides them with an opportunity to earn more if they work more than their contracted hours. (However, if less than the minimum contracted hours are offered to the employee, they will still need to be topped up to the minimum guaranteed hours as specified in their contract).
Pros
✔ You can adjust personnel costs based on expected revenue by reducing worker hours (although this isn't always a easy process and minimum guaranteed hours are still reqduired)..
✔ Hourly workers can be casual employees who don't expect extra benefits.
✔ Employee contribution is easy to measure based on time present on the job.
Cons
✖ Minimum hours are still guaranteed.
✖ Costs fluctuate each pay period if the schedule varies.
✖ You may have to pay employees a higher wage for overtime work (depending on their employment agreement). In many instances this may be agreed to be paid at 1.5 times the worker’s regular hourly wage, known as “time and a half.”
✖ You are also required to track hourly workers’ hours, which can be difficult if their hours are not consistent or you aren’t using the correct digital tools, like a time and attendance system.
✖ You may not attract senior employees, who expect autonomy, stability and benefits.
A salary is the remuneration of an agreed annual amount, paid at agreed intervals (i.e., monthly or fortnightly). This arrangement is essentially outcome and task focused rather than being focused on working a set number of hours. In most cases, it is generally expected that employees who are paid a salary will work reasonable additional hours without being paid any overtime for the additional hours they work (provided their annual salary is not less than the minimum wage). A simple way of thinking about this concept is that the role is outcome and task focused rather than focused on working a set number hours.
Pros
✔ You'll simplify payroll and accounting by reducing fluctuations in pay.
✔ You can attract employees with a flexible schedule and stable pay.
✔ You won't pay overtime wages during periods that require extra work. This offers flexibility in hours, which can be a draw to workers and can benefit businesses in busy times when they need all hands on deck.
Cons
✖ You can't pay employees less during periods that require less work, even if they clock hours.
✖ Many salaried employee aren’t required to clock in and out each day, they can come in late or leave early without as much accountability (however, salaried workers are often high-level employees who understand the expectations for them and wouldn’t abuse the flexibility their salary affords.)
✖ You can't adjust your costs when revenue fluctuates, such as during slow seasons.
✖ You have to assess employee contribution based on intangibles, rather than time present.
How to determine which to offer:
There is no right or wrong answer when determining whether your employees should be salaried or hourly. The main difference is that you’ll offer salaried workers an annual pay that will be paid consistently throughout the year. Conversely, an hourly worker is paid only for the hours they work.
The good news is that it's not all one way; you can hire a mix of employees with some paid hourly and some paid salary. Decide which compensation type makes the most sense for each role based on the responsibilities and experience required.
The greatest benefit of paying employees a salary is attracting more senior workers, who tend to expect a stable paycheck and benefits. Having mostly or exclusively salaried workers also stabilises your payroll, so costs will remain the same regardless of how much or how little business you do.
The biggest benefit to hourly wages can be cost savings for employers. Employee compensation fluctuates with the amount of work they do, provided that they are working OVER the minimum guaranteed contracted hours, so you can adjust your costs based on revenue.
For each role, consider:
Seniority and level of experience
Amount of work time the role requires
How the employee’s contribution is measured, such as being present versus business results
How similar roles are compensated in the job market
The financial resources you have allocated for the outcomes you want from the role
For example, hourly wages are common in the service industry, where a worker’s on-site presence is a necessary contribution, the amount of work available fluctuates in line with the amount of revenue coming in and many workers are seeking less than full-time positions.
By contrast, in many roles classified as professional work, the employee’s contribution isn’t about time but about outcomes or deliverables. The outcomes are often scalable, so revenue doesn’t correlate with hours worked, and workers may be more likely to seek full-time roles with steady paychecks and benefits. For these roles you should also consider the amount and quality of work that high-level employees accomplish in the time they give your company, rather than just the number of hours they technically spend in their seat. Oftentimes, salaried employees are those that have demonstrated their value to the company and are personnel you want to keep long term.
Bottom Line
Whether you compensate a role with an hourly wage vs. a salary depends on a lot of factors in your business and the job market.
Consider the norms for the type of role you’re hiring and the industry you’re in.
Think about which structure makes fiscal sense based on your business’s cash flow and revenue.
Disclaimer This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.