When it comes to employee pay, is salary better or is hourly better? We’ll provide you with the five key differences, as well as tips for how to pay your employees.
There are several factors to keep in mind as you consider paying your employees an hourly rate or a salary. With key differences between the two, you must compare and contrast to help you make the most informed decision possible for you and your employees. Keep reading to learn more about the five key differences between hourly and salary employee compensation.
A fixed income means that when you hire an employee, they know how much money they will make for the year.
While it can be beneficial for employees to know how much money they will make each month, there are other parameters they will consider. They might have to work more than the typical forty hours per week on a salary schedule without receiving overtime pay. We’ll talk more about overtime pay later in this article.
When prospective employees search for jobs, they will likely be interested in the gross pay, which means the amount they will earn as their annual salary before taxes and other deductions are taken out. A benefit to having a fixed income is that employees can determine how much they will make per year based on the listed gross pay.
When it comes to hourly wages, it is not always as easy to determine yearly income. If hourly workers want know how much they will make, they can multiply their hourly rate by the number of hours worked.
It is not always simple for hourly employees to calculate their yearly earnings because the number of hours worked may vary. This is why many people find peace of mind in salary pay.
If you choose to pay your employees hourly, you are not necessarily required to offer benefits. However, some states require you to provide certain benefits, such as worker’s compensation. As a small business owner, make sure you do your research on benefits to stay compliant.
During the job search, pay and benefits packages are two of the most critical aspects for an employee. When it comes to hourly versus salary, if you are not offering benefits for hourly employees, that might be a deterrent.
Keep this in mind when building your business plan to determine what is best for you and your future employees.
One of the most significant benefits of salary pay is flexibility. Most salary contracts include sick time, paid time off (PTO), and major holidays. Even though employees don’t work during those situations, they get paid the same amount per year.
In contrast, when employees work an hourly position, they are only paid for the time they work. This means that if an hourly employee is sick or takes a vacation, they don’t get compensated for that time like a salaried employee.
Let’s get into the details of paid time off. As a prospective employee, paid time off can be a big motivator when comparing jobs.
Nowadays, larger companies boast “unlimited PTO,” which means that employees can take as many days off as they want, as long as it is within reason and they complete their work.
That might not be feasible for a small business, but offering salaried workers some type of PTO policy is still important. To compete with larger businesses, you need to incorporate PTO because:
Even though salary jobs can offer more stability because of the consistency of paychecks, another aspect to consider is overtime.
Overtime pay is compensation for working more than set hours. According to the Fair Labor Standards Act (FLSA), which the U.S. Department of Labor Statistics wrote, overtime kicks in when you need an employee to work more than the standard 40-hour workweek.
A standard workweek is considered forty hours per week, so overtime is the extra hours an employee spends on the job. There is no limit on how many additional hours per week an employee can work; however, keep in mind that the federal law requires you to compensate your employees for time and a half of their regular pay rate.
There is an exception, however, to salaried employees receiving overtime pay. There are two types of salaried employees:
Exempt employees do not qualify for overtime pay, but non-exempt employees do. This means that if you hire an employee on a non-exempt salary, you are required to pay them overtime in addition to their salary.
Here are a few things to remember when figuring out budgets and acquiring employees.
There are several factors to examine when it comes to paying your employees. Creating a projected budget for paying your employees should be imperative as you build your business plan.
When writing a job description, you’ll want to create one that looks attractive to future employees. However, when writing, you also need to be sure that the description is accurate.
Employees value transparency, and how you treat them during the hiring process will indicate how you will treat them during employment. The job descriptions you post should include:
A job title should be a clear indicator of what the employee’s position will be. When creating job titles, you do not need to reinvent the wheel. There are plenty of opportunities to be creative with your business, but in this case, generic is better.
Remember, when employees use job hiring sites, they usually type their desired position in a search bar. If you have a job title listing that is out of the ordinary, your business will not pop up immediately. Choose a job title that is specific, concise, and common to ensure more visibility.
Once the job seeker finds the job title, they will check for an overview of the position. In this section, it is appropriate to include a little bit about your business so the job seeker knows what to expect. You can also add your mission statement so the job seeker gets a glimpse of your company’s core values.
In addition, you should list some characteristics of the type of candidate you are looking for, what the key responsibilities are, and a bit about the day-to-day aspects of the job.
Miscellaneous Job Information
People appreciate as much information as possible when looking at job openings. Other details you can list include:
Writing accurate job descriptions and being transparent through your listing is a strong strategy when looking to attract new employees.
Whether hourly or salary, competitive wages are essential to gaining and retaining employees. When you are first starting your business, this is an expense you will need to consider heavily. If you are open to casting a wider net, a solution is posting a pay range instead of a hard and fast number.
Back in the day, employers had to rely on word-of-mouth to determine what others were paying their employees. But in our digital age, internet tools can help you determine what a fair wage for your employees would be.
This is a tool offered by the United States Bureau of Labor Statistics. On this site, you can enter information like pay, degree requirements, level of training, growth rate, and industry.
After choosing the information you need, you can search for similar jobs in your industry to see statistics, including median pay by the year.
This software allows you to input information, like the type of job you are looking to compensate for.
However, because this is software, it does much more than that. Payscale provides compensation projections but will also adapt to the needs of your business once you have input your information. It is a comprehensive software that grows with your business and provides every budgeting insight you might need.
Keep in mind this is not a free service, but if you want to remain as accurate as possible with your business, this could be a great solution.
In addition to compensation amount, comparing the pay schedules of similar jobs is also a good idea. There are three popular types of payment schedules, so let’s take a look at each:
This type of pay is most common for hourly employees. This means that you will pay your employees at the end of each week based on the hours they’ve worked. As an employee, it can be encouraging to be paid for your weekly work. As an employer, paying weekly makes it easier to calculate overtime hours.
You pay an employee every two weeks or twice a month. Because this is probably the most common type of pay schedule across all professions, employees might be accustomed to this schedule. Many people feel this pay period is routine and that it offers a sense of regularity.
Just as it sounds, employees get paid once a month. This is an efficient way to conduct business as an employer because you only have to process payroll twelve times a year. This makes yearly deductions a relatively streamlined procedure.
On the other hand, most employees report monthly payroll to be their least favorite pay schedule. For example, being paid once a month makes it challenging to manage bills that might be on a different schedule than employee compensation.
Paying your employees is of the utmost importance. However, you do need to make sure you can afford to pay them while your business remains successful.
Because you are a small business owner, you will not likely have an HR department working for you. This means that you need to determine employee pay yourself.
While this might seem daunting, we’ve got your back. Here are the key aspects to consider when choosing employee wages:
This number varies by state, so if you are going to incorporate minimum wage as a payment option, you need to make sure you are staying compliant with state law. The federal minimum wage is $7.25 per hour; however, virtually every state has a higher requirement.
When creating your small business, you likely projected a business budget. We recommend implementing employee compensation as a fixed cost on your budget.
You need to determine the total amount you can allocate to employee compensation. This is a more sound strategy than breaking down employee pay one by one. The cost of your employee pay will vary significantly based on the industry; however, keep in mind that the average cost will range between 40% and 80% of your business’s revenue.
Part-Time and Full-Time
Another circumstance to consider is maintaining part-time and full-time employees. Often the life-breath of small businesses is part-time employees.
The Bureau of Labor Statistics defines a part-time employee as anyone who works for less than thirty-five hours per week. Anyone who works more than that is considered full-time.
Whether you plan on hiring part-time employees, full-time employees, or a combination, you should still have a business budget that projects the total amount of money you will designate for employee pay.
As a small business owner, you have an immense amount of information to consider when deciding how to pay your employees.. In addition to a positive work environment, employees consider compensation one of the most significant factors when looking for a job.
As an employee and employer, deciding between hourly pay, salary pay, and payment schedules can also play a big role. When creating your business plan, you must decide how much your total budget for employee compensation can be. This number may grow over time, but work to determine how much you can afford at the start.
Now that you know the five key differences between hourly pay and salary pay and how to decide how to pay your employees, you are even more equipped to conquer your small business owner's goals.
Handy Reference Guide to the Fair Labor Standards Act ⎸ U.S. Department of Labor
Using the Occupational Outlook Handbook for Your Career Search ⎸ U.S. Bureau of Labor Statistics
State Minimum Wage Laws | US Department of Labor
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