“What is a salary?” Everything you need to know about what a salary is and how it works

If you’re looking for a job, undoubtedly, you’re looking for a paycheck. As you start your job hunt and scan through various job postings, you’ll come across the term "salary" multiple times. You know it has to do with getting paid, but you might be unsure of exactly how it works, and you quietly ask yourself, ‘What is a salary? 

Don’t worry. Whether you’re looking for your first job, only held hourly paying roles, or just want an in-depth understanding of the complicated concept of compensation, this guide will break down everything you need to know about a salary and how it works.

We cover:

• What a salary is and how it works

• What factors determine your salary

• Negotiating salary

• Pros and cons of salaried positions

What is a salary?

Before accepting any new job, it’s important to understand what a salary is and how it works so that you can both maximize your earning potential and ensure you’re receiving the compensation you need to maintain your lifestyle and feel adequately rewarded for your efforts.

A salary is a set amount of income that a company pays to an employee on a monthly or annual basis regardless of the time spent working. Salaries are more common in white-collar professions, especially for managers and other senior employees.

In contrast, an hourly wage is centered around the amount of time an employee spends at work and is more common in industries with variable work hours, such as retail, hospitality, manufacturing, and customer service. Hourly wages can vary widely depending on factors, such as industry, job role, location, and experience level. 

How does a salary work?

Salaries are usually based on a fixed annual rate. This is divided into either 12 or 24 segments that are paid to an employee monthly or bi-monthly. This means salaried employees receive the same paycheck every two or four weeks. In the case of some high-level positions, a professional may receive a single annual payout. 

Salary calculations vs. hourly compensation

Let’s say your annual salary is $50,000 and you get paid monthly. Divide your annual salary by 12 to determine how much your paycheck would be before any payroll deductions. In this example, your gross pay would be $4166 every month, regardless of how many hours you worked.

This is different from an hourly wage, which is a slightly different compensation structure. There, an employee is paid a set amount of money for each hour worked. Unlike salaried positions, where employees receive a fixed annual or monthly pay regardless of the number of hours worked, hourly employees are compensated based on the actual hours they put in.

If you have an hourly rate of $20, for instance, you would be paid $20 for each hour you worked during that pay cycle. So, let’s say you worked 40 hours per week, and you get paid bi-weekly. You would multiply $20 times 80 hours (two weeks of work) and your gross pay would be $1600.

If you work more than 40 hours in a single work week as an hourly employee, you are entitled to overtime pay. Any time worked over the 40-hour mark within that week is required to be at least 1.5 times the amount of your hourly pay rate. In keeping with our example, that means you would be paid $30 for each hour you work over the weekly 40-hour threshold.

Unlike hourly workers, salaried employees are not usually eligible for overtime pay. Their payment remains the same no matter how much time they spend in the office during a given week. 

Determining factors for your salary

While the concept of a salary may seem straightforward, several factors influence its determination. Salaries can vary significantly between industries and regions due to differences in demand for certain skills, cost of living, and market conditions. Additionally, an individual's level of education, experience, and specialized skills can impact their earning potential, with higher qualifications often correlating with higher salaries.

Salary packages often include benefits, including health insurance contributions, retirement contributions, and paid time off, further enhancing their value beyond the monetary figure. In most cases, these are provided to employees at a discounted rate and are financed by direct deductions from their paychecks.

Most companies offer their employees salary raises at set intervals, often at the end of every year. This allows employees to earn more as their skills and experience increase. Many salaries are also open to negotiation. 

Negotiating salary

It’s also important to note that many salaries can be negotiated. If you bring tremendous value to the organization, asserting for a higher compensation package might be worthwhile. When negotiating, make sure to factor in the cost of benefits. If a job offers an excellent benefits package, it might be worthwhile accepting a slightly lower salary, as your overall cost of living will decrease.

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How to negotiate salary? Discover our tips and tricks!

Before entering negotiations, research industry salary benchmarks, assess your qualifications and achievements, and practice articulating your value proposition. Approach the negotiation process with confidence, professionalism, and a collaborative mindset, aiming for a mutually beneficial outcome.

What are the pros and cons of a salary vs. an hourly wage

Both salaries and hourly wages have upsides and downsides. Here are some of the advantages and disadvantages of earning a salary versus earning an hourly wage. 

Pros 

The primary advantage of a salary is that it provides stability and predictability. If you have a salaried position, you know exactly how much you’ll be paid and when you’ll receive it. This makes it easier to plan for the future and can aid with saving and budgeting. If you want to make investments, take out loans, or plan a family vacation, a salary might provide the type of financial stability you need to make better decisions.

In many cases, salaried employees also have access to a full package of company benefits. The fixed nature of salaries makes it easier for companies to manage the deductions that cover the cost of benefits. As a salaried employee, you may have access to health insurance, life insurance, retirement benefits, parental, leave, paid vacation, and many other perks.

Another benefit of a fixed salary is flexibility and autonomy. While every job is different, many salaried positions give workers more freedom to complete their work in a way that works for them. Their pay is based on their deliverables and the value they bring to the company, rather than on the amount of time they spend in the office. As a salaried employee, you may be able to adjust your hours and schedule, as long as you complete your tasks effectively.

Cons

One downside of the salary system is that it usually prevents workers from earning overtime pay. Since their compensation is fixed, more hours in the office don’t necessarily translate into a bigger paycheck. During busy times of the year, salaried employees may end up working long hours and putting in extra work without additional compensation. 

On the other hand, hourly workers are required to receive overtime pay if they work more than 40 hours in a given week. The nature of their work also means that if they choose to take extra shifts, they’ll be rewarded on payday, whether they technically worked overtime or not. Simply put, extra effort pays off for hourly employees. Despite this, many salaried employees have access to bonuses that are rare in wage-based jobs.

Another disadvantage of salaried work is the tendency to mix personal and professional time. As an hourly worker, the separation between work and free time is very obvious: if you’re off the clock, you don’t have to worry about work. These distinctions can sometimes get blurred in salaried positions, leading to an unhealthy lifestyle or burnout.  

Unsure what your skills are worth in today’s market? Know your worth and maximize your earning potential with our salary comparison tool.

Key takeaways

1. A salary is a fixed wage based on an annual rate divided into 12 or 24 paychecks, offering stability, predictability, and greater autonomy regarding their work style. 

2. This differs from an hourly wage, in which employees are paid based on the amount of time they spend on the job, and is common in industries with variable work hours.

3. Salaried positions sometimes require more work without additional pay.

4. Negotiating salary is common practice and requires research, preparation, and confidence.

5. Both salaries and hourly wages have advantages and disadvantages, and the choice depends on individual preferences and lifestyle needs.