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

Most employees receive one of two types of compensation for their work: a salary or hourly wages. Each of these models has its benefits and disadvantages, and it’s important to understand them before accepting a job. 

If you’re making the switch from hourly to salaried work, you may want to know how your work and compensation experience will change. Although it may seem intimidating at first, salaried work brings a range of perks and a degree of security that most wage-oriented jobs don’t offer. In this blog, we’ll help clear up the confusion by describing what a salary is and how it works. 

We’ll answer the following questions:

• What is a salary?

• How does a salary work?

• What are the advantages and disadvantages of a salary vs. an hourly wage?

• How do employers calculate salaries?

What is a salary?

A salary is a set amount of income that a company pays to an employee on a monthly or annual basis. This contrasts with hourly wages, which can increase or decrease based on the amount of time an employee spends at work. 

Salaries are more common in white-collar professions, especially for managers and other senior employees. In contrast, hourly wages are more common in the service industry, retail occupations, manual labor, and some trades. 

How does a salary work?

Salaries are usually based on a fixed annual rate. This is divided up into either 12 or 24 segments that are paid to an employee on a monthly or bi-monthly basis. 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.

Unlike hourly workers, salaried employees are not usually eligible for overtime. Their payment remains the same no matter how much time they spend in the office during a given week. Salaries often include benefits packages, including health and life insurance, time off, and retirement programs. 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, unlike hourly wages which are usually fixed based on time on the job.

What are the advantages and disadvantages of a salary vs. an hourly wage?

Both salaries and hourly wages have upsides and downsides. In some cases, a salaried position might make more sense for your lifestyle, while in others, an hourly wage could provide more freedom and flexibility. Here are some of the advantages and disadvantages of earning a salary versus earning an hourly wage:

Advantages 

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.

Nowadays, there’s usually more to a salary than financial compensation. 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 finance 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.

Disadvantages

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 your personal and professional lives. 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. In salaried positions, these distinctions can sometimes get blurred, leading to an unhealthy lifestyle or burnout.

How is salary determined?

There are a wide variety of factors that can affect the salary for a given position. One of the most obvious is the experience level of a candidate and their level of responsibility. Senior positions and leadership roles offer better compensation because they make high demands. It’s hard to find employees with the right skills and experience for these positions, and this scarcity leads to high demand.

Location and current market conditions also have a big impact on salary calculations. If you live in an area with a high cost of living, companies in your area are required to pay higher salaries in order to attract top talent. Conversely, low-income areas are cheaper to live in. Many states and localities also have local ordinances that govern how much a company has to pay its employees.

It’s also important to note that many salaries can be negotiated. If you bring a lot of value to the table, it might be worthwhile pushing for better compensation. On the other hand, it’s vital to examine your contributions honestly. If you’re looking for jobs in a crowded market, it might be unwise to push your salary expectations too far. Finally, 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.

Key takeaways

1. A salary is a fixed wage based on an annual rate divided into 12 or 24 paychecks. 

2. This differs from an hourly wage, in which employees are paid based on the amount of time they spend on the job.

3. Salaried employees are not usually eligible for overtime but often have access to extensive benefits packages.

4. A salary provides stability and predictability, and can sometimes give employees greater autonomy regarding their work style.

5. Although salaries are often advantageous, they sometimes require more work without a change in pay and some salaried employees find it hard to separate their work from their personal lives.