Salary vs. Wage: What Are the Advantages and Disadvantages?
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Planning for payroll is an important step throughout the accounting, human resources and finance departments of a business. When a business requires a new position, they must decide whether to pay the employee a yearly salary or an hourly wage. Understanding the important distinctions between the two can lead to unique benefits and help you make a more informed decision about which one is most beneficial to the employee and the company. In this article, we discuss salary vs. wage and explore the advantages and disadvantages of both compensation methods.
What is a wage?
Wage is a term that's usually associated with an hourly workforce. Hourly individuals typically receive their paycheck in a schedule that reflects getting paid for the previous week worked. Companies can back a salary into an hourly wage. For instance, if a manufacturing firm wants to hire welders for an hourly rate that would equate to $45,000 per year on a full-time schedule, a finance employee can divide the desired salary, $45,000, by the number of weeks in a year, 52. Then divide the product by 40 hours in a workweek.
Example: $45,000 divided by 52 = 865.38 divided by 40 = $21.63 per hour
Due to the nature of wages, the amount paid is variable. Take the welding position mentioned above. At the hourly wage of $21.63 per hour, a welder would have to work 40 hours a week to make $865. Anything less than 40 hours a week, would result in a lower overall pay commensurate on time worked.
What is a salary?
A salary is an annual amount agreed upon between company and employee and paid to the employee in increments on a schedule for work performed in a specific role. Salary payments can occur on a monthly, bi-monthly, bi-weekly or weekly basis. A salary for an executive manager might be $180,000 per year. If that salary pay period is bi-monthly, on the 1st and 15th of each month, you can calculate that by dividing the total salary by the number of payments made in a year to determine the rate of pay on each paycheck.
For example: $180,000 divided by 24 pay periods = $7,500 per pay period
A salary is a fixed rate, so it does not vary from paycheck to paycheck. If you are interviewing for a position and the salaried amount is as an annual sum per year, you are likely interviewing for a salaried position. This is usually the standard pay option for positions held by a skilled, experienced workforce in a professional work environment.
What is the main difference between salary vs. wage?
Wages are not the same as salaries, with the primary difference between a salary and wage being how they function. A wage is a variable pay that an employee earns based on how many hours they spend working. So the more hours they work, the more they get paid. A salary is a fixed pay that an employee receives annually, regardless of how many hours they work each day. Therefore, they might overwork or underperform and their salary remains the same. The salary pay method is usually for skilled or office-working personnel, while wages are primarily for labour or unskilled employees.
Advantages of salary
Here are some of the advantages of earning a salary:
Pay rate is consistent
Employees and personnel who earn a salary can benefit from knowing they are receiving a consistent paycheck every pay period. Having this assurance can serve as a sense of financial comfort since you have an expectation of how much your paycheck is going to be. This consistency in compensation also benefits payroll departments and simplifies their check dispensing process.
Pay compensation reflects your value and responsibility
Salaried team members typically take on more responsibility than hourly employees. They sometimes have to unexpectedly or consistently work nontraditional hours and longer workweeks. For this reason, they often receive higher financial compensation. This benefits the employee because they earn a larger paycheck and the employer because they can attract and hire on better talent for the position.
More time management options
Employees who earn a salary benefit from having more options regarding how they use their time. Because their pay is consistent, they can go into the office later in the day or leave even leave early so long as they meet all their quotas. This means they more flexible working hours. They usually have access to paid time off and paid holidays and may even be able to work remote when they want.
Access to health benefits
When you're a full-time salary based employee, you usually have access to health benefits. Depending on the employer, they might even cover your entire benefits plan, saving you money from each paycheck. Benefits are an essential system that allows you to get medicines and medical treatments at much lower prices. You also have the option to opt out of benefits.
Disadvantages of salary
Here are some of the disadvantages of earning a salary:
Lack of overtime pay
Salaried employees sometimes have irregular hours they have to work in order to meet their project deadlines and quotas. Therefore, they don't usually have access to overtime pay to help compensate for those long working hours. To compensate for a lack of overtime, an employee who earns a salary may have to seek out additional part time or freelance opportunities if they want more money.
May have to be on-call
Some employees work unusual hours or are on-call, which can be challenging to do consistently. Being on-call means that your employer can call you into work for any kind of urgent need, common among professions like executive IT support specialists or medical practitioners. This benefits employers in that they are getting employees that can meet the fast-paced demands of the business.
Bonus pay is contingent on performance
If there are unmet benchmarks, salaried employees could lose their opportunity at receiving a bonus. This is good for businesses because they don't have to pay for additional bonuses to their employees who don't achieve the proper reward conditions. However, companies that are paying bonuses to employees indicate that their staff and personnel are working productively.
Advantages of wages
Here are some of the advantages of earning a wage:
Pay reflects the hours you work
Hourly wages directly relate to hours worked. Employees receive payment for their true working hours, which benefits both employees and employers. This is especially advantageous for employers since they can contract a large part-time workforce. People who work beyond full-time hours may benefit from overtime pay. Overtime work provides the employee with their normal pay, plus an additional 50% of the normal compensation for each additional hour they work past 40 hours.
Employees who earn an hourly wage usually have fewer tasks and responsibilities to fulfil at the workplace. They have a consistent job to perform each day and then once their hours are complete, they can go home for the rest of the day. There is a greater sense of work-life balance since they don't have to bring their work home with them or stay late to finish an assignment.
When someone earns a salary, they usually have to sign a contract with their employer to solidify the expectations of that agreement. The process for a wage-based employee is much simpler and usually does not require any binding contract. Therefore, there is more flexibility in a having a wage, allowing an individual to move to another job with much greater ease.
Disadvantages of wages
Here are some of the disadvantages of earning a wage:
Working hours cut
Waged employees earn money for hours worked, which can be a disadvantage if they aren't getting enough hours to make what they need to sustain their lifestyles. When companies fall into challenging conditions, they might cut hours of hourly employees first. This can cause financial strain on employees who are reliant on their paychecks being consistent or at a specific pay point.
Lack of health benefits
For some employees earning a wage, they may not have access to critical health benefits. Sometimes they have to rely on paying for their own health premiums or they may have to forgo healthcare all together. Depending on their wage, they may have access to federal subsidised healthcare.
Lack of PTO or paid holidays
Wage-based employees have to contend with a lack of paid time off. If they don't work on a specific day or need to call out sick, then they usually don't get paid for it. Companies that close on holidays might not pay their employees for those mandatory days off.
Is a salary better than a wage?
Whether receiving a salary is better than a wage ultimately depends on the needs of the employee. For example, earning a wage may function better for an employee who wants access to overtime work. Salary may be more sufficient for someone who has a medical condition and can earn health benefits to help pay for a critical surgery. Therefore, there is no definitive yes or no answer to one option being better than the other. Consider your financial obligations and lifestyle and then seek job opportunities that can accommodate your expectations.
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