For most people, compensation is a major deciding factor when looking for a new job. A salaried employee earns a fixed amount regardless of hours worked, while an hourly rate is paid for hours worked.
Salaries work better for full-time or permanent jobs with an established working pattern. On the other hand, hourly rates are better for contract-based work such as retail or hospitality. Hourly rates are also better suited for employees who have flexible hours.
Some employees also earn a commission-based salary. For instance, in sales and marketing, employees receive a percentage of their sales as a commission and a base salary. Commission-based pay fluctuates depending on the employees’ ability to sell.
The choice to pay your employees a salary or hourly rate is critical to your organization’s success. It will determine employee turnover, revenue planning, and your business performance.
Salaried Employees
Salaried employees earn a fixed rate even if they work more or less than the agreed 40-hour workweek. For this reason, salaried employees are not eligible for overtime pay. As an employer, you can pay your employees weekly, biweekly, monthly, or semimonthly.
Advantages of Salaried Employees
- Hiring employees on a salary saves you money on overtime pay.
- Employees earn a flat rate throughout their tenure, allowing businesses to plan their finances.
- Salaried employees also make payroll processing easier, meaning less labor in accounting.
- You can also automate your payroll processes.
Disadvantages
- Employees may work less since they earn a flat rate.
- Employees who do not clock in or out may also report late and leave early without much accountability. However, you can prevent this by hiring high-level employees who understand your expectations.
- You must pay employees agreed salaries even during periods that require less work.
- Even if revenue fluctuates, you cannot adjust your employee costs.
- Salaries are typically higher for a 40-week work week compared to hiring the same on hourly rates at minimum wage.
- Employee contribution to the organization is difficult to quantify.
Hourly Wages
Employees earn an hourly rate for each hour worked. Such roles often do not come with a fixed annual income. However, hourly rates must meet state or federal minimum wage rates, whichever is higher.
A salary comes with employee and employer contribution-based benefits and compensation such as retirement. However, hourly wages do not include benefits or compensation such as health insurance.
Employers can hire full-time and part-time employees on an hourly basis. However, most hourly employees are classified as nonexempt under the Fair Labor Standards Act. The FLSA also sets minimum wage and worker protections.
Under FLSA, businesses must pay nonexempt employees 1.5 times their hourly rate for any hours exceeding the 40-hour week.
Advantages of Hourly Wages
- Hourly wages allow you to adjust your expenses based on revenue.
- You can reduce employee hours to cope with reduced revenue during low seasons.
- You can hire part-time employees without the additional expense of extra benefits.
- It is easy to quantify employee contributions.
Disadvantages of Hourly Wages
- Fluctuating costs during each pay period
- You may have to pay more for overtime.
- You may not attract high-level and senior employees who expect autonomy, benefits, and job stability.
Salary vs. Hourly Wages: Which Is Better for Your Business?
Before choosing the best compensation for your business model, consider the experience, roles, and responsibilities required. Some factors to consider include the following:
- Seniority
- Level of experience
- The hours required for each role.
- How employee contribution is quantified
- Compensation for similar roles in the market
- Your financial resources
A salary will attract senior workers and stabilize your payroll. On the other hand, hourly wages save you money by allowing you to adjust your costs based on revenue. Employees on hourly wages also do not cost you extra in benefits.
It is common for businesses to hire a mix of salaried and hourly wage employees. Hourly wages are also more common in service sectors such as hospitality. In these sectors, on-site presence is a necessary employee contribution.
However, in some roles, employee outcomes are quantified based on outcomes or deliverables. The outcomes are often scalable, meaning revenue does not directly correlate to the hours worked. Such roles may also require highly-skilled employees who prefer steady paychecks and benefits.
Summary
Paying your employees hourly or fixed salaries depends on your business structure and income flow. Both models have unique benefits, however, matching them with the right roles is key to saving money.
If your business requires high work predictability and fixed schedules, consider offering established roles on a salary basis. Hourly wages are better suited for businesses with fluctuating demand.
Whether you offer a salary or hourly compensation, compare the industry standard. Choose the structure that makes sense based on your revenue and cash flow. Consider contacting an accountant to establish a payroll process or automating your payroll processes using online software.