No business runs magically by itself. Rather, businesses operate with highly valuable human talent. And that talent costs money. Labor costs are a significant percentage of each business’s cost structure, generally ranging between 15-30 percent, but varying based on industry. A key cost consideration for business managers is to determine the payment of salaries vs. wages for employees.
Why is Employee Compensation Important
The purpose of paying employees is to fairly compensate them for their work. Compensation has a major role in attracting top talent, contributing to employee job satisfaction so they stay with a company, increasing employee motivation and employee loyalty, and boosting increased productivity leading to improved company profitability. Compensation decisions include deciding when to pay salaries vs. wages.
What Are Salaried and Hourly Employees
A salaried employee is an individual who gets paid a set amount each pay period, as agreed upon between the employee and the employer. That amount is generally based on a 40-hour work week, but the work time can be more or less than the general 40 hours. A salaried employee does not receive extra pay for working more than 40 hours. Salaried employees are found in essentially every industry and most management or supervisory jobs are salaried positions. Salary is considered the “base rate” of pay. Additional compensation may be provided including commissions, bonuses, and other benefits like health insurance and retirement contributions.
An hourly employee is an individual who is paid a set amount per hour of work. In most states, hourly workers are required to be paid time and a half for each hour they work beyond 40 hours in a week. The hourly wage is considered the “base rate,” and additional compensation may include health insurance or retirement plan contributions. Some employees can be part-time hourly workers, generally without added benefits.
Pros and Cons of Paying Employees a Salary vs. Wages
The pros of paying employees a salary include simplifying payroll because payable amounts are stable, more top talent can be attracted because of stable pay and the potential for greater benefits, and the business won’t have to pay overtime when extra work is required. The cons include salaried employees can’t be paid less during slow revenue periods.
The pros of paying employees hourly wages include being able to adjust labor costs when needed, given slow revenue periods, and you can have part-time hourly workers who are generally paid without benefits. The cons include that labor costs can fluctuate by pay period based on schedule variations, and you will have to pay employees at a higher rate for overtime work. Additionally, it will be harder to attract senior employees who expect greater pay stability, benefits, and working autonomy.
Determining How to Pay Employees
It is important to make a specific salary vs. wages determination position by position and role by role. Considerations will include the required seniority, level of experience, amount of work time required to fill the role, the performance and financial outcomes expected for the role, how similar roles are compensated in the industry and job market, and the financial resources you have allocated.
Payroll Mistakes to Avoid
Payroll mistakes can result in employee dissatisfaction as well as substantial financial penalties. So, it is wise to avoid these eight mistakes:
- Classifying workers incorrectly.
- Paying incorrect amounts.
- Paying incorrect taxes.
- Miscalculating overtime wages.
- Running payroll late.
- Not paying within the minimum pay period.
- Not maintaining payroll records.
- Not paying for time required to recover from injuries.
Get expert payroll assistance to help you avoid these mistakes and take better care of your employees.
Get Expert Payroll Service Assistance
Choose an expert payroll service, Palmetto Payroll, to assist you with your payroll system. We have offices in Columbia and Charleston, serving over 300 business owners statewide and we offer tailored solutions to save you time and money so you can thrive and grow including payroll, tax depositing and filing, management reporting, Human Resource Services, and timekeeping services.