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What Is a Salary?
A salary is a fixed payment made to an employee on a regular basis in exchange for their work. Salaries are usually paid every other week, twice a month, or once a month. A salary remains the same regardless of how many hours an employee works during the week.
When employers make salary offers, they typically refer to them in terms of how much the employee is paid over a year. For example, an employer may offer an employee a salary of $45,000 a year.
Salary vs Hourly Wage
An hourly wage is payment earned by the hour. Hourly wages have to be tracked throughout the week to ensure payment is calculated accurately. Salary, on the other hand, remains the same regardless of how many hours someone works in a given week.
Advantages and Disadvantages of Paying a Salary
There are both advantages and disadvantages to paying employees a salary instead of hourly wages. Which method of payment is best for your company will depend on your workforce and the type of business.
Advantages of Paying Salary
- Salaries are more predictable. Since salaries remain constant, it’s easier to calculate your overhead. Employees also tend to appreciate knowing how much they’ll make every month.
- Many employees prefer the additional benefits. Salaried positions tend to carry more benefits, including annual raises, paid holidays and sick time, among others.
- Employees will feel more valued. Salaried employees tend to feel more valued by their employers. This does depend on whether your salary ranges are strong. If employees are salaried but underpaid, this advantage won’t apply.
Disadvantages of Paying Salary
- Less flexibility. With salary positions, you can’t save money by informing an employee that they don’t need to come in. Some employees won’t enjoy working on a salary either, as they may want to be able to switch or drop shifts.
- Salaries for non-exempt employees can lead to wage-and-hour violations. FLSA non-exempt employees must be paid overtime, which means you need to track their hours. If you’re paying FLSA non-exempt employees a salary, you run a risk of violating FLSA or other wage-and-hour laws by forgetting to pay them overtime wages.
How to Know if a Position Should Be Salaried
Whether you pay an employee a salary depends on the industry, whether the employee is skilled or unskilled, and how much you plan to pay them. The latter two factors will help you determine whether the employee is non-exempt under FLSA or applicable state wage-and-hour laws.
If the employee is non-exempt, then in most cases, it will make more sense to pay the employee hourly wages. Paying hourly wages will help you comply with wage-and-hour laws.
How Can You Know What Salary Is Right?
Once you know if a position will be salaried, you need to determine how much salary you will offer. Calculating an appropriate salary is a very important task for any company. If you pay too little, you run the risk of losing the talent you need to stay competitive in your market. If you pay too much, your company may not be able to execute its strategy because it’s hampered by the cost of its workforce.
So how do you get the salary right? Below are five steps to help you set a solid foundation to get the salary range that makes sense for you.
Step 1: Analyze Your Budget
Before considering individual salaries, make sure you understand your total compensation budget for each employee. Then, consider how much of an employee’s total compensation will be salary and how much will be benefits. According to the Bureau of Labor Statistics, on average, salaries make up approximately 70% of an employee’s total compensation package. However, this may be different for your company.
Step 2: Obtain Salary Data
Internal Salary Data
Salary data collected from your own company will show you how much everyone makes in your company. This information can help you understand what the position you’re analyzing should be paid.
External (Market) Salary Data
External salary data is usually obtained through salary surveys. This information will help you determine what the average pay is in your industry, region, or both, for the position you’re analyzing.
Consider Completing a Job Evaluation
Depending on the position, you may want to complete a job evaluation. Job evaluations often use internal and external data to help calculate an appropriate salary range. There are various approaches to job evaluations, each of which has its benefits and drawbacks.
Step 3: Consider Other Compensation You’re Paying Employees
Although salary makes up the majority of an employee’s compensation package, it isn’t the only type of compensation you can pay to your employee. So, in considering what salary to pay for a particular position, make sure to also consider what other benefits the position provides. If you have an above-average benefits package, you may be able to compete for talent with a lower salary.
Step 4: Decide Whether to Lag, Meet or Lead the Market
There are three strategies companies can use to compensate their employees. Each of these compares the employee’s salary to the average salary in the job market for their position:
- Lag-the-market compensation strategy pays employees lower than the average salary for their position.
- Lead-the-market compensation strategy pays employees higher than the average salary for their position.
- Meet-the-market compensation strategy pays employees the average salary for their position.
Which strategy you choose will depend on your company’s strategy.
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