Wage and Salary

Introduction

The terms salary and wages are often used interchangeably despite having differing meanings. The essential difference between salary and wages is that a salaried person is paid a fixed amount per pay period (the total of all these periodic payments over the year amounts to the salary) and a wage earner is paid by the hour. Salaries are a fixed payment agreed to by both the employer and employee.

Wages, on the other hand, may be higher or lower than the average salary depending on the hours worked. Those earning a salary generally do not have a link between the amount they are paid and the number of hours they work (they generally do not have the concept of overtime hours i.e., they are exempt employees). Given the level of confusion between a wage and salary and what an individual is earning or which is better, this article aims to simplify and break down the essential differences between the two.

Salaried individuals are generally in management or professional positions. They are generally said to be doing white-collar office jobs, which implies that they are well educated and skilled. A waged person mostly has a blue-collar labor job implying that an individual is engaged in an unskilled or semi-skilled job.

Wage-earners however receive payment of a particular rate per hour, multiplied by the number of hours worked. They can work overtime hours (be paid 1.5x the normal rate of pay when they work more than 40 hours per week) and are non-exempt employees.

There is also a difference between salary and wages in regard to the speed of payment. If a person is paid a salary, he is paid through and including the pay date, because it is very simple for the payroll staff to calculate his salary, which is a fixed rate of pay. However, those who earn wages may be paid through to a date that is several days prior to the pay date.

This is because hours may vary, and the payroll staff might need some time to calculate their pay. This gap time period is calculated into the next payment. Thus, pay is much more likely to be accrued in a company’s financial statements for a person being paid wages than for someone being paid a salary.

Additionally, a salaried person usually has a key resultant area (KRA) set for the month on the basis of which their performance is judged. Whereas the waged person does not have any KRA and is merely judged on the basis of hourly work done.

Salary

Salary is defined as the pay employees receive for carrying out the job responsibilities specified in their employment contract. Salaries are usually for full-time work, permanent, and with a fixed working pattern. The amount to be paid is based on the employee’s experience, company location, and the average market salary for similar roles and is also specified in the contract and signed by both parties.

Generally, salaried employees are paid monthly, or sometimes, bi-monthly. This will be agreed upon before you start, and stated clearly in your employment contract. The overall amount earned is referred to as gross salary, and the money one takes home after tax deductions and other contributions is the net salary.

Types of salaries 

--    Base pay, or base salary, is one that both parties have agreed on and that does not vary over time. Employers establish a pay frequency for fixed salaries (usually monthly).

--    Variable pay depends on the work carried out or on the targets met by the employee. This variable component is usually accompanied by a fixed base salary, which the employee will receive regardless of results. The objective is to motivate employees.

--    Pay mix is the combination of a fixed plus variable salary. This model is often used for roles directly related to the company’s sales to create profit-driving motivation among employees.

Wages

This is the amount that a worker receives in return for their services on an hourly or daily basis i.e., they are paid per unit of time. An hourly rate, for example, is a set amount one gets paid for an hour of work. Therefore, they won’t be paid for holidays or days they do not work.

Examples of jobs that are typically wage-earning are daily wage labor, house painters, grocery store workers, and factory employees, where hours are flexible.

Types of wage payment

--    Piece rate is when an employee receives an amount of money for completing a task or piece of work, regardless of how long it took them. This amount is paid upon completion of the job.

--    Time rate covers the time a worker needs to complete the task at hand. The amount they will receive is based on time (one day or one year etc.)

--    Partial piece-rate pay is a combination of a wage based on both piece work and time work.

--    Nominal wage is usually reflected in a contract between both parties based on a specified amount. It is the most common form of wage payment.

--    Cash in hand is where companies pay employees in cash

--    Wages in kind is when employees receive goods instead of money. These can be physical goods (such as clothes or food) or services (training, accommodation, etc.). Wages in kind are considered a form of flexible benefits or salary sacrifice. There are regulations limiting what proportion of an employee’s wages can be paid in kind. In the UK, wages in kind should never reduce the amount an employee is paid below the national minimum wage.

--    Emotional salary encompasses all non-cash benefits or salary sacrifices that an employee may receive, which aims to satisfy their personal, family, and professional needs. We could include flexible working and remote working.

 Pros and cons of both, wages and salary

Benefits of salaried pay

 Consistency

Employees are guaranteed a certain amount every time period (week or month) excluding bonuses. This makes financial planning and budgeting easier for them. They will be able to tell with certainty how their income and expenditure is. It is also more dependable as you can count on a certain amount being paid to you every month.

Additional perks and benefits

Salaried employees are entitled to a number of pre-agreed paid days off every year. It is also possible for them to agree on flexible working hours and the possibility of more free time from work if one can get their work done in less than 40 hours per week.

They are also likely to receive more in the employee benefits, such as employer health care, pension contributions, and paid holiday time. They may also have perks such as gym memberships, childcare reimbursements, or paid maternity/paternity leave.

Higher wages

Salary workers generally have more responsibilities compared to their waged counterparts, given that they are generally professionals. If salaried workers work longer than the standard work-hour week to catch up with deadlines they are sometimes compensated for this.

Disadvantages of salaried pay

 Overtime

Although salaried employees are entitled to overtime, tracking overtime may be challenging. Some employers do not pay overtime rates, which means those employees cannot make more than their salary despite spending more than 40 hours a week working to get a job done.

This is especially problematic in companies that have a culture of ‘presenteeism’ – where people work extra hours to make it look like they are working harder. An hourly wage worker, on the other hand, would work overtime and simply charge for the hours they worked.

 Pay cuts

Companies going through difficult financial periods decrease their expenses by cutting pay. Although waged employees too are likely to get their hours cut, this would not affect their hourly rate as they only get paid for the hours they work. Pay cuts might mean salary workers work more hours with no extra pay.

 Public holiday pay

Similar to overtime pay, waged workers are often paid more to work on public holidays like Christmas or Easter. Although salaried workers do have public holidays, there may be situations where they might have to work over holiday periods with no extra pay.

Benefits of waged pay

 Payment for time

An advantage of earning an hourly wage is that employees are paid for the time they actually put in and overtime if they work more than 40 hours in a week and do extra work. Additionally, waged employees will often get higher rates for working on holidays. If earning a salary, an employee is not paid for additional hours they have worked.

 No contract

Waged employers are not bound by contracts. If they are offered another job with a higher wage, they can change employment as they have no legal obligations to their employer.

 Less responsibility

Salaried employees could be liable if something goes wrong within the company as they have greater responsibility within the company. Waged workers have less responsibility regarding the company.

Immediate pay

Unless otherwise stated, waged workers mostly get paid daily or weekly (although sometimes monthly) as their pay is directly related to the number of hours that they have worked. Salaried employees generally get paid only once a month or at the end of the time period. Therefore, wage earners do not have to budget out their expenses for as long as they earn through the month.

Employer Flexibility

A time-based pay employee is paid per hour and has a set number of hours per week that he works. This allows for flexibility for an employer who juggles several employees and schedules. Employee schedules can be easily rotated or adjusted.

Disadvantages of waged pay

Working hours

Waged workers get paid according to the hours they have worked and must work a set number of hours per week in order to earn their monthly income. This means they would have to work extra hours to earn any extra pay while salaried workers earn a constant amount. They are also not guaranteed to work the same number of hours each week. If the employer decides to cut hours, their paycheck immediately suffers.

Hours cut

If a company is going through financial hardship and are required to cut down on expenses, in most cases, employee hours are the first to go. This means a smaller paycheck as they will not earn the income intended. There may be a minimum amount of hours employees must be provided with or none at all in zero-hours contracts.

Lack of benefits

Waged employees do not have a safety net. A waged employee loses the opportunity to earn wages if they are absent from work even for medical reasons. In most cases, they do not get medical insurance, sick leave benefits or pension contributions although they might have the opportunity to opt into those.

Costly for the Company

Time-based pay can be more costly for it is complicated to figure out an employee’s paycheck each pay period. Someone will have to calculate hourly earnings, calculate and deduct taxes, and then come to a final paycheck amount. Even with automated payroll systems, it takes time to enter the number of hours and verify them, while a salaried employee has the same pay every pay period, regardless of the number of hours they work. Therefore, wage payment might become costly and burdensome for the employer.

 These tables simplify the differences between wages and salary

Having read this analysis on the advantages and disadvantages of salary and wages, perhaps you can make a fair assessment as to which would be more suited for you. 

Bibliography

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https://marketbusinessnews.com/financial-glossary/salary-definition-meaning/

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