Salary vs. Hourly: Two Payment Models Compared

So, you’ve just started your job search and you’re learning that different jobs are compensated in different ways. Some jobs are paid on an hourly basis, whereas others provide an annual salary.

You may be wondering, “What is the difference between these two payment models?” or “What are their main features?”. Those are great questions.

Compensation is an important factor in deciding which jobs to apply for, and ultimately, which job to accept. Therefore, having a core understanding of fixed salary and hourly pay can be useful.

In this article, we’re going to discuss what hourly rates are, what salaries are, and the benefits and drawbacks of each of these models.

What Is an Hourly Rate?

An hourly rate is the amount of money that you are compensated for each hour that you spend working. If you are paid on an hourly basis, you will only be paid for all the hours that you are working.

This means that if you work more, you will earn more. So, if you work for 30 hours a week, you will be paid for 30 hours. Similarly, if you work 27 hours the following week, you will only be compensated for those 27 hours in the new week.

Benefits of Hourly Pay

Hourly pay has a number of benefits that you should consider if you are thinking about a job that pays by the hour.

First, workers who are paid hourly are almost always compensated for overtime. This is because you will be paid according to the hours you put in. If you need to work late to finish a specific task, you can claim additional pay from your employer because you have worked over a certain amount.

In the US, employers are required by law to provide overtime to hourly employees. As a result, you should be able to work overtime, if there is work for you to complete.

Second, working in a position that is paid by the hour may give you more schedule over your working week. Most positions that are paid hourly offer certain flexibility over working hours—as long as the expected tasks are completed. Therefore, working in an hourly position may help you schedule in time for activities like conducting a side business, working in another part-time job, or investing in your education.

Drawbacks of Hourly Pay

Although hourly pay has its advantages, there are a few drawbacks that you should be aware of before accepting a job that pays by the hour. 

Employees who are paid hourly may be more likely to be affected by changes in the economic cycle. If there is a recession, your hours may be limited or reduced before other employees. This is because you are not required to work a certain number of hours each week. Therefore, the employer may choose to reduce your hours to cut operations costs. 

In addition, employees who are paid hourly need to show up for their scheduled hours, otherwise, they will not be paid. If you have to go to the dentist, this time may not be compensated by your employer. Hourly employees are also expected to arrive on time to start their shift, or they will start to lose out on their pay.

What Is a Salary?

A salary is a fixed regular payment made to an employee who is working in a full-time position. Typically, salaries are paid on a bi-weekly or monthly basis, although some employers opt to pay salaries out on an annual basis.

The amount that you are paid each month will be fixed. So, if you are earning a salary of $36,000 per year before taxes, you can expect to bring home $3,000 monthly. 

The size of your salary will depend on a number of factors. Employers usually provide higher salaries to those with more experience or a stronger educational background, while more junior employees may command a slightly lower salary. With that said, as you advance in a company, your salary may increase to reflect your growing experience.

Benefits of a Salary

Receiving a salary has a number of benefits.

When you are guaranteed a salary, you know that you are going to earn a consistent paycheck. The amount that you earn will be paid on a predetermined schedule—such as monthly—and the size of each check will be the same. Even if you used up the allocated sick days or paid vacation days, your salary will remain the same.

Knowing that you have a consistent salary coming in can help you better plan your finances and create a budget that reflects how much money you are earning.

Salaried employees are also likely to get other employment benefits such as healthcare and dental insurance, education stipends, favorable paid vacation time, and more. The benefits that you earn as a salaried employee will be outlined in your employment contract, alongside any eligibility requirements to use them.

Drawbacks of a Salary

While federal law requires businesses to pay hourly employees overtime, salaried employees may be expected to work longer hours in order to complete their work.

This means that if you are going through a busy period at work, you would probably have to stay in the office longer and work without being compensated for your extra time. This may not be a problem most of the time—depending on your expectations going into a job—but it is something to keep in mind before accepting a salaried position.

Conclusion

Understanding salary and hourly payment models is a crucial part of a job search process.

Before you apply for a position—or accept an offer for a position—you should ensure that you understand when you are going to be paid, how much you are going to be paid, and the terms on which you will be paid.

This information should be outlined in a formal employment contract if you have been extended an offer. Salaries and hourly pay rates are also often stated in the job description for a position, so in most cases you don’t need to apply for a job to see what model of compensation the business will use to pay the worker who fills the position.