Salary vs. hourly pay: What’s the difference?

Weighing salary versus hourly pay for your new hires requires an intimate understanding of the advantages and disadvantages of each structure. Salaried positions offer predictable costs and attract experienced talent, whereas hourly pay provides flexibility that’s more aligned with fluctuating workloads.

After comparing these approaches, you can select the best fit for your business. Explore budgeting strategies, legal considerations, and how each option impacts company culture.

What’s the difference between salary and hourly pay?

You’re faced with many pivotal decisions when setting up new hires, and payment structure is among the most impactful. You’ll need to know how salary pay works, how hourly pay works, their unique regulations, when they’re most commonly used, and their pros and cons.

What is salary pay?

A salary provides employees with a consistent, predictable income every pay period. Usually, the employment contract will lay out the worker’s gross annual salary and the frequency of pay periods. Workers are paid based on their professional talents, knowledge, and skills, reflected by a steady, consistent rate that ideally matches the quality of their work.

This salary base pay doesn’t include bonuses, equipment, or other additional expenses. And although holiday pay isn’t mandatory, employees have come to expect it. A comprehensive and competitive compensation package will attract the most qualified talent.

What is hourly pay?

Hourly wages are paid based on the number of hours worked. This structure is more common for entry-level jobs, which may be part-time or full-time. Hourly wages make sense for roles that involve a lot of regular overtime or for employees just starting out in their careers.

Minimum wage requirements vary by region and set the baseline hourly rate that employers must offer their workers.

Side-by-side comparison

Labor laws distinguishing hourly and salaried pay vary by region. Here’s a breakdown of the essential distinctions in the United States:

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In addition to employees, some contractors are paid hourly (e.g., pay-as-you-go (PAYG) contractors). These are workers outside the company who consult on an as-needed basis and are paid according to the time spent. PAYG contractors may transition to full-time employees as a company grows.

Salary vs. hourly pay: Pros and cons

So, which payment structure is best for you? There are different benefits of salary versus hourly pay. Which one you choose depends on your business needs, the type of employee you’re hiring, where your company is based, and where your employee lives. Here are some hourly versus salary pros and cons:

Salary pay pros

• A steady check helps relieve paycheck stress so employees can focus on work
• Consistency shows respect towards employees
• The consistency makes payroll processing predictable for easy budgeting
• Employees aren’t always entitled to overtime pay
• Employees likely work a consistent schedule

Salary pay cons

• Workers are entitled to certain benefits (but so are full-time hourly employees)
• They may have more difficulty with work-life balance
• There’s less incentive to work extra hours

Hourly pay pros

• Workers are only paid for hours worked
• They may have an easier time separating work and home life
• You can more easily reduce workers’ hours if needed

Hour pay cons

• With enough overtime, hourly employees could be paid more than a comparable salaried worker
• They’re incentivized to find a side gig to supplement their income
• Part-time workers may under-prioritize health concerns if they’re responsible for their own coverage

Generally, salaried employees exchange flexibility for consistency, whereas hourly workers make the opposite trade-off. An employee’s preference may depend on job type, desired work-life balance, typical pay in their home country, and preference for stable or variable income.

How to decide between salary and hourly pay

Several factors determine which payment structure is best for vacant roles in your organization.

1. Research relevant local and federal laws

If the law requires you to pay an employee a certain way, your hands are tied. Such laws vary across states and countries.

2. Familiarize yourself with industry standards

If other employers offer a generous salary and comprehensive benefits package, you’ll probably need to follow suit to remain competitive. Standards may vary depending on a remote worker’s location, so consider regional differences in industry and the cost of living when calculating compensation globally.

3. Determine what your company can afford

Stick to your budget, factoring in benefits. If you anticipate high turnover, account for the costs of re-hiring and re-training. An employee’s compensation can determine whether they consider themselves a team member or a transient hired hand.

4. Consider the needs of the role

Are you looking for someone with the flexibility to work when needed, or do you need someone more experienced who expects stability? Is it the kind of job where showing up matters the most, or are you more focused on results?

The flexibility of hourly pay pairs well with entry-level work, but a long-term hire will expect long-term benefits (i.e., a predictable salary and a retirement plan).

5. What company culture do you want to foster?

Beyond their pros and cons on a financial spreadsheet, these pay structures also encourage different work cultures. Hourly employees make their money on time worked, whereas a regular salary encourages experienced individuals to work more efficiently. How you pay your employees sets the tone for their relationship with their duties and the company.

Incentive-based compensation

In addition to hourly and salaried pay, you can supplement pay with incentive-based compensation. If you have an unusually demanding project or notice employee motivation is waning, incentive pay provides an immediate solution.

Usually, incentive pay refers to bonuses, but it could also be equity, stock options, or a potential raise. This incentive is tied to performance and ensures workers feel appreciated when they go above and beyond.

Streamline payroll for your global team

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About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.

FAQs

Is salary taxed differently from hourly pay?

Not in the United States. Any taxes you pay for a salaried employee must also be paid for an hourly employee. Tax rates vary depending on state laws and income levels, not pay structure. Check local laws where your workers are located for more specific information.

Can salaried employees get overtime pay?

As of July 2024, companies are not required to offer overtime pay to salaried employees in the U.S. if they perform particular executive, administrative, or professional duties and make over $844 each week ($43,888 per year). Other exemptions apply, and the threshold is subject to regular reviews for adjustment.

You may choose to offer bonuses as encouragement or a reward to exempt salaried workers for working extra hours. Non-exempt salaried employees must be paid overtime for working over 40 hours in a week, just like hourly employees. Some states also have daily overtime rules.

Do salaried employees get paid if they don’t work?

Regardless of pay structure, any employee will face repercussions if they miss work. Still, certain requirements must be met to legally deduct salaried workers’ pay.

In the U.S., you can dock pay for any full day an employee misses for personal reasons unrelated to illness or disability. You also don’t need to pay an employee who takes unpaid leave under the Family and Medical Leave Act. More specifics can be found on the Department of Labor website.

What are the laws around salary employees?

The Fair Labor Standards Act is the primary U.S. federal law regarding salaried employees. It covers minimum wage, overtime pay, recordkeeping, and child labor standards for full-time and part-time workers. The FLSA also protects workers against unfair employment practices, including wage discrimination based on gender and age. It’s supplemented by various laws from state to state.