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It is important that the type of pay you choose aligns with your company’s goals, so keep these guidelines in mind when deciding what makes sense for your organization:
A salaried employee gets paid a set amount regardless of the number of hours performed within a pay period. An hourly employee gets paid a rate for each hour worked throughout the pay period, and if they work more than 40 hours in a week, they are eligible for overtime compensation. A commission-paying employee, especially those in sales and marketing, is paid a proportion of the sales they make; certain commissions are paid in addition to their basic (guaranteed) income.
Although hourly workers are the most typical recipients of overtime compensation, certain employees on a salary may be eligible (though this is not usual) if they are designated as nonexempt.
Salary vs. Hourly vs. Commission
Aside from a consistent wage, salaried workers often get more paid vacation time, bonuses, and perks than hourly workers. They are also entitled to a minimum wage set by the state and/or the federal government, as well as overtime compensation. The income of workers paid on a commission might change depending on how quickly they can sell a product or service.
Employees on a Salary vs. Hourly vs. Commission Basis
Employees on a Salary
A salaried employee’s salary normally stays the same for each pay period, with the exception of one-time deductions or pay changes. As a result, companies cannot cut an employee’s income owing to poor job performance, vacations, or a company shut down due to adverse weather days, regardless of the quality or quantity of time spent on the job.
Under the FLSA, there are a few situations when it is acceptable to deduct money from the compensation of an exempt employee.
- Absences of one or more full days due to sickness or disability, including accidents on the job (deductions for partial days are not allowed)
- To compensate workers for expenses paid to juries or witnesses, or for military pay
- Penalties applied in good faith for serious violations of important safety standards (both full and partial days)
- Unpaid disciplinary suspensions of one or more full days for infractions of workplace behavior standards, such as harassment and violence, issued in good faith (deductions for partial days are not allowed)
- Absences under the FMLA (Family and Medical Leave Act) (both full and partial days)
- If an employee works less than a full week during his or her first or last week of employment (both full and partial days)
Since most companies do not have to offer overtime pay for their salaried workers, they may provide a range of benefits as an alternative. Most full-time Employees on a Salary are offered paid vacations, health, dental, vision, 401(k), or even retirement plans. However, there are salaried, nonexempt workers who must be compensated by their employer for overtime work—if they exceed their 40 hours—as mandated by the FLSA.
Workers who are paid by the hour
Hourly workers must be paid at least the federal minimum wage for each hour worked, in a nutshell. For any hours worked above 40 per week, they must be paid overtime at least one-and-a-half times their hourly wage. To verify time worked, they commonly employ timecards or an automated tracking system. Part-timers are human resources who work less than 40 hours each week.
They’re also known as nonexempt workers, and they’re governed by the FLSA and its requirements. The majority of these individuals are either paid less than the federal minimum wage of $684 per week or are directly overseen. Employees are generally entitled to minimum pay of $7.25 per hour, while this varies depending on the hourly rate set by state minimum wage laws; some are higher. Aside from that, they often do not get the same perks as other employees, such as paid vacation, retirement plans, or even bonuses.
In addition, the government sets pay rate and break time rules that you must follow on a regular basis. Because these workers are covered by all FLSA regulations, they have the right to a healthy and safe working environment as well as equal opportunity, including eligibility for child labor laws and FMLA benefits.
Workers Paid on a Commission
Workers paid on a commission are compensated based on the revenue they generate for your business rather than a straight salary. Usually, commission-based employees work in sales, retail, real estate, insurance, and the stock market. Their work structure can be based on individual or team performance.
You may include many sorts of commissions into your compensation system.
- Straight commission: The employee is paid only on the basis of a commission. Because both the company and the employee agree on a percentage of sales, there is no basic wage or hourly compensation rate. In the real estate and car industries, this is standard procedure.
- Wage plus commission: An employee earns a commission for their sales or performance in addition to a set but lower salary. It is the most stable and widespread commission-based structure in the retail business.
- Bonus commission: This is more of a reward for a good sales performance by a person or a team. It is frequently obtained as a result of an individual’s or a team’s achievement of pre-set earning quotas. It’s a typical practice among startups since it inspires their workers.
- Variable commission: To help workers break into new markets, some organizations provide incentives to help jump-start sales in a given area. The greater the commission, the longer the contract or the larger the transaction.
- Graduated commission: A business might establish commission amounts based on the number of sales that workers are expected to make. The rate at which an employee is paid is determined by the commission level attained.
- Draw: A “draw” is the money that a corporation gives to an employee at the start of their employment. If the employee sells more than the starting amount, it will be deemed revenue, and the commission will be calculated accordingly. If the employee’s sales fall short of the “draw,” they must repay the corporation the original amount.
Employers must also deduct payroll taxes and federal income taxes from commissions.
Which is better for your company: a salary, an hourly wage, or a commission?
The kind of employees you should hire is determined by your company and how you want to schedule your staff; flexibility is a major factor. Service industries, such as retail and food, are the most likely to use hourly employees since work schedules are seldom stable.
On the other hand, firms with an eight-hour workday schedule often hire Employees on a Salary. For instance, many professional and consulting services don’t have standard hours at all and receive a salary regardless of the work hours put in. And jobs that are commission-based may or may not have set hours such as in insurance or certain types of retail sales.
Please note that exempt workers are often given a salary, while nonexempt employees are typically paid hourly. Let’s look at the advantages and disadvantages of each. We provide some examples to help you decide which is ideal for your company, the kind of employees you want to hire, and the type of schedule (and flexibility) you want.
Advantages
The most significant advantage of paying workers a salary is that you can plan your payroll for the whole year ahead of time. You can set up your payroll system and keep your payroll expenditures constant since you know how many hours each employee will work every week.
Your staff will also be able to count on a consistent payout every week, bimonthly, semimonthly, or monthly. It also simplifies the process of processing vacation and sick breaks, and you won’t have to bother about calculating or paying overtime if an employee works more than 40 hours per week.
Employees benefit from being given a salary since it helps to stabilize their income and enables them to budget because their compensation is regular throughout the year. For individuals who also get commission and other forms of compensation, a basic wage assures that they will be properly reimbursed even during sluggish workweeks, which helps retain staff.
Disadvantages
If a company has salaried, nonexempt workers, you’ll need to figure out how many hours they work (since they’re nonexempt) and keep track of their paid breaks, unpaid lunch hours, and overtime hours.
The Advantages of Paying Employees on an Hourly Basis
Employers in the hotel, catering, retail, and home care industries benefit from paying staff on an hourly basis. You only pay them an agreed-upon hourly wage for the hours they work. To put it another way, hourly pay enables you to align your payroll expenditures to the busy seasons when you’ll be making more money. This implies that the employer pays for the job done and saves money by not paying a wage.
The company may also link labor expenses to a work by monitoring and paying staff hourly. If your workers are in senior management, are exempt, or have work hours that are difficult to measure, hourly compensation is not the ideal option.
Employees with a high level of job security and who work in occupations that require frequent over time are more likely to prefer being paid on an hourly basis in order to maximize their earnings. Some workers may hate being “promoted” from an hourly job where they are paid overtime to a supervisory post where they are reclassified as exempt; if they are often required to work more than 40 hours per week, they may feel shortchanged.
The Disadvantages of Paying Employees on an Hourly Basis
The most significant disadvantage of paying workers hourly is that you must keep track of their hours, which requires a significant amount of time and people to accomplish; you must also check the hours recorded on time cards and handle all of the computations.
The Advantages of Commission Paying Employees
When it comes to financial incentives, commissioned staff have a lot of leeways. Because salespeople’s income isn’t restricted, they may make more in a month than a salaried or hourly employee. The more sales they make, the more money they make, thus it’s up to them to increase their sales performance.
Employees who earn commission sometimes have more flexibility, especially once they reach their quota for the period. This is very different from the work-life of employees on a salary who are typically expected to work a minimum of eight hours a day, five days a week.
On the bright side, this wage system encourages workers to compete. Your employees will be more motivated to sell more in order to earn more commission, resulting in increased employee productivity. Aside from that, you may increase customer loyalty by having your personnel nurture their client connections.
Disadvantages of Commission Paying Employees
One of the disadvantages of commission-based compensation is the high turnover rate among salespeople, particularly if a sales representative’s performance is poor and the pay is insufficient to keep them employed. Another disadvantage is that, since most commission-based workers are competitive, they may use more aggressive tactics to get prospects to join. If not managed properly, this might lead to the end of long-term partnerships.
Conclusion
The flow and structure of your firm will determine whether you should pay your staff hourly, salary, or commission. They all have advantages and disadvantages, and matching them to the appropriate roles is critical to avoid spending money you don’t have to. Salaries are better suited to established employment with a consistent schedule and work predictability, while hourly is ideal for jobs with changing demand. Meanwhile, commission-based employment is suitable for those who have a direct influence on sales.
