Salary Vs Wages – What are The Differences?

A salary and wages may sound similar. However, they are both different remuneration packages for different kinds of workers.

Let us discuss what is salary and wages, and what are the key differences between them.

What is a Salary?

A salary is a fixed remuneration paid to an employee against services rendered to an employee.

Once an employee and an employer enter into an employment contract, the amount of the salary does not change. The employment contract will include certain terms such as accounting for extra work hours and compensation package.

Usually, the salary amount does not change irrespective of the number of hours worked in a week or month. Salary packages are generally quoted in annual terms.

A complete salary package would include base pay and a compensation package that includes different employee benefit plans.

By law, a salaried person is required to work 40 hours per week for an employer. If an employee works more than that, he/she will be entitled to overtime payments.

Salary can be paid weekly, bi-weekly, monthly, or bi-monthly depending on the contract terms.

What are Wages?

Wages are remunerations paid to workers on an hourly work rate basis. The paid amount can be calculated on an hourly, daily, or work per piece basis depending on the contract terms.

Wages are usually associated with non-skilled workers. Also, wages do not include a fixed pay slab. Therefore, the amount earned by a wage worker can change on a daily or weekly basis.

An important distinction of wages from a salary is the exclusion of an employee compensation package.

For wage workers, the limit of daily work hours is also 8 hours. It means workers doing additional work than 8 hours are entitled to overtime compensation legally. The legal rate for overtime hours is one and a half times the base hourly rate.

How is Salary Calculated?

A salary is usually described in yearly package terms. For example, an employer offers its accountant an annual package of $ 60,000.

It means the monthly paycheck for the accountant will be $ 5,000. The daily pay rate for the accountant will be $ 166.67 and the hourly rate will be $ 20.83.

An employee’s base salary is different from the total package. The full salary package includes base pay + the compensation package.

It is important to mention that employers would offer competitive salary packages. However, they would also keep the salary costs as low as possible.

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It means an employer offering commission like a fixed percentage of sales would usually offer a lower base pay. On the other hand, an employee with no commission or bonuses would receive higher base pay and lower contribution of compensation packages.

An employee’s salary included base pay and other benefits that depend on qualification and experience. (Discussed in detail below)

How are Wages Calculated?

The calculation of wages is simpler than calculating the take-home salary. The wage remuneration depends on the hourly wage rate of a worker.

Suppose an employer offers an hourly wage rate of $ 13 to its electricians. It means the daily wage rate for the electrician will be $ 104 and the weekly wage rate will be $ 520.

The legal practice of calculating overtime wages is one and a half times the normal rate. So, in our example, the electrician will be paid $ 19.5 for overtime hours.

The gross wages and net wages may differ as well. The employer may deduct payroll taxes (if applicable) and other deductions as agreed by both parties in the employment contract.

What is Included in a Salary Package?

Depending on the contract terms a compensation package may include employee benefits like:

  • Paid off time (sick leave, vacation days, annual holidays)
  • Commission and bonuses
  • Retirement plans
  • Insurance plan contributions
  • Healthcare, childcare programs
  • Employee profit-sharing plans, ownership plans (EOS)

Also, the take-home pay or the net salary of an employee is different from the total or gross salary. The employer would deduct payroll taxes, retirement or insurance contributions, and any other work-related deductions.

The deductions for employee retirement contribution plans should be considered savings for the long term. Usually, employers would match the retirement contributions of employees or offer other favorable plans.

Either way once calculated the paycheck for a salaried person would not change for the contract period unless the contract terms such as base pay rate or other benefits change.

What is Included in Wages?

Wage workers usually receive fewer benefits from employers other than wage compensation. They do not receive healthcare, insurance, paid holidays, and other benefits that a salaried employee would receive.

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A wager worker’s total wages may include the following items.

  • Basic wage rate multiplied by the total hours worked
  • Overtime hours when applicable
  • Gratuities and tips received from customers (not mandatory)
  • Healthcare benefits in some cases
  • Retirement contributions in some cases

As you can see the wage worker’s total take-home paycheck includes several optional benefits.

Deciding Factors for a Salary Package

An employee’s salary package would depend on several contributing factors. These factors range from a country’s legal protection for employees to the personal traits of an employee.

Here are a few major factors that affect the salary package of an employee.

  • Educational qualification of an employee.
  • Work experience of an employee, especially the matching job experience.
  • Financial strength, corporate governance, and reputation of the employer.
  • The legal environment around the employer.
  • Legal protection for the employee’s rights.
  • Payroll tax rates and other costs for the employer.
  • Skills possessed by an employee including hard and soft skills.
  • Job location, nature, and type of business.
  • Market benchmarks for the same role in the job market of the employer.

Some other factors like creating the compensation package items like the commission rates also affect the total salary package of an employee.

Deciding Factors for Wages

Wage workers are usually temporary and contract workers of a company. However, they possess special hard skills that make them specialists for their work roles.

Some key deciding factors for wage calculations include:

  • Hard skills possessed by the worker.
  • Work experience in the relevant field.
  • Educational qualification through skilled-based learning programs.
  • Certifications, licenses, and other prerequisites to carry out certain specialized tasks.
  • Market competitive rates for the same job.
  • Legal work hours and other worker’s rights protection.
  • Financial strength, corporate governance, and reputation of the employer.

 Some other factors like non-cash or in-kind benefits may change the wage rates for certain workers as well.

Gross Salary Vs Net Salary

The gross salary and net salary of an employee are different.

A gross pay or salary is the total remuneration package of an employee. It includes base pay, compensation benefits, overtime, and other benefits.

However, the net salary or the take-home pay of an employee is usually less than the gross pay.

The net salary is calculated by deducting payroll taxes, retirement contributions, unpaid leave, and other deductions from the employer. The net amount is the net salary of the employee.

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We can apply the same concept for the gross and net wages for wage workers as well. However, the concept is more common for salaried employees.

Salary Vs Wages – Key Differences

Let us summarize the topic of salary v wages – key differences with the following bullet points.

Basis of Calculations

  • Salaries are offered on a yearly contract basis normally. The rate can be applied on a monthly or daily basis as well.
  • Wages are usually calculated on a per hour wage rates. The rate is then applied for weekly and monthly calculations.

Payment Frequency

  • Salaries are paid on a monthly or bi-weekly basis usually.
  • Wages are often paid on a daily and weekly basis.

Nature of Contract

  • Job Contracts for salaried employees are for one year and longer.
  • Job contracts for wage workers are temporary and often offered on a monthly or project basis.

Nature of Job

  • Salaried employees are internal employees of an organization. They offer services like administration, management, accounting, marketing, and so on.
  • Wage workers are external employees of an organization. They offer skilled jobs like electricians, mechanics, drivers, and so on.

Base Rate + Benefits

  • Salaries include base pay plus compensation packages like retirement plans, paid vacations, and so on.
  • Wage packages do not include additional perks and privileges like paid vacations, memberships, or commissions.

Prerequisites for Job

  • The prerequisites of a salaried job include educational qualification, experience, soft skills, and hard skills.
  • Wage workers require hard skills and work experience normally. They may also require licenses and certifications.

Example Professions

  • Example professions of salaried employees include managers, accountants, marketers, HR professionals, etc.
  • Example professions of wage workers include electricians, drivers, mechanics, laborers, etc.

Benefits for the Receiver

  1. Benefits of salary include:
    • Fixed pay
    • Consistency
    • Job security
    • Additional benefits
    • Paid vacations, holidays, and of time
    • Opportunities for career growth
  2. Benefits of wages include:
    • No business growth responsibilities
    • Direct work hours compensations
    • No binding job contracts
    • Ease of changing the employer
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