Hourly vs. salary: Which is better?
I had a conversation with a friend, we'll call him Joel, who had two job offers. One was a low-stress 9-to-5 gig but paid $10,000 less than the other offer, which would require longer hours and greater responsibility. He didn't like a lot of things about the higher paying position, but he accepted the offer because it was more in line with the salary at his last job.
In the months that followed, he was regularly putting in 12-hour days at the office and working Sundays. My guess is that it was at least 60 hours per week, and that's being conservative. His gut instinct was right — he wasn't enjoying the new job.
Hourly vs. Salary
I couldn't help but wonder if the extra money was worth it because I was in a similar position not long ago.
When I was an employee, I was on the cusp of going from hourly to salary, and quite frankly, I'm glad I was able to avoid the uncomfortable conversation of declining a promotion. In my situation, a jump in levels would essentially mean I would be doing the same job (with the possibility of more responsibility) for the same pay.
Vacation and sick days were the same for hourly or salaried employees. When I asked what the difference was between the two pay structures, other than the fact that I wouldn't get paid for overtime on salary, I was told that salaried employees can take a couple of hours for a doctor's appointment and not have to use their sick time.
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As a young, healthy woman without kids, I had amassed more sick days than vacation time. That wasn't much of an incentive. Then I looked around me at some of the other salaried employees who stayed late or worked weekends, and I wanted no part of it. I wanted to have dinner with my husband at night and spend our weekends going to markets, cooking and watching Netflix.
At another job, I was told that being on salary meant that “if we close the office early, you'll still get paid.” But we closed the office maybe two or three afternoons out of the year, and there were many, many events that required 8+ hour days. Once I put in a 22-hour day for a particularly big event.
In these particular situations, I just didn't see the benefit of switching to salary. Was I crazy, or was everyone else?!
Exempt and Non-exempt
First, let's look at what exactly it means to be hourly or salaried. According to the Fair Labor Standards Act (FLSA), which governs most jobs, employees are either “exempt” or “nonexempt.”
Nonexempt employees are typically paid by the hour and are entitled to overtime pay if they work more than 40 hours per week.
Exempt employees, on the other hand, do not get overtime pay. For example, a sales consultant is usually exempt, but a customer service rep who works in a call center will most likely be nonexempt.
Every field, company, and job is different, but generally, the following are the benefits and drawbacks of each pay structure.
Benefits of Hourly Work
The benefits of being paid by the hour include the following:
- Guaranteed a certain dollar amount for every hour you work.
- Positions usually have a predetermined number of hours you'll work.
- If you're asked to work more than 40 hours, you get paid overtime, which is time-and-a-half for each hour after the first 40 hours. For example, if your hourly wage is $12, you would be paid $18 for every hour past 40 hours in a week.
- Some employers double your hourly rate if you're asked to work holidays.
The drawbacks? If your place of business closes early or decides to cut back on hours, that means a smaller paycheck. The likelihood of that happening depends on the industry and the company. A 9-to-5 office job is likely to have a set schedule, whereas a job working in retail might fluctuate more.
Benefits of Salary Pay
The benefits of being paid a set salary include the following:
- Guaranteed a certain dollar amount per paycheck.
- Some companies offer salaried employees additional perks, such as vacation days or a more flexible schedule. For example, if you finish your work early, you might be able to take the afternoon off.
- Often salaried positions come with a higher status and/or a jump on the pay scale.
- Salaried employees might be happier, according to a study published in Personality and Social Psychology Bulletin. Researchers found that income didn't affect happiness levels as much for salaried employees as for those paid hourly. Hourly workers experienced a stronger relationship between income and happiness.
The downside is that if a salaried position demands more than 40 hours per week and working on holidays, you won't get paid extra for your time.
What Would you Choose?
In my case, there were no extra perks and no bump in pay. My hours were just as set as they were for salaried coworkers. Maybe more so since my boss was reluctant to have me work overtime and have to pay time-and-a-half.
I think in Joel's case, it wasn't such a good deal, either. If he was making $50,000 and working 60 hours per week, he made about $16 per hour. If he had accepted the other job offer at $40,000 and 40 hours per week, he would have made $19.24 per hour. He was working at a lower hourly wage, and he wasn't even enjoying his job.
But in many cases, it can be a great thing, especially if you make more money, get extra benefits, and your company doesn't expect 80-hour work weeks with no time off to compensate.
If you're given the choice between the two, whether at your company or when negotiating job offers, look at the whole package. Find out the average number of hours the job requires, calculate your hourly wage, and think about what your time is worth. (Even better: Compute your real hourly wage, since it'll reflect hidden job costs, such as wardrobe and commute.)
If you're young and single, maybe you want to focus on your career and climb the corporate ladder. If you're a father of two small kids, making it home for dinner every night might be your top priority. Then look at the perks and decide if they're worthwhile to you. For example, a free pass for doctor appointments didn't matter to me in the least, but I would've jumped at the chance for a flexible schedule.
In short, don't assume that salary pay is necessarily better. Every job and every employee's personal situation is different, so crunch the numbers and weigh the benefits for yourself.
Editor's note: This article was first published in 2011 and updated by Katie Ryan O'Connor in October 2016.