What’s it: A salary is a regular lump sum payment usually paid to employees every month. Companies do not pay it based on the hours worked or the output produced. Instead, they regularly pay every month and at a fixed nominal according to the work contract. So, for example, when employees are absent several times, they still get the same pay.
Salaries are usually increased once a year, determined after an employee performance evaluation. And during the following year, employees will receive a higher nominal every month, according to the new salary.
How do salaries work?
The company and the employee agree on the salary when the employment contract is signed. It represents the compensation paid by the company each month to employees in return for the work done.
Compensation to salaried employees does not depend on the total hours worked or units produced by the employee. So, when they don’t come to work, they still receive payments. And then, salaried employees usually have better benefits than wage workers.
Salary employees receive payment by transfer to their bank account. It is unlike wages, which may involve handing over in cash by company staff to workers.
Finally, companies will periodically revise salaries, usually once a year. They evaluate employee performance in the past year. If employees show good performance, they may decide to raise their salary. Thus, in the following year, employees receive higher payments each month.
What are the factors affecting salary?
Salary is common for white-collar jobs like office clerks. However, it varies across industries, skill groups, and positions in the company. For example, some industries offer higher salaries than others because they involve high risk or require specific skills. Then, it also varies between positions within the company, where higher positions offer more pay. The following factors affect salary:
More experienced employees are considered more effective at work. As a result, they are more productive and usually receive higher pay.
Then, when salaried employees move to other companies, the experience leaves them with a higher bargaining power than less experienced ones such as recent graduates. Thus, they are more likely to receive a higher salary.
This factor is usually considered a proxy for experience. Older employees are often perceived as having more mature experience. Thus, they are more likely to receive higher compensation.
Education affects employees’ knowledge, abilities, and skills. Therefore, those with higher education are considered better off. In addition, they have also invested more money and time in pursuing education to develop themselves. Thus, they often receive higher pay than those with less education.
For example, undergraduate graduates will receive higher pay than high school graduates. Likewise, those with master’s degrees receive higher pay than undergraduates.
From which university the employee graduated is another influencing factor. Those who graduate from prestigious universities are more likely to earn higher salaries than those who graduate from less well-known universities. Likewise, in developing countries such as Indonesia, graduates from overseas universities are often more valued than graduates from domestic universities.
Abilities and skills
Skilled employees receive higher salaries. This is because they are more productive and contribute more to the company than the less skilled.
Then, the factors considered are professional certificates, such as Chartered Financial Analyst (CFA), Certified Public Accountant (CPA), and Financial Risk Manager (FRM). Such a certificate formally acknowledges their abilities and skills in a related field. Thus, employees holding professional certifications or licenses can earn more than others.
Some industries offer higher average pay than others. For example, companies in the healthcare, information technology, and finance industries may pay more than companies like the fast-food industry.
Type of work and position
High-risk jobs – such as commercial airplane pilots – offer higher pay than low-risk jobs. Likewise, jobs with specialized skills usually offer higher pay, such as lawyers, doctors, or actuaries.
In addition, compensation and benefits also vary between positions within a company. For example, higher-level positions such as top management will have higher salaries than lower-level positions. That’s because higher positions involve more complex tasks or greater responsibilities.
Companies in urban areas often pay more than those operating in rural areas. Likewise, companies in developed countries also offer higher salaries than companies in developing countries.
Two contributing factors are the cost of living and local demand for work. For example, living in urban areas is more expensive than in rural areas, so companies will usually offer compensation for at least a decent standard of living in each area.
What is the difference between salary and wage?
Salary is an alternative to wages. The latter is usually given to manual workers such as those who work in factories or warehouses. Whereas the former is usually common for administrative or service work.
The next difference is related to the calculation. For example, the wage is calculated based on hours worked, called time-based wages. Or, it is based on the output produced by workers, called piece-rate wages.
Meanwhile, salaries are usually agreed upon when the employment contract is first signed. It can go up if employees show excellent performance. Companies usually evaluate their performance and salaries every year. If it increases, the employee will receive a new, higher nominal every month in the following year.
Then, if the salary is paid at a fixed nominal each time it is given to the employee, it does not apply to wages. Wage workers may receive different pay, depending on the wage rate and how many hours they work or how much output they produce.
In addition, the company can pay wages more quickly, perhaps once a week or every two weeks. Meanwhile, salary is usually given every month.
In what business is salary suitable for use?
Some companies use a wage system, while others use a salary system. Typically, the salary system is suitable for businesses in the service sector or other white-collar jobs.
Companies in the service sector do not produce physical output. Thus, how much of each employee’s output is difficult to measure. Finally, using a salary system becomes a more reasonable option.
What are the advantages of a salary?
Measurable income. Employees do not need to estimate how much will be received at the end of the month. That’s because the company pays them a fixed amount every month.
Income security. In addition to receiving a fixed nominal every month, salaried employees have long-term work contracts with the company. Therefore, even when they missed work several times, they still received the same amount. They lose pay only when they resign or are fired.
More facilities. Salaried employees usually receive various benefits, often not accepted by wage workers. Examples are facilities such as pension benefits, insurance, gym facilities, or tuition reimbursement.
Higher dollar. Salaried employees usually receive more dollars than wage workers. That’s because their work requires not only hard skills such as manual work but also soft skills, which are often expensive to develop.
Suitable for service. The service sector does not produce physical output. Thus, each employee’s contribution is difficult to measure. Therefore, the salary system is suitable to be applied.
More flexible cash. Companies disburse cash every month, longer than wages, which may be paid once a week. Thus, they can be more flexible in allocating cash for other more urgent needs.
What are the disadvantages of salary?
Less flexible for employees. Some people like to be paid more quickly, for example weekly. Thus, they have the financial flexibility to meet their daily needs.
No extra pay for overtime. Unlike wage workers, salaried employees do not get paid for the extra time. So even though they had exceeded their normal working hours, they didn’t get any extra pay. Some generous companies may only offer a meal allowance.
Low job mobility. Employees are bound by long-term employment contracts when they become effective. Contracts usually require them to work for a minimum period before they can resign.
Needs more supervision. Some employees may tend to be lazy and less productive. For example, they may spend more time chatting with coworkers than doing chores at work. Or they are sometimes absent. And, they are free to do it all because it does not affect the dollars they receive at the end of the month.
For this reason, companies often need more layers or levels of positions as the organization gets bigger. For example, it could involve staff, senior staff, assistant managers, managers, senior managers, etc. And, higher positions monitor the performance of their subordinates more closely.
Not a motivating factor. Salary is important to meet basic needs. But, often, it does not result in higher motivation, or the effect may be temporary. For example, an employee gets a raise. In the early months after the ascension, he may be more diligent. But, in the following month, they may revert to old bad habits, such as frequent absences.
What to read next
- Financial Motivation: Why It Matters and Types
- Wage: How it works and Types
- Time-Based Wage: How it Works, Pros and Cons
- Piece-rate Wage: How it Works, Advantages and Disadvantages
- Bonus: Types, Advantages, Disadvantages
- Salary: Influencing Factors, Advantages, Disadvantages
- Commission-Based Pay: How it Works, Pros, Cons
- Performance-Based Pay: How it Works, Pros, Cons
- Share-Ownership Scheme: Its Importance, Pros, and Cons
- Fringe benefits: Examples, Advantages, Disadvantages
- Profit-Sharing as a Motivator: How it Works, Advantages, Disadvantages