Wage: How it works and Types

What’s it: Wages are irregular payments to workers. Companies may pay them based on the hours worked or their output. It may be paid daily, weekly, monthly, or when the project has been completed. Unlike salary, workers at the same level may receive different payments depending on their contribution.

The money received depends not only on their total hours worked or the total output produced but also on the wage rate. If companies raise wage rates – for example, because of government regulations, they get paid more even for the same total hours worked or total output as before.

How does wage work?

Wages are usually synonymous with payments to those who work in warehouses or factories. Or those involved in a project. They are usually involved in manual work.

Employers may pay it periodically, for example, every week. But, in fact, for a small and short duration project, they may give it after the project is complete, and it could be a few days or more than a week.

The nominal received by employees varies depending on their contribution; for example, it is calculated based on the total output they produce or the total hours they work during the week. So, even though the wage rate is the same, each can get a different payment.

Then, workers may receive it in cash, directly through company staff. Or it is transferred to their bank account.

Now, take a simple example. Say your company pays a worker $30 per hour and pays him weekly. At the end of the week, you calculate the total hours worked is 40 hours. So you spend $1,200 – before taxes – to pay him.

What are the types of wages?

We divide wages in two based on whether they are calculated per hour worked or per unit of output. They are:

• Time-based wage
• Piece-rate wage

Time-based wage

Companies pay wages based on the total hours workers spend at the workplace. For example, the company pays $20 per hour. So, the longer their working hours, the more they get paid.

If they work extra hours, the company pays them per hour spent, which may be higher than normal hours, say $25 per hour. Thus, the pay received by employees takes into account normal working hours plus overtime hours. Say, they work 9 hours a day, where 8 hours is normal working hours. In this case, they will receive a payout of $185 = ($20 x 8 hours) + ($25 x 1 hour).

Time-based wages are common for service businesses, where the output produced by each worker is difficult to measure. In addition, businesses with differentiated products may also apply this remuneration system. They attach importance to quality as their value proposition. And, since workers are paid based on total hours worked, there is no reason to go after quantity over quality to get paid more. That’s because whatever their output is, it doesn’t affect the dollars they receive.

The advantage of time-based wages is about quality. Employees don’t rush to get work done in pursuit of quantity, so they can ensure quality meets standards.

Meanwhile, the main weakness of this time-based system is that there is no direct relationship between worker productivity and their compensation. Thus, those who work hard and are lazy can get the same pay as long as they spend the same total working hours.

Piece-rate wage

Companies pay workers based on the output produced. In other cases, it may be per project, i.e., when the project has been completed.

Unlike time-based wages, the pay received by workers does not depend on the total hours spent working. So, if they are more productive, they can produce more output for less or the same total hours worked as others. But, finally, they can earn more.

Then, if workers produce higher output than targeted, they get paid according to how much output has been produced. Thus, the total pay received equals the total output (including extra output) times the wage rate.

Piece rate wages are common for manufacturing businesses with standardized products. Thus, quality is not an important consideration because, for example, it has been specified through a computer-aided machine. Thus, workers focus on speed to get the job done.

Adopting piece rates allows companies to directly link productivity with workers’ pay. This is because they receive payment according to the output they produce. Therefore, the more productive they are, the more they get paid. 

The piece-rate system is important when companies need higher production to meet increased demand. They can encourage workers to be more productive by, for example, increasing wage rates for each extra output produced.

But, due to too much focus on quantity, quality can deteriorate. That can be dangerous because consumers no longer trust the company’s products. Eventually, sales fell.

In other cases, workers may receive less pay even through no fault of their own. For example, the engine shuts down due to a technical problem. Thus, workers can only do less output. And, finally, they get paid less.

What is the difference between wage and salary?

Wages and salaries are often equated because, indeed, they represent the compensation commonly given by employers to workers. However, the two are different in several aspects. Here are some of the differences:

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