A salary is part of a compensation package that employers provide to employees in exchange for performing specified services. Generally understood as covering one year's worth of services, it's the money an employee earns at regular intervals — often monthly, semi-monthly or even weekly — throughout the year. Payment terms are typically agreed on between an employer and employee at the beginning of the working relationship, although the details can be changed over time.
While an individual must agree to being a salaried employee, it is the employer who decides whether to offer this position to a worker. Once hired, these employees may need to work a minimum number of hours each week, but compensation is usually based on more than just the time spent at the office. To maintain their positions, employees must typically continue to meet certain performance standards.
Salaried employees may be expected to contribute more work than usual at times. In the U.S., a law called the Fair Labor Standards Act guarantees that all employees are entitled to overtime pay, but it doesn't apply to those who are considered "exempt." Exempt employees include those in professional, administrative, and executive positions, as well as some sales and computer workers. They must also earn at least a certain amount each week, perform certain types of duties, and get paid the same salary even if they don't work the regular number of hours.
For exempt employees, this might mean that they sometimes work weekends or late into the evening without any extra pay. Some employers might offer incentives, such as holiday or year-end financial bonuses, to keep employees who are working especially long hours motivated. Compensation time, sometimes called "comp time," may be offered as well, so an employee who comes in on a Saturday to meet a deadline, for example, might get to take a day off during the following week.
Distinguishing between exempt and non-exempt employees is not always easy, and some employers try to classify as many workers as possible as exempt to save money. An employee who is regularly asked to work overtime and thinks that he or she might meet the criteria for overtime pay may want to speak with the human resources department of his or her company or to an employment attorney or other labor law professional.
Employers with the resources to do so may decide to increase a worker's compensation periodically. Raises and promotions are usually issued following an annual performance review between a management executive and an employee, although they could occur more or less frequently. A talented employee who is performing particularly well, for example, might be offered a raise to encourage her to continue to do good work and to keep her happy with her job.
Although some positions come with pre-set salaries, it's often possible for an individual to negotiate. Some employment professionals suggest that, when an applicant is offered a job, he or she should always try to negotiate for more money, in part as a way to show the new employer that the individual has done research on the position and knows his or her worth. Raises can also often be negotiated, especially if a position has been changed and new responsibilities added.
Although it's relatively uncommon, salaries for individuals, departments or the entire company can, in some cases, be reduced if a regional economy is slowing dramatically or an employer is experiencing severe financial hardship. It may be better for the employees to take a — hopefully temporary — pay cut to keep the company going through the hard times than for some or all of the workers to lose their jobs.
Salary vs. Wages
While "salary" may be the accepted term for any and all compensation that employees earn, it is not always an accurate reflection of someone's earnings. Income that is earned first and foremost relative to the number of hours worked is considered a wage. A wage employee is paid specifically according to the number of hours he or she works, and he or she is nearly always entitled to overtime pay for working more than the required number of hours each week.
Salaried employees, however, are often given certain perks that may or may not be given to wage employment. For instance, they can usually accrue sick days and vacation time that allow them to miss some work and still be paid. Not all hourly positions provide those types of benefits. Also, having a consistent, regular paycheck often makes it easier to create a budget. With wages, the income amount may vary from one pay period to the next.
It is not uncommon for employees who join a firm as an hourly employee to be moved into salaried positions. This might happen after a predetermined trial period of several months, or it might be a way for an employer to keep hold of a strong talent. Considering that salaries require more of a financial investment in employees than wages do, the former tends to provide more prestige and job security.
Often, a salary is part of a broader compensation package — one that extends to include both retirement and health-related benefits. In fact, some employers will use benefits as an incentive for talented workers when they can't offer them a higher base pay. Another tactic that some employers use is to offer employees stock options, which represent the right to buy equity shares in a company at a discounted price. This has the added incentive of encouraging both productivity and loyalty, since an employee who is financially invested in the company likely wants to see it succeed.