Salaried employees: Understanding the ins and outs of compensation
What compensation structures are typical for different types of jobs? What are the pros and cons of a salaried pay structure? What are the types of compensation that exist—base, bonus, stock, and other benefits?
Those who are salaried are hired with the condition that they receive a certain amount of compensation, regardless of the actual hours worked. Many roles in various organizations—such as those in law, education, finance, and technology—are salaried because the roles often require workers to devote greater than forty-hour work weeks and the exact timing and logistics of the work can be fluid, particularly if it includes travel. From an HR standpoint, salaried employees are exempt, meaning employers do not have to pay them overtime for working more than a forty-hour work week, as is required for hourly workers per Fair Labor Standards Act.
Benefits and beyond
Beyond base pay which is defined at an annual rate (e.g., $50,000 a year), compensation for salaried employees typically includes benefits, particularly various types of insurance (health, dental, life, disability), and might also include contributions into a 401(k) plan, or a structured investment account that’s assumed to be a portion of the employee’s broader retirement savings that’s accumulating throughout the course of her career. Employees choose the amount that they want deducted from their paychecks and contributed to their 401(k) plan, with the maximum amount defined that cannot be exceeded. Not all organizations offer 401(k) plans for salaried employees, but many do. Within that group, most match the employee’s contribution up to a certain amount, but the terms of matching vary and some may not provide matching at all.
With salaried positions, another benefit is paid vacation days or paid time off (PTO). The minimum amount of PTO in the US is two weeks plus at least seven major holidays (Christmas, New Years, Thanksgiving, Memorial Day, 4th of July, Labor Day, and usually either Columbus Day or Martin Luther King Day), with some offering more. Most employers offer at least two, three, or even four weeks a year to start and add additional time as your tenure increases. For more detail on the ins and outs of time off, check out our piece on taking leave.
Bonuses and more
While the minimum wage is defined at the hourly level, it applies to salaried workers in that their prorated annual pay must exceed the minimum wage. Meanwhile, beyond base pay and basic benefits, many salaried positions include a bonus component or what might be called “variable pay.” In this case, the variable part of the total compensation package might be defined at an annual level based on a set of objectives that must be achieved by the employee, such as achieving a revenue target, or a less quantitative goal, which are typically defined as “Management Business Objectives” or MBOs, such as launching a new product or achieving a particular number of happy customers who are referenceable. In other cases, the variable pay might be provided on a quarterly cadence and be tied to attaining an established sales target and the amount is based on percentage attained as part of a sliding scale.
For salaried employees in sales, most are provided a variable component of their pay beyond their base salary called a commission. In this case, the commission percentage is defined (e.g., 10% of sales revenue) along with a quota, or target amount of sales that the employee is expected to attain. Within this structure, the employee is sometimes provided added incentives beyond the defined commission on the deals they book in the event that they achieve their quota. For example, some are provided a higher rate of commission once they exceed it or possibly a special bonus paid immediately related to a sale, which is sometimes referred to as a “Spiff” or “Spiv.” Many companies also offer reward trips for their top sales reps, which is sometimes called “Club.” In cases where companies have these types of annual events for their highest sales performers, the terms of realizing an invitation to the “Club” are defined each year along with the employee’s quota and other sales targets that are established. The sales reps then work to achieve those targets through the deals they close throughout the year.
Finally, beyond base and bonus, some companies also offer employees equity in the firm, which might come in the form of stock options or grants of units of stocks or (RSUs—restricted stock units). Not all employees are provided equity, but usually more senior roles in a company expect that this is part of their total compensation package. Anywhere between .01% to about 3.5% is pretty typical, though some companies may give less than .01% and some may go beyond 3.5%. In the event that the organization commits a defined amount of equity to the employee as part of their defined compensation, they will also define the terms of vesting, or how and when the equity is granted to the employee over time. Typically, vesting includes a three to four-year term and the first grant is not provided until the employee has reached their one-year anniversary date. At that point, they will typically receive one-third or one-fourth of the total amount committed to them, depending on the term, and then additional grants on an ongoing basis, which is typically defined as monthly or quarterly.
What happens when you’re fired?
Like hourly employees, salaried employees are considered to be “at will” in the US, meaning employers can terminate their employment at any time for any reason. However, some laws are in place to protect employees that make it more difficult to fire salaried employees without “cause” or specific reasons related to performance that have been documented in an organized, fact-based way that can be proven in the event that the employee claims that wrongful termination took place (e.g., due to discrimination based on gender, race, or age). More specifically, employers typically need to have put the employee on a Performance Improvement Plan (a.k.a. PIP) to ensure the employee has been given direct feedback on their poor performance and an opportunity to improve based on specific changes defined for the employee’s behavior and outcomes and a reasonable time for achieving the improvement. In the event of a more widespread layoff, or extensive cut in an organization’s workforce with the goal of cutting costs to keep the firm operating effectively (i.e., costs are less than revenues), the documentation and conversations required for a one-off performance-based termination for cause are not required. Proving cause is also often not required when an employee has worked for an organization for less than three months, which is more or less treated as a “trial” period.
Netting it all out
The upside of salaried positions is that they provide a predictable revenue stream for you and your family, regardless of the actual hours worked from week to week. The downside is that the expectation with these types of positions is that you work greater than forty hours and be more “available,” either in person or especially online to respond to requests from executives, customers, and other stakeholders. This level of commitment typically comes with greater overall compensation and other economic benefits, but again has a price in terms of what might be perceived as an intrusion or a job that bleeds into your personal life.
The compensation comparison: Hourly vs. salaried vs. consulting structures
Now that we have a basic understanding of salary structures, we wanted to provide a framework for netting out the various terms and conditions of hourly, salaried, and consulting structures side-by-side to clarify the tradeoffs and make it easier to assess what might make the most sense for your unique situation.
While the terms of one arrangement might be great for you in your 20s, you might require something entirely different as a new working mom and then yet another arrangement as your family matures. There’s no right or wrong answer, just like with most things, but it’s still critical to get a sense of what you need most and what arrangement can best accommodate your priorities.
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Alexis Harding is Women at Work’s resident HR expert. A long-time HR professional based in the Boston area, Alexis has rich experience in the HR departments of several large institutions over nearly two decades. She is here to engage with your questions about a range of topics that might be impacting your career and your overall success.
Christina Van Houten is the founder of Women at Work. Based in Boston with her husband and two teenage sons, she has spent the last 20 years of her career as a senior executive in the enterprise technology sector. Prior to evolving into tech, Christina founded a women's athletic apparel brand and served in several public interest roles focused on community and economic development. She started working at age thirteen and hasn't stopped since. She’s eager to help women find their way to the best possible life they can achieve.