How Salary Is Calculated: A Practical Guide to Hourly Pay, Salaried Pay, Overtime, and Job Classification

Understanding how salary is calculated helps employees interpret their paychecks, advocate for fair compensation, and compare job offers. Employers also benefit from applying the correct rules, especially when it comes to overtime and compliance with labor laws. Although pay systems vary by country and even by company, certain principles are widely used. This article breaks down the essentials: hourly vs. salaried compensation, overtime rules, pay periods, and the meaning of “exempt” and “non-exempt” status.

1. Hourly Pay: How It Works

Hourly compensation is straightforward: employees earn a fixed amount of money for every hour they work.

1.1. Formula for Hourly Wages

Hourly Pay = Hours Worked × Hourly Rate

Example:
If someone earns $20 per hour and works 40 hours, their gross pay is:

• 40 × $20 = $800

If overtime applies (often after 40 hours in a week), additional rules kick in.

1.2. Advantages of Hourly Pay

• More pay for more hours (including overtime).

• Clear breakdown of how each hour is compensated.

• Flexibility—common in jobs with variable schedules.

1.3. Considerations

• Income can fluctuate week to week.

• Some benefits may not apply until a certain number of hours are met.

• Time tracking accuracy is crucial.

2. Salaried Pay: Fixed Compensation

Salaried employees earn a set amount per pay period regardless of the number of hours worked. This amount is typically quoted as an annual salary (e.g., "$60,000 per year").

2.1. Formula for Salaried Wages

Pay Per Period = Annual Salary ÷ Number of Pay Periods

Examples:

• If you earn $60,000 annually and are paid monthly:

  • $60,000 ÷ 12 = $5,000 per month

• If you’re paid biweekly (26 pay periods):

  • $60,000 ÷ 26 ≈ $2,307.69 per paycheck

The paycheck doesn’t generally vary unless:

• Bonuses or commissions are added,

• Deductions change,

• Unpaid leave is taken (depending on employer policies and job classification).

2.2. Advantages of Salaried Pay

• Predictable income.

• Often associated with jobs that offer benefits (health insurance, paid time off).

• Encourages focus on results rather than hours.

2.3. Considerations

• Some salaried employees don’t receive overtime (if classified as exempt).

• Hours worked may exceed 40 in busy periods without additional pay.

• Salaries may feel less flexible than hourly pay.

3. Overtime: When It Applies and How It’s Calculated

Overtime compensation ensures employees are paid more for long work hours. Rules vary by country, but the most widely referenced system is the U.S. Fair Labor Standards Act (FLSA). Many other countries use similar models.

3.1. Common Overtime Calculation

In the U.S., non-exempt employees must be paid at least:

• 1.5 times the hourly rate for hours worked over 40 in a workweek.

Example for an hourly employee making $20/hr:

• First 40 hours: 40 × $20 = $800

• 5 overtime hours: 5 × ($20 × 1.5) = 5 × $30 = $150

• Total gross pay = $950

3.2. Salaried Non-Exempt Overtime

Some salaried employees are eligible for overtime. Their hourly equivalent must be calculated:

Regular Rate = Weekly Salary ÷ Weekly Hours the Salary Covers

Example:

• Weekly salary: $800

• Salary covers 40 hours

• Regular hourly rate: $800 ÷ 40 = $20/hr

• Overtime is then calculated on this rate.

3.3. Double-Time

Some industries, states, or union contracts add double-time for holidays or long shifts. This is not universal, but where applicable it’s:

Double-Time = 2 × Regular Rate

4. Pay Periods: How Often Employees Get Paid

A “pay period” is the timeframe employers use to calculate wages. The frequency affects paycheck amounts but not annual earnings.

4.1. Common Pay Period Types

Weekly (52 paychecks/year)

• Paid once every week.

• Paychecks are smaller but more frequent.

• Common in construction, retail, and service jobs.

Biweekly (26 paychecks/year)

• Paid every two weeks.

• Standard for many U.S. employers.

• Two months each year will have three paychecks instead of two.

Semi-Monthly (24 paychecks/year)

• Paid twice per month (e.g., 15th and 30th).

• Consistent monthly budgeting.

• Not suitable for hourly jobs requiring weekly overtime calculation, because weeks don’t align neatly.

Monthly (12 paychecks/year)

• Paycheck is larger but infrequent.

• Common in academic or executive positions.

• Requires careful budgeting.

4.2. Effect on Gross Pay

Only the each-paycheck amount changes depending on frequency; the annual salary stays the same.

5. Exempt vs. Non-Exempt Status: Why It Matters

Classification determines whether an employee is eligible for overtime. The terms “exempt” and “non-exempt” come from labor law—particularly the FLSA in the U.S.—but similar systems exist in other countries.

5.1. Non-Exempt Employees

• Eligible for overtime pay.

• Usually tracked hourly, but can be hourly or salaried.

• Typically include roles with:

  • Manual labor,

  • Retail and hospitality work,

  • Administrative support,

  • Any job not meeting the exempt criteria.

5.2. Exempt Employees

Exempt employees are exempt from the overtime rules. They must be paid a salary and meet specific job-type criteria (e.g., executive, administrative, or professional roles).

Typical characteristics:

• Paid a fixed salary regardless of hours.

• Not eligible for overtime.

• Often higher-level positions requiring discretion or specialized knowledge.

5.3. Why Classification Exists

Governments use these categories to protect workers:

• Non-exempt rules safeguard against overwork and underpayment.

• Exempt rules acknowledge that some jobs do not align with hour-by-hour tracking.

Misclassification can result in legal consequences for employers and lost compensation for employees.

6. Other Factors That Influence How Salary Is Calculated

Beyond hourly rates or salaries, several elements affect gross and net pay.

6.1. Bonuses

Bonuses may be:

• Discretionary (e.g., holiday bonuses)

• Performance-based

• Contractual (e.g., sales commissions)

Some bonuses must be included when calculating overtime (varies by jurisdiction).

6.2. Shift Differentials

Workers may earn more per hour for:

• Night shifts,

• Weekends,

• Hazardous conditions.

6.3. Benefits Deductions

Deductions that reduce take-home pay include:

• Health insurance premiums,

• Retirement contributions,

• Payroll taxes,

• Garnishments,

• Union dues.

These do not change how salary is calculated, only the net amount received.

6.4. Unpaid Leave

Exempt employees usually receive their full salary even if they work fewer hours, unless:

• They take unpaid personal leave,

• They start/stop mid-pay-period,

• Company policy or local laws allow partial-day deductions in specific circumstances.

7. Converting Between Hourly and Salaried Pay

Many people want to compare job offers across pay structures.

7.1. Converting Hourly to Salary

Assume a 40-hour workweek and 52 weeks per year:

Annual Salary = Hourly Rate × 40 × 52

Example:

• $25/hr → $25 × 40 × 52 = $52,000/year

If you frequently work overtime, your actual gross income may be higher.

7.2. Converting Salary to Hourly

If exempt, this is only for comparison — not payroll calculation.

Hourly Equivalent = Annual Salary ÷ (52 × Weekly Hours)

Example:

• $60,000 salary, 40-hour week

• $60,000 ÷ (52 × 40) ≈ $28.85/hr

8. How Employers Budget for Salary

Employers consider several factors when setting pay:

• Labor market rates,

• Minimum wage and overtime laws,

• Internal pay structures,

• Job responsibilities and required qualifications,

• Cost of benefits,

• Expected weekly hours.

Salaried roles often include built-in expectations of additional effort, while hourly roles focus more strictly on hours worked.

9. How Employees Can Verify Their Pay

Employees should review:

1. Pay stubs – to understand hours, rate, deductions, taxes.

2. Employment contracts or offer letters – covering salary, pay periods, bonus eligibility.

3. Timecards (if hourly) – to confirm accuracy.

4. Overtime rules – to ensure correct classification and compensation.

If something looks incorrect, employees can:

• Ask HR or payroll for clarification,

• Review local labor laws,

• Keep personal time records.

10. Summary: Key Takeaways

• Hourly employees are paid for each hour worked and usually receive overtime.

• Salaried employees are paid a fixed amount each pay period, regardless of hours.

• Overtime is typically 1.5× the regular rate for hours worked beyond legal thresholds.

• Pay periods—weekly, biweekly, semi-monthly, or monthly—affect paycheck size but not annual income.

• Exempt vs. non-exempt status determines overtime eligibility.

• Many other factors (bonuses, benefits, deductions) influence take-home pay but not base salary calculations.

Understanding these elements empowers employees to interpret job offers, track earnings, and ensure proper compensation.