Hourly or Salary? Which Compensation Structure is Smartest for New Startups?

If you’re in the first stages of starting your new company, you’re likely taking a hard look at every expense that can affect the bottom line. After all, you’ve seen the statistics that 90% of startups will fail after their first year and you naturally want to be in the successful 10% that do. One of the first places you might look at is your employee compensation structure. If you’re currently paying all of your employees a salary, you might consider if an hourly rate would be more cost-efficient, and vice versa if you’re already implementing an hourly structure. With so many variables, it can be difficult to discern which route is the best to take. Here are a few key facts to help you make your decision, grow your company, and ensure employee morale stays high in the process.

Understanding the Difference

To begin, it helps to understand the exact difference between an hourly and salaried employee. A salaried employee is known as “exempt” and gets paid a set rate each month, equalling a set amount each year, regardless of the hours that he or she works per week. On the other hand, an hourly employee, as the title suggests, is paid on a per-hour basis and is known as a “non-exempt” employee. You can read more here about this distinction.

The Fair Labor Standards Act (FLSA) provides regulations that help govern whether an employee should be classified as exempt or non-exempt. From the nature of the work to the compensation rate, there are myriad factors that will be taken into consideration. Still, if you’re on the fence about how to pay your employees, there are a few things to keep in mind.

1. Do you have distinct or general tasks? If you have one defined, distinct task to assign an employee to and can ensure no role overlap, hourly may be the way to go. For instance, if you just need someone to write blog articles for your company or package materials, that job can be provided to a contracted, or 1099 employee who works on an hourly basis. That way, you’re not spending money to keep them on the job if there isn’t work to do. On the other hand, if you expect that employee to wear many hats and be available to perform tasks both in and outside of the exact job description, your best bet is to go with salaried.

2. Do you need access to top-tier talent? If so, salaried is often your best bet. Why? Hourly positions can be off-putting to some employees, as the understanding is that they don’t get paid unless there is work to be done. As such, it’s hard to promise or guarantee a set amount of money each month, which could leave them pinching pennies if the work simply isn’t there. While there may be overages where tons of work is needed, if times are lean then the opposite could hold true. To maximize your candidate pool and attract top talent, consider making the switch to salary.

3. Do your local laws dictate a certain practice? While we’ve discussed the FLSA, keep in mind that there are also local state laws that may dictate whether or not you can hire salaried or hourly employees. For instance, under the FLSA, even if you have a salaried employee, he or she may still be eligible for overtime and if that is not understood and implemented, you could be looking at a major headache down the road. As hourly employees don’t usually have a standard rate per hour, it can be difficult to calculate their overtime compensation, but this is an important step to take, especially in a company’s infancy, to make sure your employees are content and rewarded for their efforts, especially those that go above and beyond.

At the end of the day, determining your pay structure will be a combination of more than a few considerations. Chief among them will be your local statutes. From there, you can take a look at the nature of the work you need to be accomplished, and the level of talent and expertise you require access to. Then, you’ll be able to make an informed decision that’s good for your bottom line, as well as the workforce that helps support it.