August 2024
Teresa Clarke explains all you need to know about labour costs Salary.
An employee who is paid a salary is paid a set amount of money for 12 months, split into monthly payments.
For example, you might be paid £24,000 a year in salary, which will mean that you get paid £2,000 per month (before deductions).
A salary is paid at the set amount and is not affected by the number of hours actually worked.
Hourly pay
An employee who is paid hourly is paid for every hour they work.
For example, a waiter might be paid £12 per hour for every hour they work. If they work 10 hours, they will be paid £120 (10 hours x £12).
Overtime
If an employee works more than their set hours they may be offered overtime, and this is often paid at a higher rate.
For example, the waiter might be paid £12 per hour for up to 30 hours per week, but if they work on a Sunday then might be offered ‘time and a half’ to work on that day. This means their pay will be 1½ times the usual rate. £12 x 1½ = £18 per hour.
Overtime payment
Overtime payment is the total amount the employee is paid for that Sunday work.
The agreed overtime rate of £18 (time and a half) is paid for the three hours they work. £18 x three hours = £54 overtime payment.
Overtime premium
Overtime premium is the ‘extra’ cost to the business because they paid the higher rate.
The normal rate of pay is £12. The extra £6 is the overtime premium.
If that employee worked three hours on Sunday, the overtime premium is £18. £6 x three hours = £18.
Just remember that premium means ‘extra’, as questions may ask for overtime pay or overtime premium.
Piecework
An employee who is paid by piecework is paid for every piece, or unit, they make or pick or finish.
For example, an agricultural worker may get paid £10 for every box of cabbage plants they pick.
Guaranteed wage
If an employee is paid by piecework, they may also have a guaranteed wage.
For example, I am paid £10 for every box of cabbages I pick in a day. I also have a guaranteed wage of £90. If I pick 12 boxes of cabbages I will earn £120 (12 x £10). However, if I pick six boxes I would earn only £60 (six x £10), so I will get the guaranteed wage instead. Think of it as a minimum wage.
Bonus
A bonus is an extra payment given to employees or teams of employees to encourage them to be productive and manufacture more goods.
For example, I might be offered £10 per box of cabbages I pick, but if I pick more than 12 boxes I will get an extra £2 per box.
If I pick 15 boxes of cabbages I will earn £150 (15 boxes x £10). I will also earn a bonus for the three boxes above the bonus target of 12 boxes, so an extra £6 (three extra boxes x £2).
If you like my way of explaining things you might like my workbooks, which are all available from Amazon in both paperback and as eBooks.
The links to all my workbooks can be found at https://www.teresaclarke.co.uk/
- Teresa Clarke FMAAT is a freelance accounting tutor
