Find out what wages are, how to calculate yours, and the different compensation methods available for you.
5 min read
Wages are compensation paid to an employee in exchange for their time and labor. If you’re working for a company, wages may be just one part of your total compensation package. Here, we’ll explore what wages are in more detail, as well as any other forms of reward or compensation you might receive.
What are wages? A definition for employees
So, what does ‘wages’ mean exactly? Essentially, wages are a fixed payment employees get from their employers for their work. The amount of wages you earn and how frequently you’re paid will depend on whether you’re receiving a salary or hourly pay. To put this in perspective, we’ve outlined some of the most common compensation types for you here.
Commission
Commission is a payment you can earn on top of your regular wage for achieving a certain target, goal, or quota. Commissions are a type of compensation method most often seen in the sales profession. Employees tend to have a base wage upon which commission can be added based on their performance. This financial compensation is a great way for companies to push sales. For example, you may earn an extra commission if you manage to sell a certain number of units, such as cars.
Bonuses
Bonuses are also sometimes known as short and long-term incentives. A short-term incentive is a monetary reward usually paid monthly, quarterly, or annually—typically when business targets are met. A long-term incentive commonly covers a 3-to-5-year period and can be paid in cash, company equity, or shares. Bonuses may also be awarded if the company has a successful year in terms of growth.
Overtime and holiday pay
As an employee, you’re generally eligible for overtime pay if you work more than your contracted hours—meaning anything over the hours you initially agreed to work. Overtime may be paid at ‘time and a half’—1.5 times your usual pay rate. Some compensation packages also include holidays or vacation days.
Cash value
Cash value is the proportion of your wages you receive in your paycheck . Although money is usually the biggest—or sometimes only—compensation method used to pay employees, other non-monetary benefits can also make up compensation packages. These can include health insurance, travel expenses, or free childcare.
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To further clarify wages, let’s look at an example. You may earn €28.50 an hour and work 30 hours a week. This means you will earn €855 in wages for the week—€28.50 x 30. If you were to then work 10 extra hours during that week at time-and-a-half, this would be an additional €427.50 earned (€28.50 x 10 x 1.5). Your total wages for the week would therefore be €1,282.50. As another example, if you work as a sales executive at a car company, they may offer you a base wage of €20 an hour for 35 hours a week. Your minimum weekly wage would then be €700—€20 x 35. If you sell a car during that week for €24,500 and earn a 20% commission on that sale, you would receive €4,900 in total. This would give you an overall weekly wage of €5,600. Remember, commission is not always paid out weekly, to be sure to check when you can expect the extra money to hit your bank account.
What are gross wages?
When it comes to wages, it’s important to distinguish between gross pay and net pay. Gross pay means the total amount earned before any taxes or deductions are taken off. Once these deductions have been made, you’re left with your net wage, which is what will be transferred into your account. All this information should be detailed on your payslip.
How do you calculate your gross wages?
To calculate your gross wages, simply multiply your contracted hours by your hourly rate and add any additional overtime hours you’ve worked. You can use this formula:(Number of contracted hours x hourly rate) + (any overtime hours x overtime hourly rate) = gross wagesFor example:
If you’ve worked 35 hours and your hourly rate is €28.50, 35 x €28.50 = €997.50
Say you’ve worked an additional 15 hours of overtime at a rate of 1.5 x your normal hourly rate. This would be 15 x €42.75 = €641.25
Add the contracted pay to overtime pay for gross wages—€997.50 + €641.25 = €1,638.75
What is the difference between wages and a salary?
A wage is based on an hourly pay rate, so the amount you receive is calculated according to how many hours you work. This means that wages may vary from week to week. On the other hand, a salary is a fixed amount of money paid to you—and is typically spread out over a 12-month period. A salary is also agreed to by both the employer and employee at the start of an employment contract.
How are wages paid?
How wages are paid differs depending on your company, industry, and even the standards of the country you live in. But in general, the frequency of wage payments can vary between weekly, twice per month, or monthly.
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Prevailing wages are a basic hourly pay rate that employers issuing government contracts must pay employees. This is only for people working in specific service industries. Prevailing wages are most commonly used for occupations like construction workers, manual laborers, and mechanics. The rate is set geographically and by market conditions, ensuring everyone—regardless of gender or race—is working on a level playing field and paid a fair wage. It also prevents taxpayers from having to pay more than they should.
Garnered wages are wages that are withheld from employees via a court order—usually because money is owed for a debt. In some cases, this money can be sent directly to a third party for repayment. For example, an employer could withhold your pay to then send it directly to a creditor until the debt is resolved. Wages can be garnished to finance unpaid taxes, outstanding loans, and child support.
Social security wages are the proportion of your earnings that are subject to government taxes, specifically concerning social security. These are usually deducted from your gross salary at the source by your employer. You can normally find these details on your payslip.
Many countries will let individuals earn up to a certain amount before taxes kick in. For example, in the UK, you can earn up to £12.5k before having to pay any taxes—while in Germany, you can earn up to €9,000. The amount of taxes you pay will also vary due to the compensation package offered to you, as well as your tax bracket and personal circumstances, such as whether or not you have children. Your employer is required to make the necessary deductions from your gross wages before making your salary payment. They also need to provide you with a payslip that outlines tax deductions made.
When your wages arrive in your account will depend on how frequently you’re paid. When you start a new job, you’ll give your account details to your employer who will generally set up a regular direct deposit payment method for your wages. This means that your wages will automatically go into your account. When you first start a job, your payday will usually be detailed in your employment contract.
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