MBA1131 Paying Staff Hourly vs. Salary

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Hey O welcome to the $100 RBA show, the business podcast that doesn't waste your time with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of the $100 MBA, a complete business training and community online. And in today's lesson we're going to discuss paying your staff hourly versus salary. What are the pros and cons? Is one inherently better than the other or is one option better for a certain situation while the other's not? When you start a business and you start building your team, start hiring people to help you build the dream, you're gonna ask yourself, should I get a freelancer? Should I get somebody on an hourly basis? Should I pay them hourly even if they're working 40 hours plus? Or should I give them a salary where they get a certain amount of money and or benefits and they're expected to work a certain amount of hours and take on certain responsibilities? I've been through this debate in my own company more than a few times, so I'm gonna share with you my own results, what I've learned along the way and what might work for you in your particular situation. So let's get into it. Let's get down to business I think the best way to start today's lesson is just to outline the pros and cons for each option. Paying a staff member hourly versus a salary. Then I'm gonna go into the details of which option is best for your particular situation. Let's talk about cost number one. Hourly is always going to be cheaper. Cause you're not gonna be paying the person when they're not working. They work five hours this week. You pay for five hours this week, or 50 hours for that matter. They decide to take two weeks off. Hey, they're taking two weeks off. You don't have to pay anything because they're not working. A lot of people equate hourly, Sally, to freelancers, people that come into your company as a consultant or a freelancer and get paid hourly. Inherently it's going to be more efficient, cost wise, because you're only going to be paying for the hours they work with a salaried employee. Employee if they're off sick, if they're on holiday, if it's a holiday, a public holiday, they're not working and they're getting paid because hey, they get paid a salary every month or every two weeks, whatever frequency you pay out, regardless of what day or holiday it is. Now you might be saying, well, that doesn't sound so good. I want to save some money. Well, it's all just about the money. Let's talk about commitment. It's a lot easier for a freelancer, an hourly waged employee, to feel less committed and leave your company. That's kind of the benefit for them to be a freelancer is that flexibility. They may not be getting as much money if they had a salary job. On the flip side, if you have a salaried employee, they're a lot more committed. And personally, I like this model more as a company because I want to make sure that when somebody works for our team that we're taking care of their financial obligations, that they could just focus on doing great work. So most of our salaried employees are full time. Now that doesn't mean that you can't give somebody a salary that's working part time. Somebody's working, let's say 30 hours a week instead of 40. You can pay them a set salary every month for putting in those hours. Now, will they go over 30? Will they go under 30? At times, yes. But there's a trust system going on here. One of the advantages of having a hourly employee is that it's easy to pay overtime or extra work because it's just the number of hours they work extra. With a salaried employee, they'll tend to work more than the hours that they're assigned and they're not compensated for it. So it's kind of a tricky one. I know when I was employed as a teacher, I was a salaried employee and I put in a whole lot more hours than what it said in my job description. I was working 50, 60, 70 hours a week. I was bringing work home, I was grading papers, I was in management. When I was a manager, I was planning out meetings and professional development opportunities for the teachers. So if I don't feel recognized, I don't feel like I'm being compensated. So be aware of that. If somebody's on a salary, recognize them for their extra mile, for their extra work. Now, I do recommend going hourly. If you're just getting started and you're making your first hire.

Why?

Because you don't know if this person's going to stick around for a while or not. So it's a good way to do sort of a trial period for the first few months, maybe two or three months. They can be an hourly employee and then you can give them a salary for the long term kind of contract. Also, when you're starting out, it's easier to budget. You don't need 40 hours for every single employee. You might need 10 hours here, 30 hours there, 20 hours there. And you can save some money that way. Remember, when you're starting out, it's so important to be profitable, so you want to keep your expenses down as possible. But of course you want to compensate people properly. So an hourly wage is a good way to do that. Also, when you're going hourly and you're attracting freelancers, other benefits are not really expected. Whether they are 401ks, health benefits, massages like in Google, people understand they're being compensated for the hours they work with salary. People that are used to salary jobs are used to certain benefits, whether they're paid vacations or some of the other things I talked about before. The most important thing is that regardless if you hire for salary or for hourly, you make it clear in the job description what is included, what benefits are not included, so people know what they're getting into. If you set up expectations in the beginning, it just makes it a whole lot easier throughout the interview process and the hiring process and thereafter when they're actually a part of your team. Expectations are everything. Now, if you've been doing business for a while, maybe a year or two, and you're finding that you're having some turnover. People are leaving your company after maybe nine months or a year. And it's hard to keep people around. There's a good chance that's because there is no commitment. And a good way to get commitment is to get people on salary. When people know they have to commit 40 hours a week to working with you, they they're really not gonna have much time to do other things. They may be able to pick up a job or two on the side, but their main focus is gonna be working for your business. And that allows them to really fully commit mentally to you. I found this personally with our business webinar Ninja. At the start, we had a lot of freelancers, a lot of hourly waged employees. But we get more commitment the more we have salary. Employees so much easier to get a long term employee when they're on a type of salary or package. And in a way you're committing to them first and therefore they commit back to you. Now it's your business so you can create your own package. You don't have to go super extravagant. Of course, make sure that you're covering what you need to cover legally. And that depends on where you live, your country, and all that kind of stuff. Some countries require a retirement package if they live in that country, some people don't. So make sure you're in the clear with that. And I would speak to your accountant or hire an accountant as your first hire to clarify that. I'm going to tell you flat out, in our experience, salary employees are more expensive. It's just not as cost effective. But what you get back in terms of commitment and camaraderie and dedication and care is huge. And it makes a great impact on your business and your product and improves business overall. It also costs you more money to keep making new hires when there's high turnover. So by having more commitment, you save money than having to go through that whole cycle of putting a job ad and spending time and going through interviews. No one likes that as an entrepreneur. So save yourself all those headaches. I do want to say don't commit to salaries. You cannot pay out if you're not ready financially in your business yet. If you're not profitable to the point where you can do this, don't do it. Don't feel like you have to. It took us a very long time to be able to be in that position and we had slow, steady growth. But what you want to do is you want to have a healthy margin of profit month in and month out, just in case business kind of slows down and your sales drop, you still can cover salaries and and you know, to pay people on time. Super, super important. Don't mess with people's time off. Don't mess with people's salary and then you'll have a happy company.

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I really believe that an hourly wage is a good place to get started. Especially if you're a self funded company and you don't have a whole bunch of funding, a whole bunch of cash to spend. You can always graduate people from hourly to salary, but the other way around is not so easy and welcomed. Do what's best for you and your profitability. The best thing you can do for your employees is to stay in business, to stay profitable so they can keep their jobs and do wonderful things. It's your job to make sure that happens. All right, that wraps up today's lesson. Before I go, I want to leave you with this. One of the things that comes to salary or pay that I've learned along the way and I wasn't so good at before but I've gotten better at is that setting up systems to increase or give increments to your employees so that they know that if they work hard or they're committed that they're going to continue to get paid more and more. It doesn't have to be a major raise every single time. But it has to be some sort of increment, some sort of raise in their salary so they feel like, hey, I'm being recognized and this person values me as a contributor to the team. It also helps to keep them happy and not looking outside for other jobs. It's very competitive out there, especially if you have great talent. They're wanted, people want them. They can find a job easily. So if you want to keep people happy, you have to take the initiative and make sure that they're compensated and continue to be compensated properly. Even evaluating them every six months or so and giving a small increment in their salary can make a huge difference. Sometimes it's just the act. It's the consideration that matters. Thank you so much for listening. I'll check you guys in the next episode. I'll see you then. Take care.

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