Difference Between Wages and Salary

You might often come across people using the terms wages and salaries synonymously. But are they the same?

In reality, wages and salaries are quite different from one another. Their calculations, types, components and benefits make them significantly different. If you are unaware of the differences between wages and salaries, this article is definitely for you. 

Keep reading to know how wages and salaries differ from one another.

What are Wages and Salaries?

In simple terms, wages are remuneration a person receives based on the time he/she spends on a particular work. On the other hand, salary is a definite amount a company or business must pay its employees regardless of the nature of their work. 

Furthermore, businesses can calculate and distribute wages on an hourly, daily or weekly basis. However, salary calculations are done on a monthly basis. 

How are Wages Calculated?

The method of how wages are calculated is simple. To go ahead with this calculation, employers set an annual rate. This makes the number look bigger and helps in the recruitment process. Following this, they divide the number by the pay period.

For instance, if you wish to calculate the hourly wage of an employee, you must divide the total amount by number of hours the employee has worked each week. 

Types of Wages

There are three types of wages prevalent in India. The points below highlight the different types of wages in India:

• Fair Wages

This is considered the mean wage between the minimum wage and the living wage of an individual. 

Employers determine the fair wage of an employee based on their working capacity and workload. This makes it evident that the minimum limit for a fair wage is a company's ability to pay minimum wage. The upper limit depends on the industry’s capacity to pay that employee. 

Several factors, such as wages that other employers or industries pay for similar work that requires the same ability and productivity, are considered by an employer to determine the wage of an employee. 

• Living Wages

These wages are sufficient to serve the basic requirements of an employee and his/her family. The Committee on Fair Wage defines a living wage as the minimum amount that covers all basic amenities that a person and his/her family can afford to live in a modern society.  

Companies must also keep in mind that the living wage of an employee must not only fulfil the basic necessities like food and clothing needs of an employee and his/her dependents. It must also ensure that the employee receives a certain degree of comfort to lead an urban life. 

• Minimum Wages

As the name suggests, the minimum wage is the lowest wage an employer can provide to its employees for their service. With a minimum wage, an employee can meet his/her necessities. The minimum wage might also encompass certain expenses on comfort needs. However, this might depend on the cost-of-living ratio of a city or state. 

As minimum wages cover the bare necessities of an individual, this might hamper the employee’s work efficiency. A company which cannot pay minimum wage to its employees does not hold the right to exist. 

If it does, the organisation comes under the score of ‘forced labour’ as per Article 23 of the Constitution of India. To maintain its existence and function smoothly, a company must have enough funding to pay at least the minimum wage to the employees. 

Examples of Wages

For a better understanding of what wages are, let’s consider a simple example of wages. 

Mr Ray works as a part-time employee in a mall, which pays him on an hourly basis. His payment is directly proportional to the hours he has worked on a given day. Let's assume that Mr. Ray earns Rs.30 per hour. He works for 60 hours a week. Now, let’s calculate his wage for one week’s work. 

Wage= Rate for an hour* working hours

Wage= Rs. (30*60) = Rs. 1,800

Pros and Cons of Wages

Pros of wages:

• Employers cannot bind waged employees with any contract. This gives the employees the freedom to quit immediately in cases of inconvenience without going through any formal process. 
• Waged employees can enjoy more work flexibility than salaried employees. The former can do overtime to increase their earnings. 
• Usually, waged employees work on a part-time basis. Thus, they have comparatively lesser responsibilities than their salaried counterparts. 

Cons of wages:

• Employees working on wages do not receive any add-on benefits like house rent allowance or travel reimbursement. 
• As no contract binds their service, these employees are easily replaceable.
• These employees are more prone to pay cuts as they do not receive any paid leave. 

How are Salaries Calculated?

Unlike wages, salaries are fixed incomes that an employer must pay their employees periodically. The employer and employee are bound by a contract that ensures that the former will pay an employee a fixed monthly amount in return for their service. 

Salaries are not calculated based on a person's working hours. An employee’s job role, performance and hierarchy are some of the determining factors of salary. 

The following formula is used to calculate salary:

Gross salary= CTC- EPF - Gratuity

You can also follow the formula below to calculate your in-hand salary after deducting taxes. 

In-hand salary= Gross Salary-Income Tax- EPF- Professional Taxes

Types of Salaries

Let’s take a look at a few important types of salaries: 

• Gross Salary

This comprises the total earnings of an employee without making any statutory and non-statutory deductions. The gross salary of an employee can be affected by his/her attendance and loss of pay. 

• Net Salary

This is the final amount an employee receives after all the required deductions. Hence, net salary is also referred to as the in-hand salary of an employee. The net salary gets calculated after considering deductions like Employee State Insurance (ESI), Tax Deducted at Source (TDS), professional tax, Provident Fund (PF), loss of pay and any other applicable deductions. 

• CTC

Cost-to-company (CTC) is the total amount an employer promises to pay its employees for their service in one financial year. A CTC comprises components like PF employer contributions, insurance, gratuity, and other additional benefits. 

• Fixed Pay and Variable Pay

Fixed pay or fixed salary is a definite amount that a company offers to employees in return for their service. This salary is mentioned in an employee's salary slip and other allowances. Basic pay, Dearness Allowance (DA), conveyance allowance, House Rent Allowance (HRA) and other types of special allowances are a few examples of fixed pay. 

Variable pay is an incentive that an employee might receive upon fulfilling certain conditions. Failing to do so, the company might not provide the employee with the variable pay.  A good example of variable pay is performance-based incentives. Many companies pay this to their employees to fulfil their revenue targets. 

Examples of Salaries

Let’s assume the following example of salaries to understand the calculation of the basic salary of an employee.

For instance, Mr Mehra’s payroll looks like this. 

Gross salary= Rs. 60,000

DA= Rs. 3,000

Conveyance Allowance= Rs. 2,000

Medical Insurance= Rs. 2,000

Other allowances= Rs. 4,000

Basic Salary= Gross Salary-(DA+ HRA+ Conveyance+ Other Allowances)

 As per the formula, the basic salary of Mr Mehra will be

Basic salary= Rs. 60,000- (3000+2000+2000+4000)

Therefore, the basic salary of Mr Mehra will be Rs. 49,000.

Pros and Cons of Salaries

Pros of salary:

• Salary provides stability and assurance owing to its consistent pay cycle. 
• Salaried employees enjoy several other benefits like house rent allowance and medical and travel insurance.
• The salaries depend on the responsibilities a person takes during their service under an employer.

Cons of salary:

• Salaried employees do not get paid for working overtime.
• There are chances for employees not receiving their full compensation in cases of failure to meet their revenue targets. 

Difference between Wages and Salaries

The table below displays the differences between wages and salaries for a clearer idea: 

When you understand the difference between wages and salaries, you can decide if a salaried job or a waged one suits your finances and lifestyle better. However, before signing in for a role, consider reading the offer letter or contract thoroughly to have a clear idea about your wages or salaries. 

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