Making the Hourly to Salary Transition

In a previous job, I received a call from another department’s director and was informed that one of his hourly employees was being converted to salary. This particular individual had been acting in a management capacity for the past few months due to his manager leaving the company for another opportunity. He’d been doing a great job and the director was ready to officially give him the position and convert him to salary. The first thing the manager asked was how much the employee had made year-to-date and also to project how much he’d make for the year assuming he’d work the same amount of hours each pay period. After performing the calculations, I projected the employee would make about $75,000 for the year and the director was surprised at the amount when I told him. Long story short, the employee was offered a $60,000 salary and he accepted. When I received the pay rate change, it was my turn to be surprised. I don’t know what happened behind closed doors, but I couldn’t help but wonder if the employee was not aware that he actually received a significant pay reduction.

If you are ever in this position or think you will be in the future, be prepared to negotiate. The first thing to do is annualize your pay. Take your most recent check stub, find your year-to-date gross pay, and divide it by how many paychecks you’ve received for the year so far. This amount is your average gross pay per paycheck. Next, take that amount and multiply it by the number of times you are paid in a year.  Weekly is 52, biweekly is 26, semi-monthly is 24, monthly is 12. This is your annualized pay. Note that this will only work if the hours you work each pay period are fairly consistent. If your hours fluctuate because of seasonality, your calculation will not be accurate. Now you know what you will make if you continue to be an hourly employee.

You should also look at the prior year. If you worked at the same place the entire year, look at your W-2 to see how much you made. If you only worked part of the year, annualize it to see what you would have made for the year.

So let’s take the opening story and use that as an example. Here’s how the dialogue might have played out had the employee knew AND discussed his annualized salary:

Director: Joe, you’ve been doing a great job since Bill’s been gone and I’d like to offer you the manager position. We’ll convert you to salary at $60,000 a year effective this pay period.

Joe: I appreciate your confidence in me. I’ve been working hard and I’m glad it’s been noticed. At my current pay rate, however, I’m targeted to earn about $75,000 this year. Last year I earned $68,000. My hours are consistent each pay period and I don’t foresee that changing. With my new responsibilities, it might even increase a little bit. Converting to salary doesn’t seem to make much sense for me financially. I’m essentially getting a promotion, but with less pay. What are your thoughts?

The director is going to know it doesn’t make sense! But Joe kept the conversation open-ended, which gives the director options (remember my last blog?). The director doesn’t feel pressured or offended and might even appreciate Joe’s efforts for doing his homework. Pay negotiations don’t always happen at a job interview and I think a lot of people forget that. Joe might not get the $75,000, but he'll get more than $60,000. No rational employer would give an employee, a GOOD employee, that large of a pay reduction paired with a promotion.

In summary, annualizing your pay provides a barometer for which to measure your employer’s offer. It’s your benchmark to decide if you need to open up a dialogue and negotiate a higher salary or accept the offer outright.

This isn’t a foolproof strategy. Some employers are more employee-friendly than others, but it never hurts to try. As the saying goes, “You miss 100% of the shots you don’t take.”