How Salary Is Calculated
Hello, I’m Kevin - a financial planner who helps tech professionals and their families live great lives.
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Three Parts
This article has three sections:
How Salary Is Calculated
How Salary Is Determined
How to Get a Raise
1. How Salary Is Calculated
What Is Salary?
The word salary dates back to Roman soldiers.
According to Mark Kurlansky in Salt: A World History:
The Roman army required salt for its soldiers and for its horses and livestock. At times soldiers were even paid in salt, which was the origin of the word salary and the expression "worth his salt" or "earning his salt." In fact, the Latin word sal became the French word solde, meaning pay, which is the origin of the word, soldier.
Salary vs. Hourly
In private companies, salaries are paid to administrative, professional, and managerial employees. Those who work directly with customers are often paid hourly.
To get the equivalent of an hourly wage in salary, multiply by 2,080:
40 hours a week times
52 weeks a year.
For example:
$15 an hour is about $31,200 a year,
$30 an hour is about $62,400 a year, and
$50 an hour is about $104,000 a year.
However, it’s not that simple.
Hourly and Salary Differences
Some of the many pay differences between hourly and salary include:
hours worked,
overtime,
shift differential,
holiday pay, and
variable compensation.
Hours Worked
Some positions work more hours during peak seasons - like the holidays. Hours may be more limited the rest of the year.
Someone who averages more than 40 hours a week may see a decrease in their pay if they go on salary. There are also rate impacts.
Overtime
Employees might be paid overtime. That rate is often “time and a half” - or the base rate times 1.5 - for working more than 40 hours a week.
However, a position may not be subject to minimum wage and overtime rules depending on its duties and pay.
The minimum weekly compensation for a position to be exempt is currently $684 per week, or about $34,568 a year. That’s the salary threshold for exemption as of 3/18/2025. However, the limits are in flux.
Shift Differential
Some positions pay extra for working less desirable times of day or days of the week. For instance, there might be an incentive to work nights and weekends.
Salaried positions rarely have shift differential pay.
Holiday Pay
Hourly workers may also be paid a higher rate for working holidays. It could be twice (2x) the usual rate.
It may even be possible to stack overtime and holiday pay to earn 1.5 times the holiday rate. That triple (3x) compensation for those overtime holiday hours might be lost when moving to a salary.
Variable Compensation
An employee may also lose individual commissions or bonuses. A frontline leader might be bonused on their team’s performance.
However, a salaried position could have other benefits like:
an annual bonus,
extra stock grants,
more schedule flexibility…
Frequency
How much someone receives each paycheck depends on their salary and how often they’re paid.
Every Other Week
Many companies pay every other week - or 26 times a year. For example, T-Mobile pays biweekly.
With this frequency, an employee receives three paychecks two months a year. Extra paychecks can help someone pay off debt or save more.
Twice a Month
Other companies pay on the 15th and last day of the month. For instance, ServiceNow pays twice a month.
This cadence works well for monthly bills. However, an employee may need to save more regularly since they won’t have months with an extra paycheck.
Monthly
Still other companies pay once a month. For example, Amazon pays monthly for many salaried positions.
These income spikes require more planning. Since each paycheck needs to last a month, an employee must resist the urge to spend. They might also benefit from keeping a larger emergency/opportunity fund.
The size of each paycheck is based on the payment frequency and base salary.
For someone who earns $100,000 a year, their gross pay would be:
$3,846 if paid every other week (26 times a year),
$4,167 if paid twice a month (24 times a year), and
$8,333 if paid monthly (12 times a year).
Net Pay
However, that’s the gross pay. It’s not what’s deposited into the employee’s checking account(s).
Taxes taken out of the paycheck include:
state and federal income,
Social Security and Medicare,
state paid family leave insurance,
state paid medical leave insurance, and
state long-term care insurance.
There can also be payroll deductions like:
health, life, and disability insurance,
401(k) and Employee Stock Purchase Plan contributions,
auto and pet insurance, and
wage garnishments.
An employee may receive much less than their gross pay!
2. How Salary Is Determined
Perhaps more interesting than how salary is calculated is how it’s determined. Salary is set through a process that’s competitive, negotiable, and increasingly transparent.
Position
Companies often pay the least they can to attract and retain top talent. Pay primarily depends on position.
As of May 2023, the annual mean wage was:
$65,470 for all occupations,
$36,690 for retail salespersons,
$90,580 for business and financial operations occupations, and
$137,750 for management occupations.
Location
Compensation also depends on location.
For instance, the average wage for all occupations in May 2023 was:
$47,570 in Mississippi,
$60,210 in Forida, and
$80,300 in Massachusetts.
However, the position matters more.
The mean wage for a retail salesperson was:
$31,270 in Mississippi,
$35,190 in Forida, and
$40,490 in Massachusetts.
The mean wage for business and financial operations occupations was:
$70,000 in Mississippi,
$84,010 in Florida, and
$101,770 in Massachusetts.
The mean wage for management occupations was:
$95,560 in Mississippi,
$129,870 in Florida, and
$160,460 in Massachusetts.
Budget
On average, larger companies pay more.
Bigger companies tend to have more:
resources,
consistent cash flow, and
customers.
All Industries
Average salaries and wages per hour grow with company size:
$26.19 for 1-49 workers,
$28.27 for 50-99 workers,
$32.40 for 100-499 workers, and
$42.82 for 500+ workers.
Information Industry
The U.S. Bureau of Labor Statistics combines tech and media into one "information" sector.
As in total, average salaries and wages per hour for the Information sector grow with company size:
$39.78 for 1-99 workers,
$51.96 for 100-499 workers, and
$67.36 for 500+ workers.
Impacted by Benefits
The salary budget could depend on the company’s other benefits.
For instance, a company may pay lower salaries if they offer more:
flexible schedules,
holidays and Paid Time Off (PTO),
health benefits,
401(k) matching, or
stock compensation.
Consider two of my past employers: T-Mobile and Amazon.
T-Mobile offers:
fewer work hours,
more holidays and Paid Time Off (PTO),
better healthcare and other insurance,
4% match on the first 5% of employee 401(k) contributions,
immediate 401(k) match vesting,
a generous Employee Stock Purchase Plan (ESPP) discount,
annual bonuses, and
fewer Restricted Stock Unit (RSU) grants.
Amazon offers:
more work hours,
fewer holidays and less Paid Time Off (PTO),
worse healthcare and other insurance,
2% match on the first 4% of employee 401(k) contributions,
three-year cliff 401(k) match vesting,
no Employee Stock Purchase Plan (ESPP) discount,
sign-on bonuses, and
more Restricted Stock Unit (RSU) grants.
Marketability
Employees working in the same position may be paid differently even at the same location.
Compensation is generally based on pay grade, career band, or level. Companies call these ranges different things.
The salary range for a position may be 30%, 40%, or more!
Comp for new hires often depends on the perceived value of their:
skill,
experience, and
education.
Skill is tough to quantify. Experience is generally related to age. The impact of education on income is more direct.
Age
For the fourth quarter of 2024, the average median income extended out for a year was about:
$35,308 for those aged 16 to 19,
$40,768 for those aged 20 to 24,
$59,072 for those aged 25 to 34,
$70,512 for those aged 35 to 44,
$69,472 for those aged 45 to 54,
$65,936 for those aged 55 to 64, and
$60,268 for those aged 65+.
Education
More educated individuals tend to have higher incomes and less unemployment.
The median annual income in 2023 was about:
$109,668 with a doctoral degree,
$114,712 with a professional degree,
$90,324 with a master's degree,
$77,636 with a bachelor's degree,
$55,016 with an associate's degree,
$51,584 with some college and no degree,
$46,748 with a high school diploma, and
$36,816 with less than high school diploma.
People develop specific skills and knowledge through education. They’ve also shown some capacity for hard work, delayed gratification, and positive social interactions.
Performance
On the job performance drives promotions and raises.
Merit
Annual merit increases tend to match or beat inflation slightly. Raises of 3% to 5% are common.
They also depend on how the company’s performing:
Raises may be suspended in down years.
A company in distress might cut compensation across the board.
It also matters where someone's comp is within their pay grade:
Those newer and less proven in their role may be paid on the lower end of the range.
Established employees who consistently deliver value may be paid on the higher end of the range.
An employee at the very top of their range may not receive annual raises. They may instead receive spot bonuses.
Promotions
A promotion often comes with a 5% to 15% raise. Here again, the situation matters.
Someone at the top of their previous career band may receive less of a raise. On the other hand, someone who was promoted more quickly may receive a larger percentage increase. Also, the amount of additional responsibility could contribute to the raise.
Other compensation could grow as well, including:
target bonus as a percentage of salary and
stock options or grants.
3. How to Get a Raise
Potential steps to grow your compensation include:
Know Your Value
Improve Your Marketability
Add More Value
Prove Your Value
Explore Your Options
Get and Negotiate Offers
Choose the Best Offer
1. Know Your Value
The first step is to know the value of your position on the open market.
Research your position's salary range for both your company and your industry. It's even better if you can get that information for your city.
Sites like glassdoor.com and levels.fyi share data from other employees.
It's important to know where your compensation falls within the range.
2. Improve Your Marketability
Unfortunately, your performance may not be enough.
Compensation is based on other factors like:
skill,
experience, and
education.
Skill
Many skills are marketable.
However, it's important to determine which skills could help you most. That's where a mentor can prove invaluable.
Find someone doing what you’d like to do. Tell them you're inspired by what they've accomplished and would greatly appreciate the opportunity to learn from them.
When you meet, ask:
what worked for them,
what they recommend you do, and
what resources they'd suggest you use to achieve your goals.
Study topics related to your field. If your executives post content, study it carefully. Develop a point of view in case you meet them.
Check out resources beyond your company. Presentations, interviews, podcasts, and blogs can provide great insight on topics related to your current or future roles.
Experience
There's no substitute for experience.
Expand
If you're comfortable in your role, you likely aren’t growing enough!
Ask to join an important meeting.
Volunteer for a new project.
Request a stretch assignment.
Lead an initiative.
Mentor
It may be your turn to mentor someone!
Take a summer intern, recent hire, or more junior teammate to lunch. Share what you've learned. Others will notice your support.
Also, teaching helps clarify your thinking.
The way doctors often learn a new procedure is:
see one,
do one,
teach one.
Be Patient
Remember that some things just take time.
A relentless focus on improvement for years or decades can lead to incredible results.
Education
A lack of education could be holding you back! What are the desired qualifications for the position you want?
It may be an associate's, bachelor's, or master's degree. It might also be a certification or additional coursework.
Many employers cover the cost of education. Using benefits typically isn't looked down upon; quite the opposite!
An employee who uses them is often considered resourceful, proactive, and dedicated. If that's not the case, you may be in the wrong place.
3. Add More Value
Adding more value may be the quickest way to increase your pay.
Focus on your individual peformance:
Complete your projects on time.
Improve your metrics.
Then, help others achieve success:
Mentor teammates.
Collaborate with coworkers in other teams and departments.
Solve your supervisor's biggest problems.
Wherever possible, quantify the impact of your results.
4. Prove Your Value
A critical and often overlooked step is to prove the value you create to your supervisor.
Show them how you're adding a ton of value. Ask how you can make an even bigger impact.
Prepare for Raises
Among the most important conversations are those two to three months before raises:
Your manager needs to recommend your raise percentage.
He or she must then advocate for you.
Your skip-level manager (and perhaps other leaders) will then adjust your raise percentage.
Payroll needs time to implement the final numbers.
Your manager then needs to communicate the raise to you.
Start Early
If raises are typically in mid-February, start having these value-add conversations with your supervisor in December or January.
Update your resume with recent accomplishments. Expect to discuss your impact with your manager at any time.
5. Explore Your Options
More money is often only a temporary motivator. However, earning less than your value can be demotivating.
If your income doesn't rise significantly after a year of steady focus, something may be wrong. You might be in the wrong position, team, department, or company.
Explore your options.
Prepare
I suggest updating your resume at least once a year.
Edit it again before exploring your options. You'll want to be ready for any opportunity!
Calculate your count, percentage, and dollar impacts wherever possible. Create a different version of your resume for each position you’re considering.
Meet informally with coworkers and hiring managers on other teams. Also meet with friends and acquaintances at other companies.
Your goals are to:
strengthen your network,
learn more about other companies, and
better understand different positions.
You're trying to determine whether another opportunity could be better than your current position. Getting a referral would be a bonus.
You may also want to prepare for interviews:
Clarify your STAR (Situation, Task, Action, and Result) responses to “Tell me about a time when…” questions.
Review topics likely to be tested by technical questions.
Prepare your own questions about the company, position, and hiring manager.
Inform
If you have a good relationship with your supervisor, mention you're considering other opportunities.
Have a list of two to three open internal positions. Ask your manager whether they know the hiring managers or anyone else on those teams.
The conversation may inspire action from your manager. You might receive a raise just by mentioning you're exploring other options!
Also, find two to three interesting external positions. Don't share them with your manager or coworkers unless needed for a referral.
6. Get and Negotiate Offers
Apply
If your supervisor does nothing or - even more tellingly - encourages you to explore other options, start applying. Hopefully, he or she will give you time to interview.
Interview
It may take several rounds of interviews to secure a new position.
The hiring process for an internal role may be less extensive. Expect the hiring manager to reach out to your supervisor to learn more about you.
External positions will likely require references and a background check. The process may take weeks or months.
Here's something that’s served me well. Mentally, I prepare for the role above the open position.
My questions focus on how to thrive:
What have been some of your biggest accomplishments at [Company X]?
What are some of [Company X's] biggest areas for improvement?
Imagine it's a year from now and I'm thriving in this position. What would I have accomplished over the course of the first year?
How could I have the most impact in this role?
What would you recommend I do to ramp up quickly?
What might you suggest I do between now and when I'd start to hit the ground running?
Negotiate
Once you have an offer, work to get a second one!
Always know your Best Alternative To a Negotiated Agreement (BATNA). Your second option provides leverage.
If you're buying a home, find at least two good properties.
If you're refinancing, negotiate with at least two lenders.
If you're negotiating a job offer, get at least two good ones.
Without a second offer, your best alternative is your current position. However, you've likely informed your manager you're looking elsewhere.
Negotiate everything that's important to you or hiring firm:
work hours,
base salary,
sign-on bonus,
stock compensation,
schedule flexibility,
continuing education,
responsibilities, and more.
7. Choose the Best Offer
Determine and accept the best overall package.
It may not be the highest salary! Other factors could take priority.
Once you decide, never look back:
If it goes well, great!
If not, it’s a learning experience.
Hey, thanks for reading my post about how salary is calculated.
Just reminder, I share a lot of resources that can help you.
Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, or legal advice.
