The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

There are four main ways that an employee’s financial compensation can be structured:

Type How It Works

Salary Employee is paid on the basis of a fi xed annual

rate. The amount he is paid does not depend on

the actual hours worked.

Hourly Employee is paid on the basis of a rate per hour

worked.

Commission Employee is paid on the basis of a percent of his

sales.

Piecework Employee is paid on the basis of the number of

items he produces.

The calculations for gross pay depend on the way that the employee’s wages are structured.

We will consider each of these in turn.

Gross Pay Based on Salary

The simplest case for calculating gross pay is when an employee is salaried. The only

thing to consider in this case is how to convert the annual salary into an amount per pay

period. This gross pay per period depends on how often the company pays its workers.

The two most common pay periods in the United States are semimonthly (pay period

is a half-month; for example, payday might be on the 15th and on the last day of every

month) and biweekly (pay period is 2 weeks; for example, payday might be every other

Friday).

If employees are paid semimonthly, they will receive 24 paychecks each year. To calcu-

late an employee’s gross pay on this schedule, simply divide the annual salary by 24.

Example 15.1.1 Stephany earns a $26,500 annual salary. She is paid semimonthly.

Calculate her gross semimonthly pay.

Gross semimonthly pay 

Salary

______ 24 

$26,500

____ 24
$1,104.17

If employees are paid biweekly, they will receive 26 paychecks per year (in most years) so

to calculate biweekly gross pay we divide the annual pay by 26.

Example 15.1.2 Jason earns a $25,900 annual salary. He is paid biweekly. Calculate

his gross biweekly pay.

Gross biweekly pay 

Salary

______ 26 

$25,900

____ 26
$996.15

Unfortunately, a year does not contain exactly 52 weeks, and occasionally one of the pay-

days falls on an “extra” day, meaning that there may be 27 paydays on a biweekly sched-

ule. This creates an issue for businesses that pay their salaried employees biweekly. Some

companies calculate biweekly pay by dividing by 26 regardless. This means, though, that

in years with an extra payday salaried employees wind up receiving 27/26 of their intended

annual salary—a significant additional expense for the business. Other companies divide

annual salaries by 27 if there are 27 paydays in the year. This results in everyone getting

the correct total salary, but doing this requires good communication with employees, since

at the start of a 27 payment year salaried employees will see an apparent drop in their gross

pay.

Salaried employees may also be paid on a weekly or a monthly pay schedule. The

calculation of gross pay in those cases is essentially the same as for biweekly or semi-

monthly; the only difference is that the annual pay is divided by 52 for weekly or 12 for

monthly.

15.1 Payroll 581