How to Calculate Increasing/Decreasing Salary

Salary and wage changes can happen for a variety of reasons. It's important for employees and employers alike to understand how these changes affect employee pay, whether it's computed at a yearly or hourly rate, and whether they're paid weekly, biweekly, semimonthly or monthly.

During challenging economic times, employers may be looking to cut costs, while some employees receive bonus pay. Understanding how these changes affect how much an employee earns is a powerful tool in planning the financial future of your business.

Different Types of Pay Changes

The change in an employee's pay, whether an increase or a decrease, may be expressed in a percentage or dollar amount. It's most common for hourly employees to get a dollar amount increase or decrease, while salaried employees are more likely to be given a percentage. However, different employers handle things differently, and it's useful to be able to convert back and forth. In doing these calculations, remember to adjust for taxes and other deductions, such as retirement funds or health plans that are funded from paycheck withholding.

Paycheck Calculator Tool

While the yearly pay an employee takes home is often casually referred to as a "salary," a salary technically refers to a specific way of being compensated for work that is done. Even if you are not dealing with a salaried employee, it's convenient to know how hourly wages add up over a year.

If an employee is salaried, it's good to understand what hourly rate the salary translates to. This can be achieved via a paycheck calculator tool, such as the one at the Calc XML website, or a money increase calculator.

Determining Salary Changes

The number of workdays and working hours in a year varies depending not just on whether it's a leap year, but also how the arrangement of weeks falls in a year, making weekends and holidays fall differently year to year. This number ranges from 260 to 262 workdays per year, or 2,080 to 2,096 working hours per year. The United States Office of Personnel Management uses 2,087 hours as the standard for the average number of hours worked in a year, and many employers follow suit.

From there, employers can divide the year into 52 weekly pay dates, 12 monthly pay dates, 24 semimonthly pay dates, and either 26 or 27 biweekly pay dates. This last measure varies because of calender differences year to year. Most employers adjust the biweekly pay for salaried employees so that they receive the same amount every two weeks, regardless of how many pay dates there are in the year. This means that salaried employees may receive different take-home pay per paycheck some years, even though the total amount they earn over the entire year is the same.

For hourly employees, this is more straightforward: If a worker is paid biweekly, there will be some years when they can expect one more paycheck for the same amount they usually get. Also, when they are paid biweekly, they can expect to receive three paychecks in two months of the year.

Converting Hourly Wages

To convert from an hourly wage to yearly pay, take your employee's hourly wage and multiply it by 2,087. This gives you a good estimate of what they earn working 40 hours a week all year. For example, if you pay $15.30 per hour, multiply $15.30 per hour by 2,087 hours to get $31,931.10 for the year.

To convert from a salary to an hourly wage, take a salary and divide it by 2,087. Therefore, for an employee with an annual salary of $45,000, their hourly rate is $45,000 divided by 2,087 hours, which is the equivalent of $21.56 per hour.

Calculating Dollar Increases or Decreases

Changes in pay are often described to employees in terms of percentages. For example, you may tell a worker that they are receiving a 3.5 percent merit increase, or your company may decide to cut all pay by 5 percent. When you give a percentage like this, you need to know what that translates to in terms of dollars. You can use a paycheck percentage calculator, or you can calculate the amount manually.

You need to multiply the percentage increase or decrease by the employee's current pay. To do this, express the percentage as a decimal by dividing the percentage by 100, so a 3.5 percent increase is expressed as 0.035, and a 5 percent decrease is expressed as -0.05. To convert a decimal to a percentage, multiply by 100 instead.

Multiply this decimal by the worker's current pay. For example, a 3.5 percent increase on a $45,000 salary comes out as 0.035 times $45,000 yielding $1,575 more the employee will be making per year. Add this to the current yearly pay to get the new yearly amount: $1,575 + $45,000 = $46,575.

For a decrease, remember to keep in mind the negative sign: a 5 percent decrease works out to be -0.05 times $45,000 = -$2,250. To get the new, decreased yearly rate, add the two numbers together: -$2,250 + $45,000 = $45,000 - $2,250 = $42,750.

Hourly Rate Percentage Changes

If you pay your employees an hourly rate, multiply the hourly rate by the percentage change (expressed as a decimal) to get the new hourly rate, and convert this number to their yearly pay using the 2,087-hour approach.

For example, if an employee is paid $15.30 an hour and receives a 4 percent increase, you multiply 0.04 times $15.30 per hour to get $0.61. Their new hourly rate is $15.91, and the new yearly pay amount is $33,204.17.

Pay Changes as a Dollar Amount

When pay changes by a dollar amount, you might still like to know what percent change this is to get a sense of the scope of the change.

If you know the dollar amount in terms of how much is being added or subtracted from the worker's current pay, then determining the percent change is straightforward: Divide the pay change by their current pay.

Finding Increase From a New Rate

If you know the new rate your worker will be paid but not the difference between their old and new rates, you need to find the difference yourself.

To get there, subtract the old pay rate from the new pay rate. If the employee received a raise, the resulting number is positive. If the pay is being cut, this number is negative. From there, find the percentage by doing the same calculation as above – dividing by their old pay.

Doing these calculations can help you better estimate your employees' market worth and negotiate pay raises.