Converting an Annual Wage to an Annualized Wage

When working on proactive pay equity or when responding to a legitimate complaint or an OFCCP audit,...

Posted by Thomas Carnahan, Ph.D on July 12 2023
Thomas Carnahan, Ph.D
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When working on proactive pay equity or when responding to a legitimate complaint or an OFCCP audit, the basics of compensation analysis are often overlooked. Although this may seem rather simple, we often see mistakes made in the calculation of a salaried worker’s hourly rate and reporting an “Annual” Salary and an “Annualized” Salary.

One common error is incorrectly calculating the salary to be reviewed. The goal is to standardize the compensation measure to be analyzed when conducting a pay analysis. This is generally straightforward for hourly workers but requires some thought for salaried workers, especially those who work less than full-time.

First, determine your organization's standard annual hours. Salaried workers are often expected to work a standard of 2,080 hours (52 weeks at 40 hours a week) a year. If your organization has different standards, for example 35 hours a week is considered to be a “full-time” salaried employee, then you’d use a different calculation (52 weeks at 35 hours a week or 1820 hours per year). Next, take the individual’s salary and divide it by the number of hours that the person is expected to work. If the salary is $75,000 a year and the typical work week is 40 hours, then the wage rate would be $75,000 divided by 2,080 which equals $36.0576923076923. Next, round that number to the nearest cent and the hourly rate is $36.06 per hour. Most mistakes are made in the lack of rounding.

Now we know two things about each employee: 1) their Annual Salary and 2) their wage rate. We need to perform more computation to standardize the assumptions on all employee compensation so that we can adequately compare similarly situated employees. We need to put everyone on the same standard no matter how many hours they are expected to work per year. If someone’s annual salary is $37,500 and they work 20 hours per week (or 1,040 hours per year) then they have the same wage rate of $36.06 per hour as the employee in our first example, but different Annual Salaries. Therefore, we create an Annualized Salary which is to take the individual employee wage rates and multiply them all by the full-time expected hours per year. Using our above example, we will take the wage rate of $36.06, multiply it by 2,080 and get the Annualized Salary of $75,004.80. You will know when you’ve done this correctly for a computation based on 2,080 hours because all Annualized Salaries will end in either .00, .20, .40, .60, or .80. any other ending in the cents columns will indicate that you probably forgot to round the wage rate to the nearest cent when converting from an Annual Salary.

Getting these basics correct helps to ensure that an analysis of compensation is truly identifying the reasons for differences in pay instead of accidentally reviewing pay that is not standardized.

Thomas Carnahan, Ph.D
Thomas Carnahan, Ph.D
Thomas Carnahan is Berkshire's Compensation Services Manager. He has a Ph.D in I/O Psychology from Capella University.

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