The ABC Widget company paid its salaried employees each month 1/12 of their annual rate of pay. Then, on a month that began on a Sunday, they switched to paying them every other week 1/26 of their annual pay.

Alice said that works out worse for the employees, as in the first month, they'd get only 1/13 of their annual pay instead of 1/12.

Bob said "No, you're getting some of your money sooner by two weeks, more than making up for it, so that it's better for the employees."

Who is right?

In my previous post, I had misread the problem.

For salaried employees, they used to get:
Salary/12 per month times 12 months.

From now on they are going to get:
Salary/26 per 14 days  which is equal to:
Salary/(26*14)  per day
So in a year they will get:
365.25/(26*14)  = 1.003434 of their Annual Salary

In my previous post I figured the interest income lost by being paid on average about one week later.  This worked out to about a 0.06% loss.   The 0.3434% pay raise more than offsets the loss due to the time value of money.

So Alice is wrong completely.  Bob's reasoning is wrong but has the right answer:  the employees are better off under the new plan

Posted by Larry on 2005-01-02 19:02:24