“I pay by the hour — people stretch out tasks. I pay a salary — half of them just ‘sit on the payroll.’ How do you find a balance so you don’t overpay for nothing and don’t lose the best people?”
This question troubles every business owner. On one hand, hourly tracking seems fair — you pay for what you get. On the other — a fixed salary provides stability and supposedly motivates results.
The truth in 2026: both approaches are outdated in their pure forms.
The real battle isn’t between “hourly” and “salary.” It’s between paying for “sitting in a chair” (which is unprofitable) and paying for results (which is profitable). In this article, we’ll explore which model works for different types of roles, and how time tracking shifts its function from “supervisor” to “diagnostician.”
Why hourly pay becomes a trap
For manual labor, hourly tracking made perfect sense: more hours at the machine = more parts produced. The formula is simple and fair.
But for modern business — knowledge work — this approach doesn’t work.
The efficiency paradox
Peter Drucker in his book The Effective Executive clearly distinguishes:
“In manual work, we only need efficiency — doing things right. But in knowledge work, we need effectiveness — doing the right things.”
| Type of Work | What We Measure | Relation to Time |
|---|---|---|
| Manual | Number of units produced | Direct: more hours = more output |
| Knowledge/Intellectual | Quality of decisions | Inverse: fatigue reduces quality |
Problem: If you pay by the hour, you financially penalize efficiency. A developer who solves a task in 2 hours instead of 8 earns 4 times less. What conclusion will they draw?
Parkinson's Law in action
“I have two marketers on my team. One finishes tasks in 5 hours, the other in 8. With hourly pay, the first earns less. A month later, he also started ‘working’ 8 hours.”
Cyril Northcote Parkinson formulated the law: “Work expands to fill the time available for its completion.”
With hourly pay, employees subconsciously stretch tasks to “produce” the required hours. Productivity turns into activity simulation:
- Checking email 20 times instead of 3
- “Researching” instead of making decisions
- Meetings for the sake of meetings
Salary: peace model or laziness model?
A fixed salary solves the problem of “stretching time.” But it creates a new one — lack of connection between effort and reward.
Basecamp’s approach: “Protected 40 hours”
Jason Fried and David Heinemeier Hansson in It Doesn’t Have to Be Crazy at Work describe the model:
- Fixed competitive salaries
- No bonuses or negotiations
- Strict limit: 40 hours per week max
The logic: If a person doesn’t have to worry about “hour padding,” they focus on quality.
“You don’t buy an employee’s time 24/7 — that’s a path to burnout and mistakes. You buy their best energy. The answer isn’t working more hours, it’s working with less nonsense.”
When salary works
| Condition | Why It Matters |
|---|---|
| Clear expectations of results | Employee knows what they are responsible for |
| Culture of accountability | No “just sitting on salary” |
| Competitive pay | Money is not a daily concern |
| Hour limits | Protection against overtime |
When salary fails
Without clear metrics, a salary becomes “pay for existence.” The employee earns for the position, not contribution.
“Moved the team to salaries. Three months later, productivity dropped by 30%. People relaxed — money kept coming regardless of tasks completed.”
Hourly tracking in 2026: a new role
Here’s the paradox: giving up hourly pay doesn’t mean giving up time tracking. On the contrary, tracking becomes even more important but changes its function.
From “accountant” to “diagnostician”
| Old Role | New Role |
|---|---|
| Counting hours for payroll | Diagnose where time disappears |
| Monitor presence | Identify “time wasters” |
| Record for reports | Optimize for results |
Peter Drucker insisted: you must know where time disappears to consolidate it into large blocks for important work.
Laura Vanderkam: we lie to ourselves about our time
Time researcher Laura Vanderkam in 168 Hours proves:
“People who claim to work 75+ hours a week actually work about 50. We tend to overestimate our busyness.”
Only accurate time logs show reality:
- How much time is spent on deep work
- How much is administrative noise
- Where optimization opportunities exist
Nucor hybrid model: salary + team results
If you fear people will relax on salary — study Nucor Steel’s model, described by Jim Collins in Good to Great.
How the model works
| Element | Implementation |
|---|---|
| Base salary | Average or below market |
| Bonus | Significant, tied to team results |
| Metric | Tons of steel produced, not hours logged |
Why it works:
“Nucor employees arrived 30 minutes early. Not because they were paid for it — but to prepare tools for maximum productivity. Their income depended on results, not hours.”
Effect: Lazy employees are removed by peers, not managers. The team becomes a self-regulating system.
Office adaptation
Instead of “tons of steel,” use:
- Completed projects
- KPI achievements
- Client satisfaction
- Cycle speed
Which model to choose: decision matrix
There’s no universal answer. Different roles require different approaches.
| Role Type | Recommended Model | Why |
|---|---|---|
| Linear/routine | Hourly tracking + automation | Direct link between time and output |
| Creative | Salary + project evaluation | Time does not correlate with idea quality |
| Managerial | Salary + team bonuses | Results depend on the team |
| Expert | Top 10% market salary | “Remove money questions from the table” |
Role of tracking in each model
For hourly roles: tracking = basis for pay. Automate to avoid manipulation.
For salary roles: tracking = diagnostic tool. Employees track their own time to show overload from “administrative noise.”
“My developer showed logs: 60% of time — meetings and approvals. We cut meetings in half. Productivity increased 40% — without changing pay.”
How to implement a hybrid system: 5 steps
-
Role audit
Divide your team into categories:- Where output depends directly on time?
- Where time is just one factor?
- Where time doesn’t correlate with output at all?
-
Set competitive salaries
For key roles, pay at the top 10% of the market. This “removes money from the table.” -
Define Key Result Areas
What exactly do you expect from each role? Not “be at work 8 hours,” but:- Close X tasks per week
- Reach Y metric
- Complete Z project on time
-
Implement tracking as a diagnostic
Hourly tracking is not for control, but for optimization. -
Link bonuses to team results
Individual bonuses create competition. Team bonuses create collaboration.
Conclusion
In 2026, the dilemma “hourly tracking vs salary” is misleading. The real question: what are you paying for — presence or results?
| Model | When it works | When it fails |
|---|---|---|
| Hourly | Linear roles with direct time-output link | Knowledge work, where time doesn’t correlate with quality |
| Salary | Clear result metrics & culture of accountability | No expectations — people “sit on salary” |
| Hybrid (salary + team bonus) | Requires a self-regulating team | No metric transparency |
Key insight: Time tracking remains critically important — but not for payroll, rather for diagnostics and optimization.
“Pay for the mind, not the clock. Use tracking to protect employees’ time from chaos, not to count pennies.”
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FAQ
Do we need hourly tracking if we pay salaries?
Yes, but for a different purpose. Tracking becomes a diagnostic tool: you see where team time disappears, where overload occurs, which processes “eat” productivity. Data for optimization, not payroll calculation.
How to avoid “sitting on salary” without micromanagement?
Define clear Key Result Areas for each role and implement team bonuses for results. When team income depends on collective outcomes, colleagues regulate productivity themselves, without manager intervention.
Which model works best for remote teams?
For remote teams, salary + team bonuses work best. Hourly pay remotely creates temptation to “fake presence.” Salary with clear result metrics removes this problem — it’s not about hours online, but what’s accomplished.
