If you’ve ever applied for a new job, you’ve most likely seen the phrase ‘pro rata’ used in employer salary descriptions. What does the term mean in this context and others, and how can you calculate values using the pro rata basis? We’ll answer these questions below.
What is pro rata?
The phrase ‘pro rata’ stems from the Latin term for ‘in proportion’. It’s used to describe the proportional value of a part in comparison to its whole. This doesn’t necessarily mean that each part is equal; instead, it means that all parts contain weighted values in relation to their proportional size.
What does this look like in real life? For example, if you’re paid a pro rata wage, the wage is calculated using what you would earn working full time. Part time wages, paid pro rata, are proportional to full time wages. Imagine that you work on a pro rata basis for 30 hours per week, while your colleague works full time at 40 hours per week. Both of your positions are advertised with a salary of £40,000. Your colleague earns the full amount, while your pro rata salary would be £30,000 per year to represent the 30 out of 40 hours worked.
What is pro rata used for?
As you can see from the example above, a pro rata calculator is often applied to salaries or hourly wages. However, these calculations are also applicable to financial situations such as dividend payments, interest rates, and insurance premiums.
In the case of dividends, a company’s shareholders are paid according to the number of shares they own. Imagine that Company ABC has distributed a total of 100 shares among four shareholders. Each share produces dividends of £3, for a total value of £300. No matter how the dividends are distributed, the total value cannot exceed this amount.
Shareholder 1 holds 50 shares and receives £150.
Shareholder 2 holds 30 shares and receives £90.
Shareholder 3 holds 10 shares and receives £30.
Shareholder 4 holds 10 shares and receives £30.
The dividends are paid out proportionally to the total value of £300, or pro rata. A simple formula to calculate pro rata dividends is:
Per Share Dividend = Total Dividends / Total Number of Outstanding Shares
You can then multiply the per share dividend amount by the total number of shares each shareholder possesses.
How to calculate pro rata salary
Although also seen in finance, you’re likely to use a pro rata calculator to calculate employee wages. The easiest way to work out pro rate salary is by dividing the total annual salary by the number of full-time hours. You can then multiply the result by the pro rata hours worked.
Let’s take the example from above.
£40,000 / 40 = 1000
1000 x 30 = £30,000
You can use the same pro rata calculator method to figure out holiday benefits for part-time employees.
There are a few additional considerations if you’re thinking about hiring employees on a pro rata basis. To begin with, you’ll need to check the latest government rules regarding benefits for part-time workers. In most cases, part-time hires must receive the same level of benefits as full-time employees, though the benefits can be applied on a pro rata basis. Some benefits can’t be reduced, however, such as subsidised parking or medical perks.
The bottom line
The pro rata concept is applicable to numerous situations, both in finance and payroll. You can use this proportional system of calculation whenever you must break down units of measurement into smaller pieces. With some simple mathematics or online calculators, you’ll be able to adjust your amount to the proportional value.
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