Pay groups are specific groups you can filter your employees into based on their positions and the pay they receive. Pay Groups can be applied to specific hierarchy items in the hierarchy settings. When an employee punches under that hierarchy item they will be organized in the payroll report by the pay group that was assigned to that hierarchy item.

For example:

You could use the pay groups feature to make two groups that would enable you to differentiate which employees receive hourly wages vs. those who are salaried.

Visit this article for step-by-step instructions on how to make pay groups.