Overtime is a profit killer! I have seen overtime pay kill companies’ profitability. The issue is employees will squeeze 40 hours of work into 50 hours, so they get paid time and one-half the last 10 hours. What a great deal it is for all the employees, but not the employer. They work fifty hours, are paid for 55 while they are only accomplishing 40 hour’s productivity. Overtime is a profit killer!
For example, I have a good friend that owns a company that installs beautiful floors and cabinets into residential and commercial garages. It takes a three-person crew four days to do the garage from start to finish. There are two mechanics and a crew leader. I am assuming the leader makes $20 per hour and the workers make $15. The three employees cost the owner $50 per hour or $400 per day times four days equals $1,600 for salaries for the installation. If payroll taxes, workmen’s compensation insurance, and benefits cost an additional 25%, the fully burdened cost to the employer would be $2,000.
Now assume that the crew worked two hours’ overtime each of the four days of the installation. The additional cost to the employer would be 8 hours x $75 per hour or $600 plus 25% burden equals $750. The overtime just raised the labor cost of the job from $2,000 to $2,750, a 37.5% increase. Most projects cannot have a 37.5% additional labor cost and remain profitable. If you annualize the overtime cost to the employer for the crew, it would cost an additional $46,000 per year. If the company has eight crews installing garages with the teams having the same amount of overtime, it will lower profits (or increase the loss) by $368,000. Overtime is a profit killer!
My recommendation to the employer, eliminate all overtime pay and create a bonus pool for the employees to distribute 25% of all profits to the employees.
Incentive plans, if done properly, are self-policing. The employees want the company to be profitable to maximize their bonus potential. If there are employees in the company wasting time and money, they pressure them to either get productive or get out. Good incentive plans are a beautiful thing!
My name is Robert Curry, and I am an Author, CEO Coach, Keynote Speaker, and Turnaround Specialist. Over the past 20 years, I have worked with more than 70 companies taking their businesses from Loses to Profits.
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