7 minute read
Ways to whip overtime costs
By Wally Lynch Paid Associates Dallas, Tx.
VERTIME can be frustrating, particularly when competitors are open 50 to 60 and even 70 hours weekly. It's expensive, but where and how do you draw the line when you want to take care of your customers?
These and similar questions usually surface each month when the figures are presented to management. Coping with overtime is like running a mile in knee deep water. Yet the practice of perpetual and/or hefty overtime continues virtually unabated.
Unfortunately the costs involving people are notjust wages. Benefits, which include payroll taxes. insurance, pensions. profit sharing, stock options, etc., are all sympathetic and react to augment personnel wage and benefit costs.
The chart shows a very typical situation which one dealer found in his company. The averages tell the story.
The work week was 54 hours, 40 paid at a straight time rate of $5 per hour and 14 at the overtime rate of $7.50, which with benefits became a cost of $6.66 per hour to the company. A 40 hour work week is 2080 hours annually. Straight time with benefits would cost an average of $5.90 per hour or $12,272 annually. A 54 hour week, 2808 hours annually, and at the $6.66 hourly rate cost the company $18J14.80 per wage earner annually.
Overtime makes a big difference, so let's examine a few options for change. First, for easy figuring we'll use l0 as the number of hourly paid employees. Thus, the total annual payroll for a 54 hour week is $187,148. An examination of cash register tapes showed that, like most retailers who sell to contractors, they did about 75 % to 80% oftheir business in 20% to 25% of their open hours, requiring maximum personnel scheduling during 15 to 18 hours ofthe 60 hours they were open each week. (Employees worked 7:30 a.m. to 5:30 p.m. six days with a one hour lunch break)
OPTION NO. l: No change. Ten people are compensated annually for 2808 hours each, or 28,080 hours in total at a cost to the company of $187,148.
OPTION NO. 2: Eliminate all overtime and hire enough people as full time employees to cover the728 hours of overtime previously worked by each of 10 workers at $8.85 per hour for $6,442.80
Story at a Glance
annually. The total of7280 hours generated by l0 people annually had cost $8.85 each, or $64,428.If the company buys these same hours at $5.90, the cost for 7280 of them is $42,952 annually, or a savings of$21,476.
OPTION NO. 3: Eliminate all overtime and hire enough people part time (under 30 hours per week) to replace the 7280 hours of overtime eliminated. Since they are part time they get reduced benefits and thus only M.50 per hour out of pocket by the company to buy each hour. This $4.50 for 7280 hours equals $32:7ffi. This generates a savings over the overtime expense previously paid ($64,428) of $31,668.
OPTION NO. 4: Eliminate all overtime and hire enough people part time to make up only one-halfofthe 7280 hours of overtime previously worked, or 3640 hours. Regular employees would be put on staggered shifts recognizing customer time demand patterns and hence 3640 man hours are no longer utilized or paid for by the company. Thus 3640 hours filled with parl timers at $4.50 each costs $16,380 instead of the $&,428 previously paid in overtime, a savings of $48,048.
OPTION NO. 5: Eliminate all overtime. Stagger three shifu: 7:30 a.m.4:30 p.m.; 8:00 a.m.-5:00 p.m. & 8:30 a.m.-5 :30 p.m. Each employee gets Sunday and one other day offper week scheduled Tuesday through Friday. Thus ten employees work no overtime and company saves $64,428.
Once overtime has been eliminated there will always be pressures on management to ''allow it" for this or that reason. There probably is no foolproof way always to make the right decisions because ofthe ongoing conflict between the economically practical and a missionary zeal to service the customer in the face of competition, but here's one method that may help.
Suppose that the company has elected Option No. 3 above, and is generating pre-tax profits of $72,841 on sales of $1,871,148. They are paying for 20,800 man hours at $5.90, or $122720 and7280 hours at $4.50, or $32;760. The total payroll costs are $155,480; the pre-tax profit is not 3.89 % The average hourly cost per person is $5.54. Every man hour purchased at this rate has generated $2.59 in pre-tax profit. The sales needed to support these man hours were $66.63 each ($1,871,148 + 28,080). The company's total sales were $1,871,148. Their pre-tax profits were 2.2%, or $y'l,l73. (Overtime cost $64,428, or 1.56 times realized profits. Reducing labor costs goes right to the bottom line.)
Another way to look at it is to determine how much in sales would be required to generate a similar amount in dollars and pre-tax profits. Divide profit total by pre-tax profit percent (2.2).
Presumably overtime would only be made available to full time employees who would receive $8.85 per hour for overtime. In order to retain pre-tax profits of 389%, each hour of overtime would have to generate $2n.51 in sales. (Nominally 3.89% of $221.51 equals $8.85) Therefore one hour of overtime for each of l0 employees would cost $89.50 and should generate $2,n5.1O in additional sales.
Working these l0 employees for 9 hours each on a Saturday without a day offduring the week generates 90 hours of overtime at a cost of $796.50 to the company. The sales required to support this additional payroll expenditure would be nominally $20,475.58. That's the amounr of sales required to generate 3.89% , enough pre-tax profit to recover an additional fi96.50. It isn't a perfect method but it is a way for management to identi! what's right no matter who's right.
BREAKDOWN OF WAGE BENEFIT COSTS &
EFFECTS OF PAYROLL CHANGES ON PRE-TAX PROFITS
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The Merchant Magazine
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