Prosperio Group has prepared this document for the benefit of its client. This document is incomplete without the accompanying discussion and contains proprietary material. This document should not be reproduced, either in total or in part, circulated, or quoted from without the expressed written permission of our firm. Exempt vs Non-Exempt – DO THE MATH! Beth Carroll Managing Principal October 28, 2015
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Prosperio Group has prepared this document for the benefit of its client. This document is incomplete without the accompanying discussion and contains proprietary material. This document should not be reproduced, either in
total or in part, circulated, or quoted from without the expressed written permission of our firm.
Exempt vs Non-Exempt –DO THE MATH!
Beth CarrollManaging Principal
October 28, 2015
Agenda
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Introduction to Prosperio Group
Review the Math Options for Exempt vs Non-Exempt
Introduction to Prosperio Group
Prosperio Group focuses on compensation design and management for the Transportation & Logistics Industry
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DEFINE the goals
for the business
FOCUS the
organization on the goals
EXECUTEthe plans to
reach the goals
Prosperio Group also provides:
Sales Compensation Consulting across all industries
Broad-based Compensation and Performance Management Consulting
Custom Compensation and Benefits Survey Development and Administration
Business Objectives &
StrategyOrganization Structure &
Roles
Hiring, Training &
Development
Process Management &
Execution
Compensation
Transportation & Logistics Experience:
We are or have been members of the TIA, AFA, ATA, CLDA, NPTC, TCA, TMSA, FIATA, and the CSCMP.
We have published articles in The Logistics Journal, The Supply Chain Quarterly, and Overdrive. We have been quoted in CCJ, Fleet Owner and Heavy Duty Trucking and have given numerous speeches.
Beth Carroll is the VP of Finance and Planning for the TMSA and is the Chair of the TIA Compensation Survey Committee and participates on the TIA Foundation Board.
Michael Kodat is on the Education Committees for both the TIA and TMSA.
We work globally, having completed engagements in 8 countries for companies with employees working in 39 countries.
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43
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Transportation Companies by Segment
Brokers
Air & Ocean FreightForwarding
Trucking Cos
3PL/FreightMgmt/Outsourcing
Other T&L/Supply Chain
Warehousing
We have extensive experience acrossindustries, but the clear focus is Transportation
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Many companies are represented in more than one segment.
156 Clients are from Beth’s 18 year career as a business and
compensation consultant;
41 from 10 yrs with Towers Watson and
115 from 8 yrs with Cygnal and Prosperio Group.
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7
5
5
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DISTRIBUTION OF INDUSTRIES SERVED
Transportation
Manufacturing
Software
Banking/Insurance
Professional Services
Farming/Food
Energy
Medical/Health
Food & Beverage
Not for Profit Professional Services
Distribution
Telecom
Financial Services
IT/Professional Services
Marketing
We have worked with start-ups as well as industry leaders
We have developed incentive plans for all of these roles…and more.
Members of our team
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Beth CarrollOwner
Lisa HinesConsultant
David MillerConsultant
Michael Kodat
Sr. AssociateConsultant
Anurag ChilukuriAnalyst
Kathie RybaExecutive Assistant
Client Project Manager for Org/Comp Work
Engagement Manager for
all Client Work
Client/Project Support Data and Analytics Support
Review the Math Options for Exempt vs Non-Exempt
So…what are you to do?
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Option #1: reclassify questionable jobs as “non-exempt” and pay them overtime, as earned Some of your employees will feel this is a “demotion”
Option #2: when the final ruling comes out on the new minimum pay levels, raise all exempt employees to this minimum level of fixed pay and adjust other pay components down for cost savings
Reduce or eliminate incentive pay (not a good idea!)
Reduce benefits (also not a good idea!)
Under either option you will need to consider the impact to your fixed and variable costs
Option #1: Reclassify exempt to non-exempt – how to do the math
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Jane is currently paid $40,000 a year salary and works approximately 50 hours per week. Jane also has a $10,000 yearly incentive plan that is based on individual and team performance; so that Jane currently has target earnings (TTC, OTE) of $50,000
Step 1 – calculate the new hourly rate If the person only has salary pay, the calculation is relatively simple:
SALARY / (2080 + ((WEEKLY OT HOURS x 52 (or 50) WEEKS PER YR) x 1.5))
(OT is typically not paid while on vacation so you should not count these weeks in the formula; however, if your vacation rate is calculated based on “average weekly earnings” then you should use 52 in the formula above)
So for Jane, her rate would be calculated as follows:
If you reverse the calculation (2080 x 14.13) + (500 OT hours x 14.13 x 1.5) this equals very close to $40,000
If the person is paid incentive pay, however, the calculation becomes more complex as now this value must be considered as well…because, once you are paying someone overtime, you must ALSO factor in any incentive payment earned during the pay period as part of “regular pay” that will be used to determine the OT rate
Huh? Yes, you read that properly…but don’t panic
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Again…once you are paying someone overtime, you must ALSO factor in any incentive payment earned during the pay period as part of “regular pay” that will be used to determine the OT rate
So, for Jane – let’s say she earns $2,500 of incentive in Q1 and works 120 hours of OT and 480 regular hours in the quarter
The OT impact of her incentive pay is $2,500 / (480 + 120) = $2,500 / 600 = $4.17 AND THEN YOU DIVIDE THIS BY TWO for final OT impact rate of the incentive of $2.08. You then multiply this by the 120 hours of OT worked and she gets an additional payment of $250.
The logic for the divide by two: she was already paid “straight time” in the $2,500 incentive payment for all hours so she is only now owed the x0.5 “bump” that is paid for OT hours.
There is not a fixed % that you can apply to come up with the impact for any amount of OT hours worked (it changes) – but this formula will give you the % impact:
[(INCENTIVE PAY / TOTAL HOURS WORKED / 2) * OT HOURS] / INCENTIVE PAY
This chart gives you the % impact for whole values of OT hours worked per week
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OT Hours % of Incentive to Add1 1.22%2 2.38%3 3.49%4 4.55%5 5.56%6 6.52%7 7.45%8 8.33%9 9.18%
If someone works a fractional amount of hours, you must run the formula to get the proper payout value (as rounding up would pay too much and rounding down would not pay enough)
This increases the complexity of our “back into the rate” formula from the preceding pages
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We now have to consider than on an incentive payout of $10,000 a year, Jane will get approximately another $1,000 in OT payments, so her new target total pay will be $51,000
If you have a small enough staff you may decide this is inconsequential and consider it part of an annual increase package (maybe give her a 2.5% raise instead of 5% raise, because the other 2.5% is coming from the additional $1k)
But if you have many people, you are going to want to account for the additional expense of the incentive impact on OT, and you have 2 options:
Option #1: reduce the hourly rate by the extra pay (combine the two formulas to do this)
{SALARY – [(INCENTIVE PAY / TOTAL HRS / 2) * OT HOURS]} / [2080 + (TOTAL OT HRS x 1.5)]
Option #2: reduce the incentive pay by the OT impact % (in this case we know it is 10%), so her new target incentive would need to be around $9,090 for the payout impact to remain at $10,000 (10,000 / (1 + % impact from formula for # of hours) – in this case:
$10,000 / 1.10 = $9,090
It is important to get your assumptions right, and to have a good sense of the actual hours people are
working before you make these adjustments
Questions?
Beth B. Carroll, CCP, GRP, CSCPManaging PrincipalProsperio Group