June 18, 2007: Performance Based Pay May Be Right for You
Acquiring and retaining great co-workers is a daily dilemma for most contractors. To entice and retain employees, many companies have tried signing bonuses, extended benefits, better hours, etc., but these efforts are not always successful in either acquiring or retaining workers. Companies that are successful at attracting and retaining employees usually have some type of performance-based compensation plan that rewards great workers and penalizes poor workers. This article discusses the often misunderstood relationships between performance based pay (PBP), labor laws, and overtime.
PBP has been around for many years but it was limited to sales reps and their performance was rewarded through commissions. Today, contractors are taking this key concept and offering it to field personnel. Performance pay is based on the premise that if certain standards are met, the worker earns compensation. Typically performance pay is based on the quality and efficiency of the jobs, not on the hours actually worked.
Federal and state labor laws allow performance-based compensation for hourly workers. Since service techs and installers are hourly workers they are defined as non-exempt employees. Non-exempt employees must be paid overtime as defined by state labor boards, and must keep a time card for all hours worked during the pay period. Often a misconception of PBP is that companies do not have to pay overtime anymore.
The Department of Labor provides a simple formula for the calculation of correct compensation. The formula consists of three values:
1. Total compensation earned for the pay period;
2. Total hours worked during the pay period;
3. Average hourly pay for the pay period.
This calculation must be carried out either manually or by a computer each pay period to determine correct compensation wages. Even though the contractor may not use PBP in the company, this calculation still is performed each pay period. It is the essence of overtime pay guidelines.
COMPENSATION IS COMPENSATIONTotal compensation is defined as all taxable wages earned during the pay period. This includes normal wages, bonuses, commissions, or incentives that are taxable. Remember, this is not normal compensation; it is total compensation. This total compensation can be paid through normal hourly wages and bonuses or some type of PBP. If you pay a technician $40 per service call and he does 20 calls per pay period, his total compensation would be $40 x 20 or $800. If you pay a technician $16 per hour and he works 40 hours, his total compensation is $16 x 40 or $600. If the monies earned through normal hourly channels, bonuses or PBP, are taxable payroll wages, they must be included in total compensation.
Total hours worked includes all hours on the job or on the premises. Time starts, typically, when an hourly worker drives up to your office or drives to their first job or call. Labor boards call this the primary or secondary office location. Time does not start when they leave the house, because that is commuting expense. Time starts when they hit an office location. This time must be kept on a time card and is completed during the pay period by the worker or the office and approved for payment. Total hours include all hours on the job which can be regular or overtime hours.
At the end of the pay period, the company must divide Total Compensation by Total Hours Worked to get Average Hourly Wage.
The average hourly wage must be equal to or above the state’s minimum wage. The average hourly wage must be used to calculate overtime pay if any overtime was worked. Some examples might help to clarify.
Joe the technician has total compensation through incentives, PBP, and wages of $1,000 for the pay period of one week. During this weekly period, according to his time card, he worked 40 hours.
Divide $1,000 earned by 40 hours worked to get an average hourly wage of $25 per hour. Twenty-five dollars per hour is higher than the minimum wage for the state, so minimum wage requirements have been met. This state defines overtime as “hours worked over 40 per week” so Joe did not work any overtime. The paycheck is correct. Now let’s look at the following week.
The following week Joe really does well and earns total compensation of $1,200 for the week. He worked 50 hours because he was on call and did some work also on Saturday.
Divide $1,200 compensation by 50 hours worked. His average hourly wage is $24 per hour that is above minimum wage. However, because he worked overtime (OT) we must pay Joe additional money. We paid him $24 per hour for 40 hours and we paid him $24 for each of the 10 hours he worked overtime, but we need to come back and pay him the half time differential for those overtime hours.
He worked 10 hours overtime times 1/2 ($24) so he deserves another $120 on top of the $1,200 he was paid. His correct pay should be $1,320.
PBP REWARDS TALENTED PEOPLEThis is the first hurdle in the PBP debate. Always be mindful that PBP is not a way to be exempt from paying overtime wages. The company still has to compensate the individual based on hours worked and average hourly wages.
Remember, PBP provides incentives for good workers to earn more money and really great workers can earn a lot more than they do now. Today we probably put a floor and ceiling on wages, and regardless of performance the field person cannot escape the ceiling. PBP can take away the ceiling and pay individuals any amount of monies they are willing to earn. PBP also creates a system of compensation that rewards and penalizes.
Instead of an owner or manager giving raises or bonuses, the PBP system provides the avenue for higher wages. The system is fair and if field personnel take advantage of it, they will make more money. If field personnel do not take advantage of it, they will make less.
In my opinion as a national HVAC consultant, I believe every company should implement some form of PBP. The only way most companies reward field personnel is through a few commissions or by working more hours. Most companies that have gone to PBP actually reduce their overtime hours and do more jobs. If personnel work less on jobs, more jobs could be done during the normal workday instead of after hours and they would make more money.
Ron Collier, Ph.D., is president of the Collier Consulting Group, a business management consulting firm for the contracting industry. Ron can be reached by e-mail at email@example.com. Dr. Collier also appears in this week’s video spotlight on The NEWS home page.
Publication date: 06/18/2007