By Derrick B. Stark, CPA
Anyone associated with a company employing more than one person has likely been following the Department of Labor (DOL) overtime rule change. The change, originally scheduled to go into effect on December 1, would have doubled the minimum salary thresholds related to "White Collar" exemptions. A Federal judge in Texas blocked the rule last week, and it is very possible it will be reversed or heavily modified by the new presidential administration. The point of this article is not to dive into the specifics of the 508 page rule or take sides with either of the prevailing positions.*
Instead, I find the contrast between what we think about as valuable and what we treat as valuable in terms of compensation much more interesting. We want our work to be personally satisfying and to ultimately matter. We want to explore new ideas, learn new skills, and develop new products. We also want our work to fit neatly into a convenient 40-hour work week. The problem here, as I see it, is a matter of proper incentives and constraints.
I have not been an employee for a long time so my vantage point is clearly that of an employer. It is precisely for that reason I hope the following statement is credible:
Without generally accepted parameters for what constitutes a reasonable amount of work in a specific time period, employees will work more and accomplish less.
Anyone associated with a company employing more than one person has likely been following the Department of Labor (DOL) overtime rule change. The change, originally scheduled to go into effect on December 1, would have doubled the minimum salary thresholds related to "White Collar" exemptions. A Federal judge in Texas blocked the rule last week, and it is very possible it will be reversed or heavily modified by the new presidential administration. The point of this article is not to dive into the specifics of the 508 page rule or take sides with either of the prevailing positions.*
Instead, I find the contrast between what we think about as valuable and what we treat as valuable in terms of compensation much more interesting. We want our work to be personally satisfying and to ultimately matter. We want to explore new ideas, learn new skills, and develop new products. We also want our work to fit neatly into a convenient 40-hour work week. The problem here, as I see it, is a matter of proper incentives and constraints.
I have not been an employee for a long time so my vantage point is clearly that of an employer. It is precisely for that reason I hope the following statement is credible:
Without generally accepted parameters for what constitutes a reasonable amount of work in a specific time period, employees will work more and accomplish less.
Managers will not plan work in advance to ensure successful and cost-effective outcomes because the incremental cost is nothing. Conversely, employees will not diligently pursue completion because there is always more time. Valuable work means momentum and momentum requires forward motion. Simply working on a project...applying time to it...does not advance the cause and results in a race to mutual mediocrity. Advancement requires completion: release the software code, make the sale, publish the research, deliver the training, test the new delivery routes. Self-imposed time constraints create the necessary pressure to make those things happen...the same way you need the constraint of a pipe to have water pressure.**
Having said that...
The value problems with the current configuration are two-fold:
Every time I want to involve staff in a new project, one that I find personally exciting or one that I think will help them develop their natural talents and make them more valuable, I have to make very specific trade-offs between the short-term goals of accomplishing our routine work this week and taking risks on new projects that may or may not pay out in the future. It is a matching problem, and inertia tilts the scales heavily in favor of the status quo originally set forth in the 1940s when most work consisted of repetitive manufacturing tasks performed by unskilled and easily interchangeable laborers. Exceptions and modifications to the rules have tried to address this by distinguishing between the unskilled workers with limited outlets for their skills and "white collar" workers with more options and authority. While those rules might help to distinguish, they cast a shadow on the transition from laborer to knowledge worker or creator.
With these transitional projects, the staff develops talents and skills that I can sell to our customers for higher profit margins and the staff can negotiate higher compensation based on those skills and contributions. It is worth noting that if we as employers cannot deliver on the higher value proposition, staff should take their enhanced skills and experience into the marketplace where they can maximize their own value.
I think this could be addressed in part with a slightly-longer unit of measurement for time worked. For example, if overtime was calculated on a monthly basis, employers could utilize workers on projects and then provide the time off any time before the end of the calendar month to maintain operating budgets. Unused overtime would be paid at the end of the month. Spreading the trade-off over a larger period of time, while simultaneously maintaining necessary constraints, could go a long way.
INCREMENTAL COST
My grief with the 150% rate for compensable overtime is largely secondary to the unit of measurement argument. I believe it becomes significantly less relevant with a more reasonable time period measurement. I am not a proponent of long working hours or singular purpose. I believe well-rested and well-rounded people create the most valuable work. Moreover, I think employees and employers take expected work hours into account and adjust hourly rates to arrive at perceived value.
For me, the argument is academic. The overtime rate seems punitive; if the big mean company forces the helpless employee to work more than some arbitrary number of hours then they should suffer fines and penalties. In reality, employment is a business deal. The employee has a skill they want to sell and the company has a need for which they are willing to pay. If more work is purchased then it should be compensated at the standard rate, right? I mean, if I go to Taco Bell and order 41 Quesaritos, I cannot imagine an apolitical application of the laws of economics that would suggest I pay $3 for the 41st, when the first 40 only cost $2 (#delish).^
My hope, then, is that we can look past the political bantering and use this opportunity to think about how we measure value and how to synchronize the incentives and constraints of employers and the employed to maximize the benefits for both.
###
*Those positions are that:
^In case the Taco Bell Corporation or its affiliates worry I am taking credit for the Quesarito, I want to clarify that I am merely commenting on its magical illustration of capitalism in the context of a review or critique. If, however, the Department of Labor ultimately adopts my monthly overtime calculation, I will not object to naming it “Derrick's Law of Quesaritos.”
Having said that...
The value problems with the current configuration are two-fold:
- Unit of Measure - It is difficult to involve entry level staff in new projects where there is no measurable guarantee of profitability when limited to 40 hours every week
- Incremental cost - Every hour in excess of the default time period costs 150% of the agreed upon price
Every time I want to involve staff in a new project, one that I find personally exciting or one that I think will help them develop their natural talents and make them more valuable, I have to make very specific trade-offs between the short-term goals of accomplishing our routine work this week and taking risks on new projects that may or may not pay out in the future. It is a matching problem, and inertia tilts the scales heavily in favor of the status quo originally set forth in the 1940s when most work consisted of repetitive manufacturing tasks performed by unskilled and easily interchangeable laborers. Exceptions and modifications to the rules have tried to address this by distinguishing between the unskilled workers with limited outlets for their skills and "white collar" workers with more options and authority. While those rules might help to distinguish, they cast a shadow on the transition from laborer to knowledge worker or creator.
With these transitional projects, the staff develops talents and skills that I can sell to our customers for higher profit margins and the staff can negotiate higher compensation based on those skills and contributions. It is worth noting that if we as employers cannot deliver on the higher value proposition, staff should take their enhanced skills and experience into the marketplace where they can maximize their own value.
I think this could be addressed in part with a slightly-longer unit of measurement for time worked. For example, if overtime was calculated on a monthly basis, employers could utilize workers on projects and then provide the time off any time before the end of the calendar month to maintain operating budgets. Unused overtime would be paid at the end of the month. Spreading the trade-off over a larger period of time, while simultaneously maintaining necessary constraints, could go a long way.
INCREMENTAL COST
My grief with the 150% rate for compensable overtime is largely secondary to the unit of measurement argument. I believe it becomes significantly less relevant with a more reasonable time period measurement. I am not a proponent of long working hours or singular purpose. I believe well-rested and well-rounded people create the most valuable work. Moreover, I think employees and employers take expected work hours into account and adjust hourly rates to arrive at perceived value.
For me, the argument is academic. The overtime rate seems punitive; if the big mean company forces the helpless employee to work more than some arbitrary number of hours then they should suffer fines and penalties. In reality, employment is a business deal. The employee has a skill they want to sell and the company has a need for which they are willing to pay. If more work is purchased then it should be compensated at the standard rate, right? I mean, if I go to Taco Bell and order 41 Quesaritos, I cannot imagine an apolitical application of the laws of economics that would suggest I pay $3 for the 41st, when the first 40 only cost $2 (#delish).^
My hope, then, is that we can look past the political bantering and use this opportunity to think about how we measure value and how to synchronize the incentives and constraints of employers and the employed to maximize the benefits for both.
###
*Those positions are that:
- employers are evil profit mongers with no interest other than exploiting the helpless by working them infinitely without appropriate compensation, or
- employees are lazy and expendable and lucky to have jobs at all, or
- any modification to the existing rule, no matter how arbitrary the existing rule might already be, will unquestionably bring about the end of capitalism, individual freedom, and possibly infect us all with bird flu.
^In case the Taco Bell Corporation or its affiliates worry I am taking credit for the Quesarito, I want to clarify that I am merely commenting on its magical illustration of capitalism in the context of a review or critique. If, however, the Department of Labor ultimately adopts my monthly overtime calculation, I will not object to naming it “Derrick's Law of Quesaritos.”
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