Keys to Reducing Overtime Costs for the Mid-Market Employer
SHRM’s reported 5.7%-6.3% of payroll attributed to overtime has often been referred to as the cost of doing business.
Organizations have never prospered through indifference, mediocrity, and submission to the status quo.
For growing mid-market companies, the sudden surge of overtime can often catch employers off guard. Whether prepared to deal or not, overtime pay has a significant price tag on it, averaging roughly $315,000 per 100 employees every year.
The top performing companies have experienced success in reducing overtime upwards of 32%. What’s the secret? It starts with improving the way employees make decisions from the top to the bottom of the corporate ladder.
How employers invariably inflate overtime cost
The first contributing factor to inflating overtime costs is a lack of accessible data to help managers make an informed decision. By informed decision we mean a decision that best meets the demands of production at the lowest labor cost as quickly as possible.
Think about some of the decisions that a manager or supervisor must make when encountering a labor shortage:
- Can we cover the shortage with current employees for a temporary production surge?
- Does the coverage gap require an employee with a particular skill or technical qualification?
- How long will the labor gap sustain?
- Can I draw from my current workforce, or do I need to explore temp workers?
- How many hours have my workers worked this week/month?
- How quickly do I have to fill this gap?
Now think of the data that a manager and supervisor will need readily accessible to make their informed decision:
- Current shifts scheduled
- Record of employee hours worked
- PTO schedules
- Employee skills and certification records
- Employee contact information
- Employee leave status
- Labor budget
All the while the clock is ticking and shrinking production levels are nipping at managers’ heals. PTO alone has a 22.6%-36.6% productivity loss attributed to payroll due to the effects of assigning replacement workers, and the average annual total cost of productivity loss for employers as a percentage of payroll reaches a whopping 6.2%.
What happens is in their haste, the majority of supervisors (47%) will respond to labor shortages by creating more shifts and assigning overtime. 21% report flat out that the unassigned work does not get accomplished. As a result, employers hastily over-assign shifts and overtime to reduce the impact on productivity loss, causing a reciprocal surge on labor costs. This is not solving the problem, it is just shifting costs from one Key Performance Indicator (KPI) to another.
What is the answer?
Informed decisions are born from accessible information and a leader-endorsed clear vision of success through KPI performance metrics. If the company culture is that overtime is the unavoidable cost of doing business, then employers can expect their supervisors to hand it out excessively with little arbitration. If the necessary data for shift-fillers to make informed decisions is not readily available (for example, it's in 4 different databases, filing cabinets, or God-forbid an employee's memory), then time constraints on decision-making will force shift-makers to make costly assumptions. Assumption-decision making always carries a risk and a cost.
Those employers experiencing a 32% reduction in overtime costs, according to Human Capital Management research performed by the Aberdeen Group, have done so by consolidating HCM data onto a single database, providing decision-makers with accessible data to quickly make informed decisions when confronted with the question of assigning overtime. That’s a $100,800 in annual savings per 100 employees. Perhaps the first step is researching leave management software with integrations for tracking employee time. Regardless, for the 79% of employers who continue to rely on paper-based reporting and integrations reliant on custom code and file imports/exports, there is a cost associated to the status quo of managing their business processes.