Equal Dollar Incentive Payouts

Posted on March 10, 2014 by Chris Kelley Posted in Compensation Consulting

Incentive pay plans for front-line employees can be a cost effective way to get more bang for your payroll bucks.  There are also tremendous employee benefits to be gained from a well-designed plan.  Higher pay opportunity is an obvious benefit, but employees can also feel better inclusion, engagement and teamwork that can come as result of a properly designed plan.

Despite this seeming like a no-brainer, win-win, it is possible to have an otherwise great incentive plan that lands you in hot water with the Fair Labor Standards Act (FLSA) with a simple oversight of the administrative roles that are in place to protect workers.

According to the US Department of Labor, employees who are nonexempt under the FLSA need to be compensated at 1 ½ times their Regular Rate for all hours worked over 40 in a work week.  Any incentive payments made to nonexempt employees need to reflect any overtime premium dollars employee may have earned.  In other words, the amount of incentive pay needs to get added the employees’ Regular Rate and then the overtime premium is paid out on top of that.

The easiest way to account for this is simply to calculate the incentive payment as a percent of total earnings in the performance.  Overtime premium pay is already included in total earnings, so basing your incentive payout as a percentage of total earnings already reflects the additional premium they are entitled to.  But as we know, administrative ease should not be the sole factor used to decide upon the mechanics of a pay plan.

Some organizations want to create a pay plan that pays out in equal dollar amounts to create a more team-oriented culture.  This egalitarian approach is fitting when the organization wants to recognize that all employees’ contributions were equally important in qualifying for the incentive payment.  In these scenarios, the employer must go back and provide an adjustment to any overtime earnings that any nonexempt employees had earned in that performance period.

To make matters even more complicated, there is a decision to be made about how to fund that additional overtime payment.  If the incentive plan is truly designed to be self-funded, then it only makes sense that the additional overtime dollars that have to be paid out need to be subtracted from the funding pool.  This creates a circular calculation that can drive a compensation analyst crazy.

What we’re going to show in the video below is how KnowledgePay created a nifty little Excel spreadsheet that uses visual basic programming / macros and the function called Goal-Seek.  By using this tool, the organization can easily figure out what the equal dollar payouts are supposed to be, stay in compliance with the Fair Labor Standards Act, and fund the payment of the additional overtime with monies from the self-funded incentive pool.

If you’d like to learn more about how KnowledgePay can help you with your Equal Dollar Payout calculator, or any other compensation analysis conundrum, visit our Compensation Consulting page.