Business Q & A

August 2005 » Business
"More than 40 hours" and "Bonus Impact"
David M. Wahby

More than 40 hours

Dear Dave,

We have picked up some public sector work for the first time this year and are confused by some of the rules and regulations we must now cope with. Specifically, what are we supposed to do when a salaried staff member works more than 40 hours in a pay period on a cost plus contract? Since salaried staff is not being paid overtime, should we stop recording against the project more than 40 hours in a week?

D.R., Ill.

Dear D.R.,

The timesheet for any individual always must reflect all hours worked. There are two ways to handle the situation you described. You may recalculate the effective hourly rate for those weeks in which salaried staff work more than 40 hours, or you may elect to keep the hourly rate constant and instead credit the firms overhead pool for the equivalent payroll value of the unpaid hours charged directly to the projects.

Assume a salaried individuals weekly salary is $1,000. That individuals standard hourly payroll cost per hour is $25 ($1,000 divided by 40 hours). If that individual were to work 50 hours one week, the hourly rate for that particular week would become $20 ($1,000 divided by 50 hours). Your first option is to change the hourly cost rate for that week to the effective rate of $20. If you elect this method, you must continue to adjust the hourly charge rate each and every week by recalculating the effective hourly rate each subsequent week based on how many hours actually are worked.

The alternative is to maintain the hourly cost rate charged to projects at a constant $25 per hour. Any and all timesheet hours would be assigned to projects at the fixed cost of $25 per hour. In weeks in which an individual works more the 40 hours, a payroll variance is created equal to the amount by which the payroll charged to projects is greater than the amount actually paid. This payroll variance is credited back as an offset against the firms indirect overhead cost pool (thereby reducing overhead cost).

Current versions of todays modern engineering accounting packages are capable of handling either method. Just be consistent in whichever method you elect to use.

Bonus Impact

Dear Dave,

Our historical practice has been to pay bonuses annually at the end of the year. We are discussing, however, whether we may generate greater benefit—in the form of more ongoing interest and enthusiasm—if we changed to more frequent distributions such as twice a year or maybe even quarterly payouts.

G.S., Kan.

Dear G.S.,

Many excellent arguments can be made either way. As a generalization, my personal choice probably would come down to making a single, larger distribution once each year.

By making one payout, the distribution is going to be larger than if you were to spread the amount among two (or four) smaller bonuses, and therefore, it might have a greater psychological oomph to it than several smaller checks. On the other hand, more frequent checks present more opportunities throughout the year to reinforce the behaviors necessary to ensure continuing success. If you stick with a single distribution, you can accomplish almost the same reinforcement by providing monthly or quarterly progress reports, sharing how well the company is doing relative to the factors that go into determining what the ultimate bonus might be by the end of the year, and still make the one larger payout at the end of the year.

If your firm is subject to up and down swings in its performance during the course of a bonus year, obviously you would need to be careful about not over-distributing in one or two periods and then incurring a loss in a remaining period. I have encountered firms that accumulate and payout bonuses from period to period, but hold back a reserve from each periodic distribution to guard against the unanticipated future bad period. At the end of the year, the remaining accumulation being held in reserve is distributed as part of the final payout.

Whether you stick with a one-time payout or move to more frequent distributions for your bonus program, dont overlook the enormous power of also making several small-value, token-like gestures in recognition of an individuals performance throughout the year, whenever you notice pleasing performance that you want to encourage. For decades, management studies have shown that we all have deeply rooted needs to feel that our contributions and accomplishments are being recognized and appreciated by those we work for. Recognition can take many forms and should not be limited to just year-end bonuses. Complement your main-line bonus program by getting in the habit of spontaneously making little gestures, signaling that you see and appreciate what individuals are doing. A sleeve of golf balls here, a gift certificate there, or perhaps an afternoon off with pay, are all small ways to let people know that you are aware of what they are contributing. The tokens used for recognition need not cost much on a dollars basis, but pound for pound, symbolic recognition can be worth its weight in gold when it comes to generating goodwill with your staff.

David Wahby is president of Wahby & Associates (www.wahby.com), a management consulting firm serving A/E clients. He can be reached at 1-616-977-9756 or via e-mail at wahby@wahby.com.


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