1. HR Metrics 3: Compensation Structure
This module discusses various compensation structures and laws including salaried vs. hourly employees, exempt vs. non-exempt status, bonuses, tips, commissions and draw.
Author: Scott Freehafer, Ph.D., SPHR, SHRM-SCP
Human Resource Management Metrics
© 2018 Scott Freehafer, Stu James, and Management by the Numbers, Inc.

2. Compensation
Compensation
Let’s think about one of the biggest costs that a business has: People! Generally, the largest people-related expenses are their Compensation (salaries, wages, commissions, tips, bonuses) and Benefits (health insurance, retirement, etc.).
One might also talk about a Compensation Package, that would include both compensation and benefits. In other words, the total value received by an employee in exchange for their labor.
In this module, we’ll focus on different types of monetary compensation, how it is structured, and some of the laws that influence compensation.
MBTN | Management by the Numbers

3. Compensation
Compensation
In this tutorial, we’ll look at 5 general categories of compensation:
Salary is a form of compensation that generally means a fixed amount of money paid on a regular basis.
(Hourly) Wages, on the other hand, generally describe a form of compensation that is based on the hours an employee works multiplied by an hourly pay rate.
Commissions are a form of payment typically based on a percentage of sales generated by an employee (salesperson).
Tips are payments made by customers for a service that are either paid directly to the server in the form of cash or indirectly through the establishment (e.g. restaurant) based on some system of sharing/distribution.
Bonuses are extra payments in addition to an employee’s normal compensation based on enhanced performance, which may be discretionary or tied to a particular formula (profits, sales goals, etc.).
MBTN | Management by the Numbers

4. Fair Labor Standards act
Exempt vs. Non-Exempt Employees
Salaries and Wages are paid to employees depending on their Fair Labor Standards Act (FLSA) status. An Exempt employee does not have to be paid overtime when s/he works over 40 hours in a 7-day period. However, an organization can choose to pay overtime to an Exempt employee if it wants to do that.
Those employees who don’t qualify as Exempt employees under the FLSA tests are considered Non-Exempt. Non-exempt employees are entitled to receive overtime pay at a rate which is at least 1.5 times his/her hourly rate. So a person who makes $10 per hour would be paid $15 per hour when working overtime. This represents an incentive for the employee and a disincentive for the employer.
MBTN | Management by the Numbers

5. FLSA Tests Rules Governing Exempt vs. Non-Exempt Status
According to the FLSA, there are three “tests” that must be met in order for an employee to be considered exempt:
must be paid at least $23,600 per year ($455 per week),
be paid on a salary basis
perform exempt job duties. These requirements are outlined in the FLSA Regulations (promulgated by the U.S. Department of Labor). Jobs that are by their nature exempt include outside sales, executive, professional, and administrative jobs.
Now let’s look at a few examples of how salaried vs. hourly wage and exempt status affect compensation.
Insight
Non-exempt status may increase the cost of compensation for employers, but if an employee “fails” one of the exempt employee “tests”, they are entitled to overtime, and if not paid, the employee may file a complaint with the Department of Labor.
MBTN | Management by the Numbers

6. Salaried Exempt MBTN | Management by the Numbers
If an employee earns $65,000 per year then that employee will earn:
Since Salaries are paid based on a time period and not based on an hourly rate with overtime, we do not need to calculate an hourly rate even if the person works less than 40 or more than 40 hours a week. As you see, Salaried Exempt status is the simplest scenario.
Time Frame
Calculation
Per Period
Per Week
$65.000/52
$1,250 per week
Bi-Weekly
$65,000/26
$2,500 every other week
Twice Monthly
$65,000/24
$2, twice a month
Monthly
$65,000/12
$5, per month
Insight
Employees who work more than 40 hours per week and are not paid overtime might not like that they don’t make more money when they work over 40 hours a week, but they also don’t make less money if they work less than 40 hours a week!
MBTN | Management by the Numbers

7. Salaried Non-Exempt Definitions MBTN | Management by the Numbers
Converting Yearly Salary to Standard and Overtime Hourly Rate
If an employee earns $65,000 / year, then that employee will earn the following per hour in the event that overtime is worked:
Hourly Rate = $65,000 / (40 hours per week * 52 weeks per year)
Hourly Rate = $65,000 / 2,080 hours = $31.25 per hour for the first 40 hours
Overtime Rate = $31.25 * 1.5 = $46.87 per hour for overtime hours
Definitions
Weekly Salary = Annual Salary / 52 weeks per year
Hourly Wage = Annual Salary / (40 hrs per week * 52 weeks per year)
Overtime Wage = 1.5 * Hourly Wage
What are the FLSA tests? We should list them if we reference it. Rewrite Insight box and take it out of insight.
Question 1: Nancy makes $65,000 per year in her base salary as a payroll professional, but since she “failed” several of the FLSA tests, she is entitled to overtime as a non-exempt employee when she works more than 40 hours per week. How much should she be paid if she works 55 hours in a given week?
MBTN | Management by the Numbers

8. Salaried Non-Exempt MBTN | Management by the Numbers
Answers (Question 1)
Hourly Wage = $65,000 / (40 hours per week * 52 weeks per year)
= $65,000 / 2,080 hours
= $31.25 per hour for first 40 hours
Overtime Wage = $31.25 * 1.5
= $46.87 per hour for work hours over 40 (or hours)
Regular Pay = $31.25 * 40 hours = $1,250.00
Overtime Pay = $46.87 * 15 hours = $
Total Pay = $1,953.05
Question 2: The following week, Nancy works 33 hours / week. How much will she be paid?
Answers (Question 2)
Because Nancy is salaried, she receives her full salary even if she works less than 40 hours per week.
Weekly Wage = $65,000 / 52 weeks per year (or $31.25 * 40)
= $1,250
MBTN | Management by the Numbers

9. Salaried Non-Exempt MBTN | Management by the Numbers
Using Nancy as an example, here are four scenarios for her compensation depending on hours worked in a week:
The advantage of being salaried is that Nancy won’t have her pay docked if she only works 30 hours, but she won’t mind working more than 40 hours per week if she has to work overtime since she will make $46.88 for every hour of overtime she works!
Of course, it will cost the organization more if she has to work overtime so her employer may want to limit her overtime!
Hours/Week
Base Pay
OT Calculation
OT Pay
Total Pay
30 hours
$1,250
None
$1,250.00
40 hours
50 hours
10 hrs.*$46.87/hr.
$468.70
$1,718.70
60 hours
20 hrs.*$46.87/hr.
$937.40
$2,187.40
MBTN | Management by the Numbers

10. Hourly Non-Exempt MBTN | Management by the Numbers
Most of the time, when we hear the term “wages”, we are talking about an hourly employee who is entitled to overtime (there are a few exceptions like seasonal workers).
Let’s say that Paul works as an assembly employee for Acme Inc. and he is paid $14.28 per hour. Paul would be entitled to $21.42 per hour for overtime hours.
Let’s say that Paul worked 58 hours this week. How much should he be paid?
Regular Pay = $14.28 per hour (40 hours) = $571.20
Overtime Pay - $21.42 per hour (18 hours) = $385.56
Total Pay = $ = $ for the week*
*Note – If Paul gets paid every two weeks and he only works 35 hours next week, he is still entitled to his 18 hours of overtime for this week!
MBTN | Management by the Numbers

11. Vacation, Sick leave, Pto Exempt
The FLSA states that overtime is to be paid to those who work more than 40 hours per week who are entitled to overtime pay. Since Vacation, Sick Leave, and Paid Time Off (PTO) are not “worked” hours, they do not count towards overtime hours, but employees are paid for those days.
As an example, let’s say that Paul works as an assembly employee for Acme Inc. and he is paid $14.28 per hour. Paul would be entitled to $ per hour for overtime hours.
Let’s say that Paul was sick on Monday and Tuesday, but he worked 32 hours Wednesday - Saturday. How much should he be paid?
Sick Pay = $14.28 per hour (16 hours) = $228.48
Regular Pay = $14.28 per hour (32 hours) = $456.96
Overtime Pay = $21.42 per hour (0 hours) = $ because actual hours worked (32) is less than 40 per week
Total Pay = $ $ $0 = $ for the week
MBTN | Management by the Numbers

12. Hourly and Sick Leave Example
Question 3: Frank works Mon-Thurs 10 hour days soldering customized printed circuit boards. During week 1 he also worked 10 hours on both Friday and Saturday. In week 2, he was sick on Tues, but worked Friday and Saturday shifts again – 10 hours each. Frank makes $20 / hr. What did he earn during these two weeks?
Answers (Question 3)
Frank’s overtime pay rate = $20 * 1.5 = $30 / hr
In week 1, he worked 40 hours at his base pay and 20 hours of overtime
Week 1 Earnings = $20 * 40 + $30 * 20 = $1,400
In week 2, he worked 40 hours at his base pay, 10 hours for sick leave (at base pay rate), and 10 hours of overtime
Week 2 Earnings = $20 * 50 + $30 * 10 = $1,300
Total Pay = $1,400 + $1,300 = $2,700
MBTN | Management by the Numbers

13. Bonuses and the FLSA MBTN | Management by the Numbers
The last wrinkle in overtime calculations is taking into account overtime for bonus payments. For bonuses that are NOT one of the following:
Solely Discretionary
Profit Sharing
Savings or Retirement oriented
Then, overtime must be paid on the bonus according to overtime earned during the bonus period. For example:
Nancy’s company provides a group bonus for meeting sales goals each quarter. During the last quarter, Nancy earned a $1200 cash bonus. She also worked 80 hours of overtime during the period in addition to her normal 520 hours during the quarter. Her employer will owe her an additional payment for the overtime she worked during the quarter calculated as follows:
Bonus per hour = $1200 / 600 = $2 / hr
Therefore, for the 80 hours of overtime she worked, she is due an additional $1 per hour (50% of $2/hr), so her total bonus = $ hrs * $1 =$1,280.
MBTN | Management by the Numbers

14. Bonus Example MBTN | Management by the Numbers
Question 4: Frank works Mon-Thurs 10 hour days soldering customized printed circuit boards and earns $20/hr. His production unit earns monthly bonuses based on quality and output. This past month he worked 210 hours of which 40 were overtime. If his bonus share was $840 without counting overtime, what should be his total bonus according to FLSA regulations?
Answers (Question 4)
Bonus pay per hour = $840 / 210 = $4 / hr
Overtime Bonus Rate = $4 * .5 = $2 / hr
Additional Amount Owed = 40 overtime hours * $2 / hr = $80
Total Bonus = $840 + $80 = $920
Insight
While we don’t tend to think about bonuses on an hourly basis, in order to comply with FLSA regulations, we have to think of non-discretionary bonus payments as additional (hourly) earnings during the bonus period to calculate the appropriate overtime bonus payment.
MBTN | Management by the Numbers

15. Tips MBTN | Management by the Numbers
Many employees who work for restaurants are considered “Tipped” Employees. Tipped Employees must be paid at least $2.13 per hour and, after adding the tips they receive, must at least meet minimum wage requirements ($7.25 is the current Federal Minimum Wage).
Example: Angela is a Server at Fish Frenzy Restaurant. Last week she worked 32 hours and received $325 in tips.
Regular Pay = $2.13 per hour (32 hours) = $ $ in tips
Total Pay = $ for the week
Since $ / 32 hours = $12.28 she is being paid more than minimum wage and the business does not owe her any more money. But if she received less than $ in tips (32 hrs * $7.25 minimum wage), the restaurant would have to make up the difference.
Insight
Did you ever wonder why some restaurants seem to be “overstaffed” with servers? It is because they do not actually have to pay their servers that much per hour if the customers are decent tippers!
MBTN | Management by the Numbers

16. Tips Example MBTN | Management by the Numbers
Question 5: Pat waits tables at Bonne Nuit restaurant and is paid $3/hr plus tips. In the first week, Pat worked 25 hours and earned only $75 in tips due to poor weather conditions keeping business slow. In week two Pat worked 40 hours and earned $550 in tips. What was Pat’s total pay and average hourly wage for the two weeks?
Answers (Question 5)
Week 1 = $3 * 25 + $75 = $150
Hourly Wage = $150 / 25 = $6 / hr which is less than minimum of $7.25, so Pat should receive $7.25 * 25 = $181.25
Week 2 = $3 * 40 + $550 = $670
Hourly Wage = $670 / 40 = $16.75 which is above minimum wage, so Pat receives $670
Total Pay = $ $670 = $851.25
Average Hourly Wage = $851 / ( ) = $13.10 / hr
MBTN | Management by the Numbers

17. Commissions MBTN | Management by the Numbers
Many employees who work in sales are paid a commission based on the amount of sales that they achieve. Commissions are a percentage of the sales that a person generates.
Let’s say that Tom is in Sales for a Restaurant Supply company and he worked 32 hours last week and brought in $20,000 in sales for the week. If Tom receives a 7% commission for the sales, he would be entitled to:
Commissions: $20,000 Sales * 7% Commission Rate = $1,400 for the week
But let’s say that over four weeks, Tom achieves the following sales:
Week 1 - $20,000 * 7% = $1,400 for the week
Week 2 - $5,000 * 7% = $350 for the week
Week 3 - $8,000 * 7% = $560 for the week
Week 4 - $25,000 * 7% = $1,750 for the week
Since there is a lot of variation in how much Tom makes per week, he might want to be put on a Draw Plan which would allow him to average things out.
MBTN | Management by the Numbers

18. Commissions on Draw Plan
Recalling Tom’s sales and commissions:
Week 1 - $20,000 * 7% = $1,400 for the week
Week 2 - $5,000 * 7% = $350 for the week
Week 3 - $8,000 * 7% = $560 for the week
Week 4 - $25,000 * 7% = $1,750 for the week
Average Commissions / Week = ($1,400 + $350 +$560 + $1,750) / 4 weeks = $4,060 / = $1,015 per week.
So Tom and the company might agree on a weekly “Draw” of $800 or $900 per week with the “extra” money going into his Draw account which could be paid out at the end of the year or left in the account as a buffer.
If this pattern held true throughout the year and Tom took an $800 weekly “Draw”, he would have the following in his Draw account at the end of the year: $1,015 - $800 = $215 (52) = $11,180.
MBTN | Management by the Numbers

19. Commissions Example MBTN | Management by the Numbers
Question 6: Sally works for a publishing company and is paid a salary of $24,000 per year plus commissions of 10% of all book sales. She is paid monthly. In January, she sold $40,000 worth of books and in February she sold $20,000 worth of books. What did she earn in January and February?
Answers (Question 6)
January = $40,000 * 10% + $24,000 / 12
= $4,000 + $2,000 = $6,000
February = $20,000 * 10% + $24,000 / 12
= $2,000 + $2,000 = $4,000
Question 7: If Sally sold an average of $30,000 worth of books per month, what would her compensation be for the year? If she and her supervisor decided to put her on a draw salary the following year based on 80% of her monthly commissions, what would be her monthly draw? What would be her monthly compensation presuming her salary remained the same? What would be left in the draw account at the end of the year if her annual sales were the same as the previous year?
MBTN | Management by the Numbers

20. Commissions Example MBTN | Management by the Numbers
Answers (Question 7)
Annual Compensation = $30,000 * 10% * 12 + $24,000
= $36,000 + $24,000
= $60,000
Monthly Draw = $30,000 * 10% * 80%
= $3,000 * .80
= $2,400
Monthly Compensation = $2,400 + $24,000 / 12
= $2,400 + $2,000
= $4,400
End of Year Draw Acct. = Annual Commissions – Monthly Draw * 12
= $30,000 * 10% * 12 - $2,400 * 12
= $36,000 - $28,800
= $ 7,200
Check: Is 28,800 80% of $36,000? Yes!
MBTN | Management by the Numbers

21. Further Reference For Further Reference:
MBTN Modules: HR Metrics 1-2, 4-5
US Dept of Labor Website regarding FLSA
MBTN | Management by the Numbers