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Exempt vs Non-Exempt –DO THE MATH!

Beth CarrollManaging Principal

October 28, 2015

Agenda

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Introduction to Prosperio Group

Review the Math Options for Exempt vs Non-Exempt

Introduction to Prosperio Group

Prosperio Group focuses on compensation design and management for the Transportation & Logistics Industry

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DEFINE the goals

for the business

FOCUS the

organization on the goals

EXECUTEthe plans to

reach the goals

Prosperio Group also provides:

Sales Compensation Consulting across all industries

Broad-based Compensation and Performance Management Consulting

Custom Compensation and Benefits Survey Development and Administration

Business Objectives &

StrategyOrganization Structure &

Roles

Hiring, Training &

Development

Process Management &

Execution

Compensation

Transportation & Logistics Experience:

We are or have been members of the TIA, AFA, ATA, CLDA, NPTC, TCA, TMSA, FIATA, and the CSCMP.

We have published articles in The Logistics Journal, The Supply Chain Quarterly, and Overdrive. We have been quoted in CCJ, Fleet Owner and Heavy Duty Trucking and have given numerous speeches.

Beth Carroll is the VP of Finance and Planning for the TMSA and is the Chair of the TIA Compensation Survey Committee and participates on the TIA Foundation Board.

Michael Kodat is on the Education Committees for both the TIA and TMSA.

We work globally, having completed engagements in 8 countries for companies with employees working in 39 countries.

91

43

40

26

16

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Transportation Companies by Segment

Brokers

Air & Ocean FreightForwarding

Trucking Cos

3PL/FreightMgmt/Outsourcing

Other T&L/Supply Chain

Warehousing

We have extensive experience acrossindustries, but the clear focus is Transportation

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Many companies are represented in more than one segment.

156 Clients are from Beth’s 18 year career as a business and

compensation consultant;

41 from 10 yrs with Towers Watson and

115 from 8 yrs with Cygnal and Prosperio Group.

122

22

8

8

7

5

5

43

3 3 2

1 1

1

1

1

1

DISTRIBUTION OF INDUSTRIES SERVED

Transportation

Manufacturing

Software

Banking/Insurance

Professional Services

Farming/Food

Energy

Medical/Health

Food & Beverage

Not for Profit Professional Services

Distribution

Telecom

Financial Services

IT/Professional Services

Marketing

We have worked with start-ups as well as industry leaders

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8

24

28

42

30

19

39

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0 - $2m $2m - $10m $10m - $25m $25m - $100m $100m - $500m $500m - $1b $1b - $10b >$10b

Distribution of Clients by Size (using Revenue)

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We’ve worked with 122 T&L companies in the last 8 years, and

many other “general industry” companies in the last 18 years

T&L Companies: Trucking Co's Other Industries:

Brokers Pepsi Logistics Company ABF Freight Banking/Insurance Manufacturing

ABF Multimodal Pinnacle Freight Barney Trucking Bank of America AMCOL Asia Minerals

AM Transport Quarterback Transportation (Canada) Barber Transportation / MBNA Merger (Thailand, China)

Ameri-Co Logistics Roadmaster Bennett International Group Fifth Third Bank AMCOL Paper (UK)

Barton Logistics RWI Transportation Bennett Motor Express PNC AMCOL Australia Pty

Becker Logistics Ryder Freight Management Group Brown Integrated Logistics US Bank (Australia)

Blakeman Transportation Tandem Logistics, Inc. Con-way Freight Farming/Food AMCOL HQ, HPC,

Blue Ribbon Transport Taylor Distributing Con-way Truckload ED&F Man Bio-Ag, MPG

BNSF Logistics Trinity Transport Cozzzini Bros (Route Drivers) Kalsec Bosch Automotive

Burris Logistics Traffic Tech Gallano Trucking Perdue Farms Bosch Power Tools

Cargo Barn Trek Freight Hill Brothers Transportation Solae CETCO Lining Technologies

Choptank Transport Tucker Worldwide Nussbaum Wells Dairy (Co-Op) Dur-A-Flex

Connect Logistics US Xpress Pride Healthcare Elster Solutions

CRST Logistics ZMac Roehl Transport Express Scripts Herman Miller

DART Advantage Logistics RFG Stryker Navigation Kohler

Des Moines Truck Brokers Stand alone 3PLs Secure Land Transport Trustmark Poly-One

Dover Services Land-Link Traffic Systems Wegmans (Private Fleet) Capital BC/BS PA Siegel-Robert

Eagle Transportation M33i US Foods (Private Fleet) Professional Services Williams Advanced

Enterprise Truck Brokers SheerTrans US Xpress Martiz Materials (Taiwan)

Fastmore Logistics Sunset Transportation Today's Staffing

Fetch Logistics Universal Traffic Service (UTS) 4PL, Supply Chain or Specialized Software

GENCO ATC ABF Expedited Solutions DealerTrack

GTO 2000 Freight Forwarders ABF Household Goods Reynolds & Reynolds

Integrity Logistics ABF Global APL Logistics / Automark

JH Rose Logistics APL Logistics Global Sales (Singapore) GENCO Other

L&L Freight Service, Inc. Hannic Freight Forwarders Jacobson Companies Comcast Small

Landstar Panther Expedited King Solutions Business Services

Logistics Group International Red Arrow Logistics Manna Freight CONNStep

Majestic Transportation Sprint Forwarders MENLO Irving Oil

Overdrive Logistics Trinet Transportation (Canada) Penske Logistics Starwood

Sterling Transportation Waste Management

Transportation companies have many roles that benefit from sound incentive design practices, here are just a few…

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Trucking/Delivery Brokerage, Freight Forwarder 3PL, Int’l Logistics

Drivers (Regional, Team, Solo) Driver Supervisor/ManagerContractor RelationsOutside SalesDriver RecruiterLoad PlannerDispatcherCustomer ServiceKey Account ManagerOwner Operator ManagersOps ManagerSales ManagerWeigh & Reweigh Analyst/ManagerTire ManagerTransportation Supervisor/ManagerLinehaul Clerk/Supervisor/ManagerOperations Supervisor/ManagerTraining SpecialistMaintenance ManagerShop SupervisorSecurity InvestigatorClaims Prevention ManagerPackaging EngineerOffice Systems SpecialistTerminal ClerkBranch ManagerInside Sales

Outside SalesFreight FinderAccount ManagerTruck FinderInside SalesTeam LeaderOps ManagerBranch ManagerSales ManagerTerritory ManagerVertical DirectorLogistics ProfessionalNetwork Load PlannersAgent Load PlannersTruckload PlannersFlatbed PlannersCarrier RelationsGlobal Forwarding AgentStation ManagerTrack and TraceOrder EntryGlobal Forwarding ManagerPricing ManagerA/R ClerkA/P Clerk

Outside SalesInside SalesLead Generation/Appt Setting RolesPricing/Sales SupportCustomer ServiceOperationsTeam LeaderOps ManagerSales ManagerAudit SpecialistBusiness Unit Leader

We have developed incentive plans for all of these roles…and more.

Members of our team

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Beth CarrollOwner

Lisa HinesConsultant

David MillerConsultant

Michael Kodat

Sr. AssociateConsultant

Anurag ChilukuriAnalyst

Kathie RybaExecutive Assistant

Client Project Manager for Org/Comp Work

Engagement Manager for

all Client Work

Client/Project Support Data and Analytics Support

Review the Math Options for Exempt vs Non-Exempt

So…what are you to do?

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Option #1: reclassify questionable jobs as “non-exempt” and pay them overtime, as earned Some of your employees will feel this is a “demotion”

Option #2: when the final ruling comes out on the new minimum pay levels, raise all exempt employees to this minimum level of fixed pay and adjust other pay components down for cost savings

Reduce or eliminate incentive pay (not a good idea!)

Reduce benefits (also not a good idea!)

Under either option you will need to consider the impact to your fixed and variable costs

Option #1: Reclassify exempt to non-exempt – how to do the math

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Jane is currently paid $40,000 a year salary and works approximately 50 hours per week. Jane also has a $10,000 yearly incentive plan that is based on individual and team performance; so that Jane currently has target earnings (TTC, OTE) of $50,000

Step 1 – calculate the new hourly rate If the person only has salary pay, the calculation is relatively simple:

SALARY / (2080 + ((WEEKLY OT HOURS x 52 (or 50) WEEKS PER YR) x 1.5))

(OT is typically not paid while on vacation so you should not count these weeks in the formula; however, if your vacation rate is calculated based on “average weekly earnings” then you should use 52 in the formula above)

So for Jane, her rate would be calculated as follows:

$40,000 / (2080 + (10 x 50 x 1.5)) = $40,000 / (2080 + 750) = $40,000 / 2830 = 14.13

If you reverse the calculation (2080 x 14.13) + (500 OT hours x 14.13 x 1.5) this equals very close to $40,000

If the person is paid incentive pay, however, the calculation becomes more complex as now this value must be considered as well…because, once you are paying someone overtime, you must ALSO factor in any incentive payment earned during the pay period as part of “regular pay” that will be used to determine the OT rate

Huh? Yes, you read that properly…but don’t panic

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Again…once you are paying someone overtime, you must ALSO factor in any incentive payment earned during the pay period as part of “regular pay” that will be used to determine the OT rate

So, for Jane – let’s say she earns $2,500 of incentive in Q1 and works 120 hours of OT and 480 regular hours in the quarter

The OT impact of her incentive pay is $2,500 / (480 + 120) = $2,500 / 600 = $4.17 AND THEN YOU DIVIDE THIS BY TWO for final OT impact rate of the incentive of $2.08. You then multiply this by the 120 hours of OT worked and she gets an additional payment of $250.

The logic for the divide by two: she was already paid “straight time” in the $2,500 incentive payment for all hours so she is only now owed the x0.5 “bump” that is paid for OT hours.

There is not a fixed % that you can apply to come up with the impact for any amount of OT hours worked (it changes) – but this formula will give you the % impact:

[(INCENTIVE PAY / TOTAL HOURS WORKED / 2) * OT HOURS] / INCENTIVE PAY

This chart gives you the % impact for whole values of OT hours worked per week

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OT Hours % of Incentive to Add1 1.22%2 2.38%3 3.49%4 4.55%5 5.56%6 6.52%7 7.45%8 8.33%9 9.18%

10 10.00%11 10.78%12 11.54%13 12.26%14 12.96%15 13.64%16 14.29%17 14.91%18 15.52%19 16.10%20 16.67%21 17.21%22 17.74%23 18.25%24 18.75%25 19.23%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

0 5 10 15 20 25

Incentive Impact on OT

If someone works a fractional amount of hours, you must run the formula to get the proper payout value (as rounding up would pay too much and rounding down would not pay enough)

This increases the complexity of our “back into the rate” formula from the preceding pages

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We now have to consider than on an incentive payout of $10,000 a year, Jane will get approximately another $1,000 in OT payments, so her new target total pay will be $51,000

If you have a small enough staff you may decide this is inconsequential and consider it part of an annual increase package (maybe give her a 2.5% raise instead of 5% raise, because the other 2.5% is coming from the additional $1k)

But if you have many people, you are going to want to account for the additional expense of the incentive impact on OT, and you have 2 options:

Option #1: reduce the hourly rate by the extra pay (combine the two formulas to do this)

{SALARY – [(INCENTIVE PAY / TOTAL HRS / 2) * OT HOURS]} / [2080 + (TOTAL OT HRS x 1.5)]

Option #2: reduce the incentive pay by the OT impact % (in this case we know it is 10%), so her new target incentive would need to be around $9,090 for the payout impact to remain at $10,000 (10,000 / (1 + % impact from formula for # of hours) – in this case:

$10,000 / 1.10 = $9,090

It is important to get your assumptions right, and to have a good sense of the actual hours people are

working before you make these adjustments

Questions?

Beth B. Carroll, CCP, GRP, CSCPManaging PrincipalProsperio Group

+1.815.534.9204beth.carroll@prosperiogroup.com

www.prosperiogroup.com

For a free mini-assessment, please contact me!