The operations manager wants another employee.
The CFO wants overtime reduced.
HR wants an approved position before posting the job.
And FP&A gets to determine whether everyone is arguing about the same problem.
The usual debate focuses on the overtime rate versus the new employee’s hourly wage. That comparison is incomplete.
A new employee brings payroll taxes, benefits, recruiting costs, training time, and a permanent cost commitment. Overtime is expensive per hour, but the company generally pays for it only when the additional hours are worked.
Hiring becomes financially attractive when the cost of covering sustained excess demand with overtime exceeds the fully loaded cost of adding enough productive capacity to handle that demand.
The word sustained matters.
A temporary workload spike and a permanent capacity shortage require different financial decisions.
Start With the Actual Cost of Overtime
Suppose a manufacturing business has experienced a sustained increase in demand.
Its existing production employees earn $40 per hour.
Assume the employees are covered, nonexempt workers paid time-and-a-half for overtime, with no additional compensation affecting their regular rate.
The overtime wage is:
$40 × 1.5 = $60 per hour
Under the federal Fair Labor Standards Act, covered nonexempt employees generally must receive at least 1.5 times their regular rate for hours worked beyond 40 in a workweek. State requirements, contracts, and the calculation of the regular rate may change the actual cost.
For this example, assume the company’s incremental overtime cost is $60 per hour, including the applicable wage payment but excluding any additional employer costs.
If operations requires 1,600 overtime hours annually:
The company expects to spend $96,000 covering the excess workload.
That is the cost of continuing with overtime.
Now compare it with hiring.
Calculate the Fully Loaded Cost of a New Employee
Suppose the company could hire a production employee at $32 per hour.
The employee would work a standard 40-hour week.
Assume 2,080 paid hours annually.
| New employee cost | Annual amount |
|---|---|
| Base wages: $32 × 2,080 | $66,560 |
| Employer payroll taxes and benefits: assumed 25% | $16,640 |
| Recurring annual employment cost | $83,200 |
| First-year recruiting and onboarding costs | $4,800 |
| Total first-year cost | $88,000 |
The 25% benefits and payroll tax assumption is hypothetical. A real model should use the company’s actual benefit costs, applicable payroll taxes, insurance, and other employer expenses.
The recurring annual cost is $83,200.
The first-year cost is $88,000.
That distinction matters because recruiting expenses don’t necessarily repeat every year.
But hiring isn’t finished once payroll is calculated.
The company also needs to know how many productive hours the new employee can actually provide.
Paid Hours Aren’t the Same as Productive Hours
A full-time employee may be paid for 2,080 hours annually.
That doesn’t mean the employee produces 2,080 hours of usable output.
Paid time off, holidays, training, meetings, equipment downtime, and other activities reduce available production capacity.
Suppose operations estimates that the new employee can provide 1,680 productive hours annually.
That assumption needs to be supported by actual operating data.
The first-year cost per productive hour is:
The recurring cost per productive hour is: