"...We get an incentive payroll report from our outside payroll check service. It only shows gross earnings and a lumped category called ‘variances’. What information should we be getting and why?  L.J., Idaho

THE INDUSTRY ADVISOR

IMPROVING YOUR INCENTIVE
PAYROLL ANALYSIS WILL PAY OFF

By Gene Levine - www.genelevine.com

  Direct labor is usually the largest single expense in a labor intensive company. It follows that direct labor costs should be under the most scrutiny and control. Generating better direct labor payroll information will provide over 10 benefits. For purposes of this article, I will limit my discussion to explain the rationale of spotlighting Variable Labor Loss; i.e., make up, time work, overtime premium.

A payroll system must be credible, provide well thought-out pay policies, and spotlight trouble areas. By revealing exactly what your labor losses are you can manage more effectively. For example, a company has serious management problems when their Total Direct Labor Variances (Make-up, Time Work and 1/2 time overtime premium) are above 15% (of total direct labor).

Here's a simple incentive payroll test taken from our Training Manuals that answers the questions of what information you need in your payroll reports (due to space constraints, not all exhibits listed below are shown but, by contacting the author, you can learn which of our training manuals contain the complete test and all applicable exhibits). Such as;

· What should a Direct Labor Payroll Analysis contain?

· How should different types of Time Work be paid?

· What can be gained by a detailed analysis?

INFORMATION:

Sue is a direct labor employee who has a minimum guarantee of $12.00 per hour. Her past 13 week incentive rolling average was $14.44 per hour. Piece rates have a $13.20 Base Rate. Minimum wage is $11.00 per hour. Sue's work record for the week we are analyzing is as follows;

Answer The Following Questions:

1. How many clock hours did Sue work? _______ Hours

2. What was her average hourly incentive pay $_____ Per Hour

3. Sue had four kinds of time work, explain what they are, and her compensation pay for each type.

a. ____________________________________

b. ____________________________________

c. ____________________________________

d. ____________________________________

4. Did Sue have any overtime? r Yes r No

5. If she had overtime (paid after 40 hours), what was the 1/2 time premium? $______

6. What was Sue's Gross Pay (before deductions) for the week? $______

7. What was Sue's "Average Hourly Pay" for the week? $______

8. What was Sue's percentage of Direct Labor Variance? ____%

SUGGESTED ANSWERS TO PAYROLL TEST:

1. How many clock hours did Sue work? 41 Hours

2. What was her average hourly incentive pay $14.18 Per Hour

Rationale:

Sue worked 41 clock hours but had a total of 2.25 hours of time work. Her incentive hours were therefore only 38.75 hours (41 - 2.25). She earned $549.20 on incentive. Her hourly incentive wage ($549.20 ¸ 38.75 hours) equals $14.17.

3. Sue had four kinds of  Time Work, explain what they are and what rate of pay she received for each type (See Exhibit I, "Time Work Codes")  .

a. Waiting for Work: Sue has no work (not due to her fault). Normally pay is 13 week rolling incentive hourly average (1.00 hour X $14.44), or, $14.44 (See Exhibit II - "Example Payroll Policy For Waiting Time").

b. Machine Delay: Sue's machine will not produce the required quality stitch, or a mechanical problem exists which prevents her from continuing work. Paid from the first minute after Sue's facilitator has–unsuccessfully–tried to correct the problem. Normally pay is 13 week rolling incentive hourly average (.33 hours X $14.44), or, $4.77.

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