The overtime premium looks like 50 per cent. Against the full cost of a hire and a seasonal workload, the real break-even is a utilisation rate.
Hiring beats overtime only when the new person would be busy for most of their paid year. Price an effective overtime hour (rate, premium, on-costs and fatigue), divide it into the full annual cost of a hire, and you get the break-even: on illustrative figures a hire costing $82,435 a year pays only if it absorbs 1,606 overtime hours a year, 85.4 per cent of its productive time. With seasonal demand, that means hiring to the trough, not to the average: 7 hires save $96,447 a year, while hiring 21 to cover average overtime costs $56,646 more than doing nothing.
Worked in full in The Private Equity Operating Partner by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Overtime is usually the first line an operating partner looks at in a plant P&L, because the premium is visible and the fix looks obvious: overtime costs 50 per cent more than straight time, so hire. That comparison leaves out everything a new employee costs that an extra hour does not, and it assumes the new hire would be fully used every week of the year. Neither holds in a seasonal business.
| Input | Value |
|---|---|
| Base hourly wage | $28.00 |
| Overtime premium | 1.5x |
| Payroll taxes and wage-linked costs | 10% |
| Output per overtime hour vs a normal hour | 90% |
| Paid / productive hours per FTE a year | 2,080 / 1,880 |
| Fixed benefits per head a year | $14,000 |
| Recruiting cost per hire | $6,000 |
| Ramp-up: weeks at 50% productivity | 8 |
| Expected tenure of a new hourly hire | 2.5 years |
| Hourly operators / exit multiple | 150 / 9.0x |
In the United States the Fair Labor Standards Act requires at least 1.5 times the regular rate for hours worked over 40 in a workweek by non-exempt employees. Some states, union agreements and other countries impose double time in certain cases, which the sensitivity below covers.
Loaded overtime rate = $28.00 × 1.5 × 1.10 = $46.20
Per effective hour = $46.20 ÷ 90% = $51.33
The fatigue factor matters: a tenth shift in a row does not produce a normal hour of output, and scrap and accident rates tend to rise with long weeks.
Wages = 2,080 × $28.00 × 1.10 = $64,064
Ramp-up = 8 weeks × 40 hours × $30.80 × 50% = $4,928
One-off cost = $6,000 + $4,928 = $10,928, spread over 2.5 years = $4,371 a year
Hire cost = $64,064 + $14,000 + $4,371 = $82,435, or $43.85 per productive hour
Break-even overtime hours = hire cost ÷ cost per effective overtime hour = $82,435 ÷ $51.33 = 1,606 hours a year
Break-even utilisation = 1,606 ÷ 1,880 = 85.4%
In Excel: =HireCost/(Wage*Premium*(1+OnCost)/OTProductivity)/ProductiveHours
So the honest comparison is $51.33 against $43.85, not $46.20 against $30.80. The gap is 17 per cent, not 50, and it only exists if the hire is kept busy. A hire who absorbs fewer than 1,606 overtime hours a year, about 30.9 hours a week, costs more than the overtime it replaces.
The 150 operators work 39,000 overtime hours a year, an average of 5.0 hours per person per week. But the demand is not flat. Each hire adds 36.15 productive hours a week (1,880 ÷ 52).
| Season | Weeks | Overtime hours a week | Hours | Hires to cover |
|---|---|---|---|---|
| Peak | 13 | 1,250 | 16,250 | 34.6 |
| Shoulder | 26 | 750 | 19,500 | 20.7 |
| Trough | 13 | 250 | 3,250 | 6.9 |
| Year | 52 | 39,000 |
The first 6 hires are fully used every week of the year. The 7th is used fully for 39 weeks and partly in the trough: it absorbs 1,840 hours, 97.9 per cent of its time, above the 85.4 per cent break-even. Every hire from the 8th to the 20th works only in peak and shoulder weeks, 39 of 52, which is 75.0 per cent utilisation: below break-even, so each one loses money.
| Hires | Overtime hours left | Total cost | Saving vs all overtime | Utilisation of last hire |
|---|---|---|---|---|
| 0 | 39,000 | 2,002,000 | 0 | |
| 3 | 33,360 | 1,959,786 | 42,214 | 100.0% |
| 6 | 27,720 | 1,917,571 | 84,429 | 100.0% |
| 7 | 25,880 | 1,905,553 | 96,447 | 97.9% |
| 10 | 21,650 | 1,935,719 | 66,281 | 75.0% |
| 14 | 16,010 | 1,975,939 | 26,061 | 75.0% |
| 21 | 6,380 | 2,058,646 | −56,646 | 62.2% |
Seven hires, sized to the trough, save $96,447 a year, worth $868,022 of enterprise value at 9.0x. The plan most plants would write, dividing 39,000 hours by 1,880 and hiring 21, costs $153,093 a year more than the optimum and $1,377,835 of value at exit. The rest of the overtime stays: 25,880 hours, concentrated in the peak, is the cheapest way to buy capacity that is needed for only part of the year. Temporary labour or a seasonal shift pattern can compete for that slice, priced the same way.
This is the same logic as operating leverage: a hire converts a variable cost into a fixed one, which pays when volume is steady and hurts when it is not.
| Overtime premium | Overtime output 100% | 90% | 80% |
|---|---|---|---|
| 1.5x | 94.9% | 85.4% | 75.9% |
| 2.0x | 71.2% | 64.1% | 56.9% |
At double time with 90 per cent output, break-even falls to 64.1 per cent, below the 75.0 per cent that shoulder-season hires achieve, and the optimum jumps to 20 hires with a saving of $503,874. If overtime hours were as productive as normal ones, break-even would rise to 94.9 per cent. Turnover works the other way: if new hires last 1.0 year instead of 2.5, recruiting and ramp-up push the hire cost to $88,992 and break-even to 92.2 per cent; at 5.0 years it is 83.2 per cent.
Comparing the overtime rate with the base wage. It overstates the saving three ways: it ignores benefits, recruiting and ramp-up, it ignores that a hire is paid for 2,080 hours but productive for 1,880, and it assumes the hire is busy all year. The second mistake is to size headcount on average overtime. Averages hide the trough, and the trough is what decides whether the marginal hire earns its cost. Ask for overtime by week, not by year, before approving a hiring plan.
Hire when the person will absorb more overtime than their full annual cost divided by the cost of an effective overtime hour; here 1,606 hours, or 85.4 per cent utilisation. In a seasonal plant that means staffing to the trough and buying the peak with overtime. The value bridge that shows where savings like this land in an exit is built in the free workbook for The Private Equity Operating Partner.
It depends on how busy the new employee would be. Divide the hire's full annual cost by the cost of an effective overtime hour to get the break-even hours. In the illustrative case a hire costing $82,435 against $51.33 per effective overtime hour needs 1,606 hours of overtime to replace, 85.4 per cent of its productive time. Below that, overtime is cheaper, even at a 1.5x premium.
Add loaded wages for all paid hours, fixed benefits, and one-off recruiting and ramp-up costs spread over expected tenure, then divide by productive hours, not paid hours. Illustratively, $64,064 of wages, $14,000 of benefits and $4,371 a year of one-off costs give $82,435, or $43.85 per productive hour against a $28.00 base wage.
Sharply. At 2.0x and 90 per cent overtime output, an effective overtime hour costs $68.44 and the break-even utilisation of a hire falls from 85.4 to 64.1 per cent. In the illustrative seasonal plant the optimal number of hires rises from 7 to 20 and the saving from $96,447 to $503,874 a year.
This article is one calculation from The Private Equity Operating Partner. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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