Thursday, May 19, 2016

Forget That Job Promotion Under The New Overtime Rules

In civil service, job promotions are based on test scores. In union jobs, seniority is the basis for job promotions. In the private sector, where over 93 percent of jobs are non-union, a manager selects who gets promoted.

The new overtime rules will make it more difficult for employees to show the qualities that make them a valuable worker and worthy of a promotion.

Private sector managers promote employees who are hardworking, trustworthy and loyal. Managers form their opinions to promote employees through observations and interactions with workers.

In a salaried job without extra overtime pay, an employer can gather more information about a worker's potential as a higher level employee. Obama, by increasing the size of the overtime group of workers from 7 percent of the salaried workforce to 35 percent, has remove the ability of many workers to signal to their employers that they are loyal, committed, trustworthy and deserving of a promotion.

Imagine two employees at a job with overtime pay where approval is needed for overtime, as is usual for most employers, otherwise workers would have strong financial incentives to extend the time to complete tasks to earn overtime. With required overtime pay, independent of the amount of work that needs to be done, both workers will show up at the start of the scheduled workday, not earlier, and leave at the end of the workday, not later, to avoid unapproved overtime.

Imagine two employees at a salaried job without overtime pay. A hardworking, loyal, trustworthy employee realizing there is extra work to be done, might come in a little earlier or stay a little later, to complete the unfinished work. A worker who sees the job just as a job and is not committed to the employer will not care about the unfinished work and will come in and leave at the scheduled time.

The government’s expansion of the class of overtime eligible workers five-fold, from 7 percent to 35 percent of the salaried workforce, deprives managers of valuable employee information to decide who to promote. With less information about a worker, companies will be more at risk of making a mistake, will be more careful and slower to promote, and will promote fewer employees to avoid the risk of a mistake.

Before the new overtime rules, employees had an option to work harder to show their employers they wanted a promotion. Under the new rules, employees lost that valuable option.

As an aside, the financial loss to employees of the new overtime rules can be computed. The expanded numbers of overtime employees were buying a call option on a promotion with extra salary, using the unpaid extra work as payment to buy that call option. The expanded class of overtime employees lost a call option whose value can be computed if one knew the estimated average number of extra hours these employees worked and the expected rate and extra salary of a promotion. If salaried employees had not valued the call option positively, they would not have put in the extra unpaid hours.

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