Why Are You Paying 50% More for 50% Less?

A partner of ours mentioned something the other day that really stuck. He was talking about the reason why they don’t want to utilize overtime and why he was loving Wonolo. Although I was expecting him to say something around rising labor costs or along the lines of having to pay out more, he mentioned that wasn’t the issue at all. Of course, paying “time and a half” does impact the bottom line when you have razor thin margins, but giving his employees extra hours and keeping them happy is something on which he prides himself. He mentioned the other downsides of overtime.

“Every time someone works 8 hours and then stays on for a 9th hour, the 50/50 rule kicks in. It means that pay goes up 50% but productivity goes down 50%. In other words, at hour 9, that worker is performing at 50% of the speed/quality/focus as that same worker was at hour 1.”

Looking at it differently (and perhaps overly simplistically), lets assume that Allen has a constant output during the normal 8 hour workday. Then during overtime, Allen’s output drops by half. What does that do to the unit economics?

Allen delivers 10 widgets during hour 1 at a pay rate of $10 per hour, which costs the company $1 per widget.

Allen delivers 5 widgets during hour 9 at a pay rate of $15 per hour, which costs the company $3 per widget.

Of course, the reality is that the widget output probably looks something more like this:

Hour 1: 9

Hour 2: 11

Hour 3: 13

Hour 4: 12

Hour 5: 10

Hour 6: 9

Hour 7: 8

Hour 8: 6

Hour 9: 5

By hour 9, Allen is tired of delivering widgets and isn’t being super productive. But you still have 10 more widgets that need to be delivered. So you can either ask Allen to stick around and keep delivering at a decreased rate at an increased wage, or you can find someone else to do it.

If Allen sticks around, you are paying 300% more per widget. $30 for the two hours of overtime work vs the $10 of regular wage that Betty could do it in. There is a $20 premium on Allen. But keeping Allen at the job today requires zero hassle on your end to bring someone else in to get the job done. If you were to bring in someone else, you’d have to hop on the phone and start dialing numbers, hoping Betty (or Carl or Diane or Xander or Yvette or Zach) will come in and do the work. If your wage is $30 per hour and it takes you 30 min to find that worker on the phone, that $20 premium is really only a $5 premium now. 9 times out of 10, weighing your time vs the additional cost, you decide to beg Allen to work overtime. It is easy and as long as Allen is willing, why not?

Now lets finish the quote and understand why this partner told us this. “…but now with Wonolo, I can offer the extra hours to someone who is looking for them and can come in fresh and energetic. And it takes me 15 seconds to post the job vs picking up the phone and getting a bunch of voice mail recordings…” This completely resets the equation back to a 300% increase in unit cost for overtime vs regular time, as no measurable effort goes into posting the job on Wonolo and getting Betty in. Why would you want to pay overtime in this situation?

You wouldn’t, and there is no longer any need to pay 50% more for 50% less.