Sunday, January 1, 2006

Cash or Carry? Bank Comp Time Or Pay Out Weekly

Author: Nick
Category: Money
Topics: , ,

I’ve briefly touched on how my job pays before, but going into 2006, a few things are changing at work that could have a big effect on what my money does after I make it. The biggest change is that we now receive our annual merit-based salary increases in February instead of October. The best part about this deal is that we received raises in October of last year and will get them again next month. Of course, my company was sneaky and reduced the amount of these raises so that they don’t lose any money on the deal. Pfft to that, but yay to another raise in February!

The problem I have now deals with overtime pay. Unlike many software engineers who get zero overtime even if they work a zillion hours in a week, I get half-time for every hour after 45 each week. We have two options when it comes to receiving overtime pay. We can either receive it in our paycheck for the week we earn it, or we can put it in a compensatory time bank. Hours accumulated in that bank can then be used just like vacation time, and hours unused at the end of the year are paid out in the last paycheck of December. An obvious advantage to banking hours and letting them be cashed out is that they are paid out at an employee’s current pay rate taking into account any raises and promotions the employee may have received earlier in the year.

In previous years, it’s usually been of benefit to bank any overtime hours earned before October because they would pay out in late December at the higher rate reflecting our usual October merit-based raises. With a raise of just four percent, that’s an extra $40 earned for every banked $1,000 worth of overtime. Of course, that money could earn that much in interest in a high-yield savings account or CD, but that’s assuming I receive it all at the start of the year. Sadly, my employer doesn’t like paying me months in advance for work I haven’t done, so banking any overtime earned before October and immmediately cashing out any after was the way to go. In addition, should I have expected to receive a promotion later in the year, banking the hours until after that point would also be the smartest move.

Now that merit raises come in February, I’m not sure what to do with the overtime I’m sure to earn in the six to eight opening weeks of the year. I don’t yet know what my raise percentage will be, though I received a higher performance ranking this past evaluation, so hopefully that will translate to a bigger pay hike. Still, it’s a gamble, so let’s weigh the pros and cons of banking the hours versus getting paid for them immediately.

Pros and cons of banking overtime

Pros

  • Potentially earn higher “interest” than any high-yield savings account or one-year CD since it will pay out at my year-end pay rate including any raises I receive during the year.
  • Employer takes out taxes on “interest” so that I wouldn’t have to worry about falling short of my tax liability at the end of the year.
  • “Interest” rate fixed in that, once I know my raise percentage, I’m guaranteed to get that rate on any overtime paid out at year-end. This protects my money from the possibility of interest rates fluctuating in the bad direction.
  • Hours usable as vacation should I decide to take off more than three weeks a year. I’m not one to take much of any vacation, so this probably doesn’t concern me.

Cons

  • Potentially earn lower interest if my raise doesn’t beat my savings rates.
  • …or even lower interest if you take into account riskier investments like stocks, bonds, and the like.
  • Banked overtime isn’t liquid like a high-yield savings account. I don’t have the option of redeeming the hours at any time unless I add them to a weekly paycheck as overtime, and that would result in the hours being paid out at half their worth.

This list might not be applicable to everyone including those whose year-end comp bank payout does not reflect mid-year raises or anyone whose raises take effect at the start of the year. If you are faced with a similar situation, choosing to bank is the best option if you’re inclined to stick with safer investments or if you’re looking to take more time off than your vacation allotment allows. But if you’re more of the high-risk, high-reward type, you’re not sure you’ll have a big enough salary increase, or you just like putting your cash in a pool and swimming around in it, it’ll be to your benefit to take the money when earned.

Since I am expecting at least another 4% pay jump in February (maybe even higher), I will bank any overtime earned between now and my raise.

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