With occupancies on the decline and room rate growth slowing dramatically, the focus of U.S. hotel owners and operators now shifts towards the basics of hotel operations. In the next few years, cost controls will dictate the bottom-line profitability of U.S. hotels, and any discussion of hotel cost controls must start with labor.

Historically, the combined costs of salaries, wages, and benefits have comprised approximately 33 percent of total revenue and 43 percent of all operating expenses.  Therefore, controlling these costs is critical, especially in the current environment when revenue growth is anticipated to be moderate at best.

Labor Cost Controls

Historically, the amount a hotel has spent on salaries, wages, and benefits has been dictated by the amount of revenue managers have to spend.  Throughout history, the annual growth (or decline) of revenues has been virtually identical to the annual growth (or decline) of labor costs.  In fact, the correlation coefficient between revenue and labor costs per-available-room from 1980 through 1998 equals 0.9924.

There are two basic ways to control labor costs.  The first is to adjust your staffing.  The second is to adjust the amount you pay.  Unfortunately for the hotel industry, external forces limit the amount of flexibility managers have controlling staffing and wages rates, especially when compared to other industries.

The Human Element

For hotels, direct employee service is an integral part of the product.  Therefore, any adjustment made to staffing levels has a commensurate effect on the level of service experienced by a guest.  This limits the amount of "cuts" a hotel manager can make.

In addition, such dependence on labor also limits the ability of the lodging industry to experience the same degree of productivity enhancements that have been achieved in other industries.  While technology has certainly improved the productivity of several back-of-the-house functions, automating front-of-the-house procedures can have an impact on guest service.

As an example, the guest check-in can be completely automated.  However, the removal of human contact from the greeting process does make a statement on the type of service you provide your guests.  Not that one way is better than the other, - it's just one example of how the use of labor defines your hotel.
 

Labor Availability

With the national unemployment rate hovering near four percent, hotel managers have struggled in their efforts to recruit and retain employees.  Unlike other industries, the low national unemployment rate has led to some relatively strong increases in labor costs.  Since 1993, the annual growth in hotel labor costs has ranged from two to three times the growth in labor costs for all U.S. private industries.

In an effort to attract employees, hotels have been forced to increase their salary and wage rates.  However, as we've said, hotels have not been able to drastically reduce their staffing.  In fact, several hotels (mostly upscale and full-service) have increased their staffing levels in an effort to improve their service levels.  The combination of these two factors is the reason behind the relatively significant increases in hotel payrolls.

Payroll Versus Benefits

From 1990 through 1999, total payroll and related expenses are estimated to have increased 4.0 percent on an annual basis.  Looking at the individual components, the actual cash paid out in the form of salaries and wages (including vacation and bonuses) has increased at an average annual rate of 4.7 percent.  This compares to a 2.9 percent growth rate for the amount paid for employee benefits (including payroll taxes).

A closer look at the relative annual growth rates between salaries/wages and benefits during the 1990s may reveal some insight into employee compensation trends during the decade.

During the early part of the recovery (1994 and 1995), the growth in amount spent on employee benefits far exceeded the growth in salaries and wages.  During this time, the predominant thought was the need to offer an increased amount of benefits in order to attract and retain employees.

However, consistent with recent compensation trends, the relative growth rates between cash payrolls and benefits have shifted since 1995.  During the past four years, the annual growth in salaries and wages has exceeded the annual growth in benefits.  While base salary and wage rates have increased, so has the offering of incentive-based bonuses.
 

Creative Solutions

The trade papers have been full of creative solutions contrived by hotel managers in order to attract and retain employees, while controlling costs.  A few examples are job-sharing among competing properties, reaching out to traditionally hard-to-employ segments of the workforce, and high-school outreach programs designed to promote the hospitality industry as a viable profession.

In the near-term, these creative solutions should take on more importance.  For the next few years it does not look like labor availability is going to improve, while hotel revenue growth is projected to stabilize.

Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.