The Components of Labor Costs by Mark Woodworth and Robert Mandelbaum
August 27, 2013 7:21pm
August 27, 2013 - Labor and related costs have long been the single expense category in operating a hotel. In 2012, 45 percent of all dollars were spent on personnel to manage, market and, critically, deliver hospitable service to create a memorable (and hopefully positive!) guest experience. Thus, managers spend a significant portion of their time recruiting, training, and scheduling employees.
In the July 2012 issue of Lodging we noted, "As the U.S. lodging industry continues along the road to recovery and occupancy levels begin to surpass long-run average levels, hotel managers will be challenged to continue to operate on austere levels of staffing. If 2011 was any indication, it appears that operators may have already reached the point when additional employee hours are needed to provide the amenities and services typically offered when hotels are more prosperous."
Sure enough, in 2012 labor costs increased at a greater pace than did the number of occupied rooms, thus indicating a decline in productivity. To gain a better understanding of the apparent dip in payroll yield, we examined information from PKF Hospitality Research, LLC's (PKF-HR) Trends® in the Hotel Industry database.
Labor costs are a function of the hourly compensation (salaries, wages, bonuses, and benefits) paid to employees, and the number of hours they work. The hourly compensation information used in our analysis comes from the Bureau of Labor Statistics (BLS). The change in total hours worked by employees was calculated by subtracting the change in average hourly compensation from the change in total labor costs. In 2012, total labor costs for the properties in our Trends® sample grew by 3.6 percent, while compensation grew by 1.2 percent. The result is an estimated 2.4 percent increase in the number of hours worked by employees at the average hotel in the study sample.
The good news for hoteliers is that increases to the compensation component of labor costs continue to be suppressed. From 2002 through 2008, annual increases in hospitality compensation averaged 3.3 percent. However, since then, the average hourly amount paid to the typical hospitality employee for wages and benefits has grown by just 1.1 percent per year.
Can the low rise in hourly compensation levels be sustained? When comparing national unemployment rates to hospitality compensation, the inverse relationship between these two measures becomes evident. As the national unemployment rate surpassed 9.0 percent in 2009, annual compensation adjustments dipped below 2.0 percent. According to their April 2013 forecast, Moody's Analytics, PKF-HR's source for economic forecasts, is projecting that the national unemployment rate will remain above 6.5 percent through 2014. Therefore, it can be expected that hotel managers will not experience elevated external pressure to boost compensation.
As noted above, compensation is the product of both the salaries, wages, and bonuses (payroll) paid to employees, plus payroll taxes and employee benefits (payroll-related expenses). According to our 2013 Trends® survey, the payroll-related portion of total labor costs grew at nearly twice the pace of the payroll portion in 2012, a trend we have observed in 10 of the past 13 years. The impending mandates associated with laws surrounding universal healthcare that become effective in January 2014 portend more of the same in the years ahead.
While weakness in national employment levels will likely continue to mitigate increases in hotel labor costs, employee productivity is a concern.
In 2012, PKF-HR estimates that the total hours worked by all employees at the typical property in the Trends® sample increased by 2.4 percent. This is down from the 3.3 percent rise observed in 2011. On the surface, this appears to indicate that operators did a better job at controlling staffing during the year. However, the number of employee hours required to operate a hotel is heavily influenced by the number of rooms occupied at the property. Therefore, when comparing the 2.4 percent increase in hours to the 1.8 percent rise in occupied rooms, we see managers struggled to control the staffing required to service the increase in business volume.
Declines in productivity are something PKF-HR has observed in the past. Since 2002, the four times that the annual change in total hours worked exceeded the change in occupied rooms, the average occupancy level for the Trends® sample was greater than 69 percent. According to the March 2013 edition of PKF-HR's Hotel Horizons® forecast, national occupancy levels are forecast to increase through 2015. Therefore, it appears that U.S. hotel managers will be challenged to control staffing while facing continued increases in business volume.
A Delicate Balance
During our analysis we analyzed several factors that impact hotel labor costs. Managers have limited ability to control payroll-related expenditures (particularly those that are government mandated), and the elevated national unemployment rate (and therefore ample supply of labor) is what it is. However, operators do have the ability to schedule staff and manage productivity.
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Contact: Robert Mandelbaum
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