|By: Gregory J. Miller and Robert Mandelbaum, March 20054
One of the most heated issues in the hospitality industry today is rising labor costs, especially with respect to employee benefits. Many of PKF Consulting’s clients have expressed their concerns that employee benefit costs grew much faster in 2004 than in the recent past. Given the revenue recovery that is occurring in the U.S. hotel industry, controlling expenses will be the key to maximizing future gains in profitability. Unfortunately, several employee benefit expenses are government mandated and hotel management has limited control of these costs. In this article, we present data that provides some historical perspective on the recent movements in employee benefit costs within the hotel industry.
Trends in Payroll and Benefit Costs
To analyze the trends of employee benefit and payroll costs, PKF Consulting sifted through data from our Trends in the Hotel Industry database dating back to 1968. When combined, payroll costs (salaries and wages) and employee benefits as a percentage of total revenue have been relatively flat over the past 35 years. Since 1968, hotel labor costs have mostly fallen in a tight range of 32 to 35 percent of total revenue. Therefore, relative to total revenue, hotels are not paying that much more in total labor costs today than they have in the past. This consistent ratio depicts management’s ability to adjust staffing levels and payrolls with fluctuating business levels.
However, when examined independently, we see different growth patterns for payroll costs and benefits. In 1968, payroll costs were 27.3 percent of total revenue. During the same year, employee benefits, which today represents health insurance, 401K matching, and payroll taxes, among other items, was 3.4 percent of total revenue. As shown in Table 1, cash payrolls as a percentage of total revenue have declined slightly since 1968, while benefit costs as a percentage of total revenue have risen. In 2004, we estimate payroll costs were 25.6 percent of total revenue, while employee benefits averaged 8.5 percent.
|Annual Changes in Benefit Costs
Hoteliers are concerned with the recent increases in benefit costs, especially considering that benefit costs in 2004 rose at their greatest levels in years. However, Trends data indicates that the current rise in benefit costs is not without precedence.
By year-end 2004, we estimate benefits will rise 9.0 percent from 2003. Benefit costs have not risen annually at such a fast pace since 1988. However, a 9.0 percent annual increase in benefits would have been considered unusually low twenty years ago. As Table 2 indicates, in the 1970s and 1980s, benefit cost increases were frequently over ten percent per year. Even when accounting for inflation, benefit costs generally rose at higher rates in the 1970s and 1980s than during the past ten years.
|Historically, benefit costs have grown faster than payroll costs on
a year-to-year basis. Only during the 1990s did payroll costs grow faster
than employee benefits. Therefore, the occurrence of benefits growing faster
than payroll during the past two years should warrant attention; the industry
may be returning to an extended period of time when benefit costs will
grow at a faster rate than payroll costs. Consequently, hoteliers may consider
planning future budgets under the realization that benefit costs are rising
faster than payroll costs.
Benefits as a Percentage of Payroll Costs
|PKF Consulting also analyzed the trend of a common industry benchmark,
benefits as a percentage of payroll costs. Table 3 indicates that benefits
as a percentage of payroll rose in the 1970s and 1980s and declined to
a degree over the past decade. This decline in benefits as a percent of
payroll comes as somewhat of a surprise given most hoteliers’ perceptions
of increased government-mandated benefits and taxes during the 1990s.
As previously mentioned, benefit costs as a percentage of total revenue were much higher in the late 1980s and early 1990s, and the current rise in benefit costs may be more of a return to historical, rather than atypical, conditions.
To conclude, the recent five to nine percent increases in employee benefits is cause for concern. The labor cost trends of the 1990s appears to be the anomaly. Over the long-term, employee benefits have grown at a greater pace than payroll costs.
Will employee benefits continue to grow even greater than the 2004 annual rate of nine percent? History might repeat itself; benefit costs have grown faster than nine percent in the past. However, should this level of growth occur, it will then be hotel management’s charge to adjust staffing, salary, and wage levels in order to keep total labor costs in line. Controlling total labor costs is a management trait that hoteliers have historically proven capable of executing.
While PKF evaluated trends on an industry-wide perspective, hotel managers and owners can evaluate their own historical labor cost trends. Plotting payroll and benefit costs from past financial statements will provide hoteliers with a wiser perspective on the movement of their own labor costs.
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|Also See:||Plying the Per Diems: How Market Forecasts Should Impact Hotel Rate Strategy / Gregory J Miller / PKF / February 2005|
|Double-Digit Profit Growth for U.S. Hotels in 2004 and 2005; Strong Revenue Growth Overcomes Some Expense Concerns / PKF / February 2005|
|Hotel Construction Signs Along the Road to Recovery; Measuring Hotel Developer Intent / R. Mark Woodworth and Robert Mandelbaum / January 2005|
|Understanding the Recovery Occurring in the Meeting’s Market; Surveying the Meeting Planners / Robert Mandelbaum / December 2004|
|First Half 2004 Hotel Profits Solidify 2005 Outlook; Industry Still Lags Far Behind its Past Peak Performance in 1998 / HRG & PKF Consulting / December 2004|
|Room Rates Across the Top 50 Hotel Markets in the U.S. Will Increase by 3.7% in 2004; Five Highest and Five Lowest Average Daily Room Rate Hotel Markets in 2005 / December 2004|
|Perspectives on the Road to Recovery - U.S. Lodging Industry 2005 / HRG & PKF Consulting / November 2004|
|Other Revenue Is Good Revenue / Robert Mandelbaum / November 2004|
|Uncanny! Hotel Occupancies “Key Indicator” of Presidential Election Outcome / October 2004|
|Is the Hotel Industry Smart Enough to Avoid Overbuilding; Ten Reasons Why Real Estate Markets Become Overbuilt / Jack B. Corgel / July 2004|
|PKF Consulting/HRG Survey Forecasts Banner Year for Hotel Transactions; Investors Favoring the Full-service Segment / May 2004|
|First Uptick for Hotel Industry in Three Years; Full-Service Hotels Lead the Way In U.S. Hotel Profits for 2004 / Hospitality Research Group / March 2004|
|Demand in the Full-service Hotel Sector is Expected to Increase by 6.3% in 2004; Best and Worst Hotel Markets in Terms of RevPAR Growth / PKF Consulting / January 2004|