As revenues continue to grow for most U.S. hotels, the combined cost of salaries, wages, bonuses, and payroll-related expenditures has declined as a percent of total hotel revenue. In 2013, labor costs represented 32.3 percent of total revenue, down from a high of 34.8 percent in 2009 but still above the long-run average of 31.2 percent. Labor costs measured as a percent of total revenue run from a high of roughly 35 percent at convention and resort hotels to a low of 22 percent at limited-service and extended-stay properties.
Strong growth in revenue, however, has the potential to mask the struggles hotel managers face to control labor costs. Therefore, it is important to also measure movements in labor costs relative to changes in other hotel operating expenses. While labor cost as a percent of revenue has declined significantly in recent years, labor cost measured as a percent of total expenses has remained relatively constant.
In 2013, 44.8 percent of all dollars spent to operate a hotel in the United States went to pay for labor-related costs, making it the single largest expense item for operators. This ratio declined a mere 0.3 percentage points from its recession high of 45.1 percent in 2009. Labor costs measured as a percent of total operating costs in 2013 ranged from roughly 35 percent at limited-service and extended-stay properties to 48 percent at convention hotels and resorts.
Components of Labor
According to the 10th edition of the Uniform System of Accounts for the Lodging Industry, there are two components to total labor costs. In 2013, salaries, wages, and bonuses accounted for 70 percent of total labor costs, with the remainder attributable to payroll-related expenses.
Salaries, wages, and bonuses constitute the direct payroll dollars paid to hotel employees. This cost is influenced by a combination of staffing levels, hours scheduled, wage rates, and bonus payments.
The second component is titled “payroll-related expenses” but is commonly referred to as “employee benefits.” This cost consists of government-mandated payroll taxes and benefits, such as paid time off, meals, and retirement or pension plan subsidies.
Because of the compulsory nature of several payroll-related expenses, this component of labor costs has been the most difficult for hotel managers to control. Payroll-related expenses increased from $5,001 per available room (PAR) in 2007 to $5,581 PAR in 2013, a compound annual growth rate (CAGR) of 1.8 percent.
Conversely, during this same time period, the amount paid for salaries, wages, and bonuses remained virtually unchanged at approximately $13,150 PAR in both 2007 and 2013. The net result has been a 0.5 percent CAGR in total labor costs the past seven years.
Labor cost is a major expense item throughout all operated and undistributed departments within a hotel. Not surprisingly, the labor-intensive rooms and food and beverage departments have the highest labor cost ratios. In 2013, labor costs represented 61.1 percent of total expenses in the rooms department and 59.6 percent in the food and beverage department. At the other end of the spectrum, labor costs are less pervasive in the administrative and general (48.8 percent) and maintenance (51.5 percent) departments.
In the sales and marketing department, labor costs measured against all department expenses are just 27.1 percent. Several limited-service and extended-stay hotels operate with no or limited on-site sales personnel. However, when you remove the franchise-related expenses contained in this department, the labor cost ratio increases to 58.4 percent.
From 2007 to 2013, rooms department labor costs have increased at a CAGR of 1.4 percent, the greatest increase among all departments. This growth can be explained by the fact that occupancy rates in most markets have surpassed their 2007 levels, and the increase in occupied rooms has required increased staffing.
Sales and marketing labor costs have grown at a compound annual rate of 1.3 percent. Full-service, convention, and resort hotels continue to invest in marketing personnel despite the increased use of Internet-based marketing tactics and distribution channels.
Within the food and beverage department, labor costs have declined from 2007 to 2013 at a CAGR pace of 0.5 percent. This decrease can be attributed to food and beverage revenue sales that are still below pre-recession levels, as well as the implementation of more self-service style outlets.
A Delicate Balance
Employee performance has a significant impact on the guest experience at a hotel. Therefore, managers spend a significant portion of their time recruiting, training, and scheduling employees. The challenge for operators is to find that delicate balance of maintaining service standards while controlling labor costs.