Finance & DevelopmentFinanceHow the Components of Labor Costs Affect Hotels' Bottom Lines

How the Components of Labor Costs Affect Hotels’ Bottom Lines

Per the Bureau of Labor Statistics, the average hourly compensation for a hospitality industry employee increased by 3.6 percent in 2016. In the hotel industry, labor costs average roughly 50 percent of total operating expenses (before deductions for management fees and non-operating income and expenses). Therefore, with STR reporting an annual RevPAR growth rate of 3.2 percent for the year, it is understandable that U.S. hotel owners and operators were concerned about their ability to increase profits.

Based on the results of CBRE Hotels’ Americas Research’s 2017 edition of Trends in the Hotel Industry, hotel management was able to contain the growth of labor costs in 2016. On average, the combined cost of the salaries, wages, other compensation, and benefits paid to both employees and contracted/leased personnel at the hotels in the Trends sample increased by just 2.8 percent during the year. Given the 3.6 percent rise in compensation, the 2.8 percent growth in total labor costs implies that hotel managers implemented cost-saving measures, such as reducing the total hours worked at their properties or improving employee productivity.

Despite their best efforts, labor costs still accounted for 90 percent of the 1.6 percent rise in total operating expenses from 2015 to 2016. Further investigation reveals that it was the non-benefit component (payroll) that was the main driver of labor costs during the year. Payroll by itself accounted for 66.8 percent of the 1.6 percent total operating expense growth rate.

The CBRE Trends survey tracks five payroll sub-categories within each operating and undistributed department of a hotel. The sub-categories are consistent with the 11th edition of the Uniform System of Accounts for the Lodging Industry (USALI). They are: Salaries and Wages: Non-Management; Salaries and Wages: Management; Service Charge Distribution; Contract, Leased, or Outsourced Labor; and Bonuses and Incentives. A sixth sub-category is used to track any compensation data that is not identified, but this category totals just 0.6 percent of payroll costs.

Analyzing the salaries, wages, service charges, contact/leased labor, and bonus payments made by U.S. hoteliers in 2016 provides some insight into how they were able to limit the increase in labor costs to just 2.8 percent. The following paragraphs summarize our analysis of the 2016 labor cost data from 4,028 properties in the Trends sample that provided detailed labor cost information in conformity with the 11th edition of the USALI. For the purposes of this analysis, we will refer to the entirety of non-benefit compensation as “payroll.”

Payroll Components
The salaries and wages paid to non-management personnel comprised 63.8 percent of payroll in 2016, followed by the salaries and wages paid to management (24.1 percent). The remaining 12.1 percent consisted of service charge distributions, payments to contract/leased labor, bonuses, and unassigned payroll.

Components of Payroll

Non-management salaries and wages measured as a percent of payroll was greatest at limited-service hotels (69.5 percent), while management salary and wage payments were the most at extended-stay hotels (29.8 percent). Given the high incidence of mandatory gratuities, it is not surprising the service charge distributions made up the greatest percentage of payroll at convention (6.6 percent) and resort (6.2 percent) hotels. All-suite hotels allocated the greatest percent of their payroll dollars to contracted/leased employees (6.7 percent). Resort hotels, the property type that achieved the greatest gain in gross operating profits (GOP) in 2016, also spent the greatest percent of payroll on bonus payments (4.4 percent).

From 2015 to 2016, the payroll component that saw the greatest percentage increase was service charge distributions (12.3 percent). In many jurisdictions, management has limited control of these mandatory payments that must be made to employees. The increase in payments made to contact/leased labor (5.4 percent) exceeded the growth in salaries and wages paid to management (3 percent) and non-management (2.8 percent). The slowdown in GOP growth most likely contributed to the 5.5 percent decline in bonus payments made in 2016, compared to 2015.

Incidence of Components
The use of contract/leased labor is frequently cited by operators as a tactic that can be implemented to overcome labor shortages and potentially control the rising costs of compensation. In 2015, 42.7 percent of the properties in the study sample reported payments made to contract/leased employees in at least one of their departments. In 2016, this number increased to 45.2 percent. Resort hotels reported the highest incidence in payments made to contract/leased employees (67.5 percent), while extended-stay hotels appear to use contract/leased employees the least (35.7 percent).

Contract lease labor

Among the operating and undistributed departments, the greatest use of contract/leased employees in 2016 occurred in the food and beverage department (33.7 percent of hotels), followed by the rooms (33.3 percent) and administrative and general departments (17.5 percent). The greatest increase in the use of contract/leased employees was observed in the food and beverage and rooms departments. Conversely, it appears that the use of contract/leased labor declined in the other operated, information and telecommunications, and maintenance departments.

Overall, the incidence of paying service charges grew from 17.7 percent of the sample in 2015 to 18.1 percent in 2016. Resort hotels are the property type most likely to pay a service charge to their employees (62.9 percent). As expected, the distribution of service charges was most frequently observed in the food and beverage department (39.7 percent), followed by the rooms department (4.6 percent).

While the aggregate dollar amount of bonus payments made by the study sample declined by 5.5 percent from 2015 to 2016, the number of hotels that paid bonuses increased. In 2015, the properties that paid bonuses comprised 89.2 percent of the total sample. In 2016, this metric increased to 89.7 percent.

It is interesting to note that the percent of hotels reporting bonus payments made to sales and marketing employees increased from 2015 to 2016, while the percent of hotels reporting bonus payments made to administrative and general personnel declined.

Payroll Pressure
Given the political and economic landscape for the next few years, it appears there will be more pressure on the payroll component of labor costs versus the benefits piece. Hoteliers need to pay attention to the increased labor reporting standards introduced in the 11th edition of the USALI. With greater transparency, owners and operators are better able to analyze the many components of labor costs, and act accordingly.


About the Author
Robert Mandelbaum is the Director of Research Information Services for CBRE Hotels’ Americas Research.


SOURCE: CBRE 2017 Trends in the Hotel Industry, properties that reported labor cost detail.

Robert Mandelbaum
Robert Mandelbaum
Robert Mandelbaum is Director of Research Information Services for CBRE Hotels Research. CBRE forecast and financial benchmarking reports can be found at