Largest operating costs in the hotel industry are labour costs, utilities, and maintenance expenses, and Labour Costs accounts for almost half of total operating costs. In another word, Labour costs measured as a percent of total revenue run from a high of roughly 35% at conventional and resort hotels to a low of 22% at limited-service and extended-stay properties. If you’re not taking a proactive approach to controlling these expenses, your hotel will not generate the amount of profit that it should.
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 labour costs.
Before we get into effective labour management, we need to understand components of labour and their impacts in the industry. There are six payroll sub-categories within each operating and undistributed department of a hotel. These categories and their weight in the hotels are listed below:
Salaries and Wages (Non-Management): Equates 60% to 70% of total payroll and covers direct payroll paid to hotel employees.
Salaries and Wage (Management): Equates 20% to 25% of total payroll and covers typical management team of the hotel.
Service Charge Distribution: Equates 5% to 7% of payroll. In many jurisdictions, management has limited control of these mandatory payments that must be made to employees. It varies between city and resort hotels as there are more service charges in resort hotels. The distributions of these charges are mainly F&B and rooms departments.
The contract, Leased, or Outsourced Labour: Equates 6% to 7% of payroll. The use of contract/leased labour is frequently cited by operators as a tactic that can be implemented to overcome labour shortages, and potentially control the rising costs of compensation. General usage F&B 30%, Rooms 35%, Admin and General Departments 18%
Bonuses and Incentives: Equates 4% to 5% of payroll. Employees in the sales and marketing, administrative and general departments were most likely to be paid a bonus. This is consistent with the typical compensation agreements for general managers, as well as sales personnel. Most sales and marketing incentives are based on revenue achievements, while general managers are more frequently rewarded for growth in profits.
Other compensation: Equates approximately 1% of total payroll costs.
Salaries, wages, and bonuses constitute the direct payroll paid to hotel employees which accounted for 70% of total labour costs. This cost is influenced by a combination of staffing levels, hours scheduled, wage rates, and bonus payments.
The second component which called “payroll-related expenses” or most commonly referred to as “employee benefits” accounted for remaining 30% of total payroll costs. 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 labour costs has been the most difficult for hotel management to control.
Labour cost is a major expense item throughout all operated and undistributed departments within a hotel. Not surprisingly, the labour-intensive rooms and food and beverage departments have the highest labour cost ratios. Depending on size and type of hotel percentage between rooms and F&B could change and we might add other departments such as Health Club, security etc.
Food and beverage department is in general biggest department in term of size and costs. The Labour costs have declined over the years mainly due to the implementation of more self-service style outlets. Also, some hotels outsourced their secondary outlets to third parties to reduce costs and agency usage is a common practice in this department.
The room department consists of Front Office and Housekeeping. Over the years, the function of Front Office has changed and as a result, it is more compact and guest faced, multi-skilled teams in place.
Housekeeping and public cleaning services are most task focus and manpower required. Due to high staff turnover in this department, some hotels reducing the size by multi-skilling their staff, others either using partly agency staff or full outsourced to third-party operators.
The remaining departments consist of revenue, finance, sales and marketing etc. functions have evolved over the years. It’s size either reduced with more automated systems, cluster functions or third-party outsourcing. Therefore, some full service but mainly limited-service and extended-stay hotels operate with no or limited on-site revenue, sales and finance personnel.
Due to changes in our industry over the years, most hotels have operational teams on site and therefore, we will focus on effective labour management in these departments.
Measuring Labour Productivity
So far, we have covered payroll categories to understand components of Labour, departments, their weight in total labour costs and which part we can influence in general. I will now focus on measuring productivity as it is important from the beginning to establish the goals in your operations.
We need to start with a big picture and set a general Hotel Productivity measurement. It is much better to have a simpler, slightly less accurate but still meaningful system, which everyone understands and follows rather than a highly accurate but complicated concept, which nobody really uses. Many management concepts fail because they are too complex and thus not fully understood by all organizational levels.
1.General Hotel Productivity:
Payroll & Benefits % of Total Hotel Revenue: