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: More general which could be used monthly, quarterly or annual basis
Total Revenue per Worked Hour: This is an easier to use a measure which results could be monitored on a daily, weekly and monthly basis. Fluctuations in daily revenue streams, ADR, occupancy, events etc will affect the results directly and you will be able to see how flexible and effective your scheduling system.
At least one or two productivity measures should be set for every operational department. They can be used as performance objectives for department heads and as a basis to budget labour costs, derived from expected revenues.
2. Rooms Division:
“Rooms Payroll Per Occupied Room (POR)” and “Rooms Payroll %” are the most commonly used ratios in P&L terms which could be used as an objective for HOD’s.
“Hours per Occupied Room” is a generic indicator for all room division departments. If you look at budgeted total working hours and divide this figure into budgeted total rooms sold then you will have a guidance figure you could use as a target throughout the year. It is a simple and effective way to track to the goal. It is important for every operational department to understand there will be losses and wins in the days and weeks is natural. Hitting or beating the monthly productivity target is the magic result for them to see and get excited about.
“Movements Per Worked Hour” is the key measurement in Front Office, the movement being defined as a number of check-in or check-out activities performed at the Front Office. This is better than using the rooms department revenues, as it might fluctuate depending on ADR of each room sold. However, you will find variations depending on leisure, group or individual check-in/out performed. It is still better than using revenue figures and would be easier to track.
Every hotel has some kind of efficiency indicator for Housekeeping and it is usually based on “Minutes Per Room (MPR)”. Some hotels use one flat target on MPR which could be wrong as you need to set separate housekeeping targets for guests staying over and for guests checking out for effective and accurate results.
3. Food and Beverage:
“F&B Payroll %” could be used on HOD objectives.
Two reasonable measurements you can use is “Hours Per Cover Served / Hours Per Customer” and “Revenue Per Worked Hour”. Whether this is done per meal period (breakfast, lunch, dinner) or for whole days depends on how accurate the results are needed to be.
“Food Revenue Per Worked Hour” would be an ideal measurement for efficiency in the Kitchen. Bear in mind, this figure will tend to be higher when the F&B business mix shifts towards banquets instead of à la carte. If there are separate kitchens for restaurants and banquets, two such scores specific to each team can be used.
Universal Productivity Norms
The number of team members required to service a certain volume of business is described as a “productivity norm”. The productivity norms for hotels are listed in the chart below are and described as optimum ratios.
The ratios are universal and are not distorted by local conditions. In fine dining restaurants, golf and other leisure activities, local practices may apply.
It is important to remind again that hotels and their departments concentrate on a few simpler meaningful measures which are regularly communicated throughout the operation, everyone understands and follows. Many management concepts fail because they are too complex and thus not fully understood by all organizational levels.
Managing Labour Productivity
Taking advantage of technology is an important part of a successful labour management program, but effective labour management isn’t just about buying the best time-and-attendance system or labour management software. It requires a complete and thorough management approach that ensures that you have the right people working when you need them and not working when you don’t need them.
It is also about leadership and demonstrating to managers that they each play an important role in effective labour management.
Here are a few ways you can reduce your hotel’s largest operating costs and increase your profitability:
Labour standards or staffing guides: Every hotel and its departments should have clear working guidelines and service standards for the task at hand. I have listed some of the industry standards above however, each hotel with its location, service offerings, standards, sizes, decorations and layouts make differences. Therefore, each department should prepare amended guidelines suitable for their hotel and department to succeed. So, we need to clearly identify how many hours it takes to complete a task, or how many shifts are needed to satisfy service standards set for a specific hotel.
Cross-training: You should always equip your staff with the necessary skills to perform tasks outside of their day-to-day job functions. This way, they will be able to lend a hand to other departments during any downtime they may have.
Scheduling: Make sure your schedules reflect the day-to-day variations in business volume. You never want to create fixed schedules for hourly employees. Oftentimes, a hotel will either be overstaffed or understaffed when using a fixed schedule – and overstaff wastes profits. Instead, use the forecast schedule to the labour standards you’ve created for each position in your hotel, and then update the schedule accordingly if adjustments need to be made.
It is advisable to set a weekly payroll meeting with all scheduling managers. GMs and/or Director of Operations should seize the opportunity to interact with each scheduling managers, to validate the business volumes on which the schedule was based and to have the manager justify the shifts being offered for approval. This is also a teaching and learning opportunity for inexperienced managers on how to schedule against properly adjusted business volumes and labour standards. In the absence of the review and approval process, people may not learn or may forget how to properly complete a schedule.
This step holds managers accountable and demonstrates the importance of the process by formalizing it. Having a reliable weekly meeting to review and plan labour is as essential to the healthy running of your organisation. This is also a time where Finance/Payroll support gets involve and provide vital financial information and answer any payroll related questions or problems.
The accuracy of Forecasting and Importance of Effective Inter-departmental Communication: Accuracy of forecasting is the key to be able to use it as a base and plan weekly scheduling accordingly. As we all know, we all work in a fast-paced business and everything could change daily or even hourly with a new group arrival or cancellation etc. Therefore, it is vital that to establish good communication between revenue and operational departments to share any changes to allow operational departments to adapt and act accordingly.
Labour management solutions: Today’s rapidly changing technology environment has produced many new labour management solutions in the form of cutting-edge software designed for this purpose. Finding the best one for you takes time but should be part of your strategy.
In summary, if you do all of these things and commit yourself to them, your success with labour costs will provide other opportunities in your operation. Setting simple and easy understandable targets adapted to your establishment is the key. Having weekly Labour meeting is as important as your hotel’s Weekly Sales, Yield or Revenue Management meetings. Neither can be considered optional. Focusing on labour as described above will lead to bottom-line and service success for you, your team, your hotel and your owners.
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