October Tip of the Month-Payroll Burden

On average, participating GROW hotels run a Burden of 19% of Payroll. Hotels with a GOP higher than 40% run a Burden of 18% of Payroll.

Consistency makes Payroll Burden one of the easiest costs to plan for and monitor. This is because these expenses are based on known factors and a re driven by employee wages, number of employees, and benefits you offer.

Separating your Taxes, Benefits, and Supplemental Pay from Salaries & Wages is the key to making sure your costs are in line. You should update your financial reports to reflect these distinct areas so you are able to ensure costs are in line. Some Choice owners have already realized improve in their Worker’s Comp and other Burden Expenses as a result of comparisons.

Payroll Taxes

  • National/State Disability Insurance
  • National Medical Insurance
  • National/State Retirement Contribution
  • National/State Unemployment Insurance (aka: FICA, FUTA, SUTA, etc)

Employee Benefits

  • Automobile Allowance
  • Child Care
  • Contributory Savings Plan
  • Dental Insurance
  • Disability Insurance
  • Expat Benefits
  • Group Life Insurance
  • Housing and Educational
  • Meals
  • Nonunion Insurance
  • Nonunion Pension
  • Profit Sharing
  • Public Subsidized Transportation
  • Stock Benefits
  • Union Insurance/Pension, and Workers’ Compensation Insurance.

Supplemental Pay

  • Personal
  • Severance
  • Sick
  • Holiday
  • Vacation
  • Paid Time Off

20 Ways to Optimize Your Labor Cost

20 Ways to Optimize Your Labor Cost

Ready to Optimize Labor Cost at your property? Follow our steps and you’ll be on your way! Download the full checklist here!

Cleaning Crew Labor Cost

1. Create Standards

Determine for each position what drives the need for more hours. Consult CIA’s “Positions and Drivers” list for ideas. The goal is to develop guidelines that allow you to prevent under or overstaffing as a result of scheduling habits.

How this Helps

Increases guest satisfaction by preventing understaffing due to down revenue.

Increases profit by eliminating unnecessary over staffing at times of high revenue.

2. Identify Minimum Labor Cost

Calculate the fewest hours and accompanying cost (multiply the hours for each position * the average rate of pay for that position) for a single day. Remember to include one day of salary for any managers.
This number can now be used to determine the minimum amount of revenue needed to make a profit, the maximum of rooms it can service, and the resulting average rate.

How this Helps

This is a critical number to understanding how to truly improve profit. You cannot reduce this cost further, without damaging guest satisfaction. Therefore time needs to be invested in planning how to stay as close to the minimum revenue point as possible.
This value can be used to help set needed revenue management goals, and look for ways to future dates below the minimum revenue needed.

3. Calculate Minimum Revenue

Take the minimum payroll cost you determined above and divide it by the payroll cost you wish to run. For instance, if I want to run a worst case 30% labor cost, and have a minimum daily payroll of $1000; the formula would be 1000 / .30. This would result in minimum revenue of $3333.

If you then determine how many rooms you could service with the minimum staffing (before needing to add more desk clerks, room attendants, etc.), you can then determine a targeted rate.

How this Helps

This calculation can help you determine what labor cost (and resulting profit) you are going to run at your lowest point.

If in our example minimum staffing would support 10 rooms, then the rate needed to hit the target would be $333.33 ($3333 / 10). As it is not likely that you can hit this rate, you would adjust it to a rate you are likely to hit. Using that resulting revenue, you would learn the true cost you will run at low occupancy.

This forms the basis for revenue management goals, as plans must be developed to avoid these levels. By knowing the number of days that you will be at low levels, you can then determine how many high-level days, and at what cost %, will be needed to offset low days.

4. Identify Labor Coast Leap Points

Using the standards, you can plot out how much labor you will have at every point of occupancy.
With that completed, you are looking for various points of occupancy, where you can sell a certain number of rooms without having to add any additional payroll, and conversely identifying where you might add a full shift

How this Helps

Most managers do not bring employees in for “splinter shifts” or less than 8 hours. Some states have labor laws defining the minimum amount of time that an employee must be paid for if called into work. If employees are scheduled in this fashion frequently it will lead to greater turnover.

If you are not going to go to a true “per room standard, you will have periods where the next 5 -6 rooms you sell will not require any additional payroll. Therefore, you can be more aggressive with the rate.

5. Begin Forecasting 1 Week Out

A major way in which labor cost becomes problematic is when scheduling is done without any idea of how much business there will be, or when managers incorrectly estimate the amount of business that there will be.

The first step in managing proper labor cost is to be able to accurately forecast for next week: how many rooms will be sold, what will the average rate be, how many guests will be in-house, and how many arrivals and departures will occur.

How this Helps

Even with a great set of standards, if we cannot accurately determine how much business there is going to be, we will either over or under staff based on bad assumptions.

If you are frequently calling employees in, sending employees home, or telling employees not to come in tomorrow, then you need to do a forecast.

This not only allows us to plan for proper staffing but makes employees lives easier as they can at least know when they will be needed.

6. Implement a Process that converts Standards and Forecasts into a Schedule

If you have an accurate set of standards, and forecast of hotel statistics and revenues, the process of determining how many hours are needed can be automated in Excel or some other program.

How this Helps

Automating this process will help eliminate bad scheduling habits, and eliminate over and understaffing.

7. Measure Daily & Make Adjustments

Develop a report that shows what you forecasted for business levels, the hours you scheduled, and the resulting payroll.

Each day, check your accuracy of both volume and hours worked. If you either missed forecast or are using more or fewer hours, make adjustments for the rest of the week.

How this Helps

While our goal is to have accurate projections and schedules. Occasionally even the best of us will mess up, especially when first learning to forecast and use standards.

Monitoring results, allows us to fix the mistakes as we see them, protecting our profit margin.

8. Have a Weekly Review Comparing Schedule & Actual

Very similar to the Daily report, this report should compare what you forecasted and scheduled, to actual results for the previous. The weekly totals and an accuracy percentage (actual / forecast or schedule) for each value provide actionable data.

How this Helps

Two of the most important factors in maximizing your labor cost is having proper standards and an accurate forecast. This report allows you to see if you are good at forecasting and if you are sticking to your standards. This report can also help you to understand why you are not hitting standards and the cost of employees not punching in and out promptly.

9. Check your Metrics Monthly

Listed in the section below are a variety of labor metrics that profitable hotels monitor and use to take actions.

You can develop new reports to track these metrics, add them to an existing report (and your operating statement), or use a program like CIA’s HLO website to create the needed tracking.

How this Helps

It is not enough to track payroll dollars and hours worked. The reason is they are not comparable, variances in the volume of business can make it difficult to compare hours and dollars.

The metrics listed below are used because they are weighted by volume, allowing for accurate comparison to other hotels, or your own history.

10. Use your History to Adjust

Highly profitable hotels analyze their results (daily, weekly, and monthly), comparing to other hotels and their own history and their goals.

How this Helps

The rise or fall in the metrics, as compared to previous performance or results of comparable hotels is often the first indication that something is happening to your labor cost and profit.

Often changes in marketplace, rate, a mix of business that may otherwise go unnoticed will become magnified by their impact on payroll.

11. Begin Forecasting the next 30-60 Days

The real improvements in profit from labor cost optimization comes from learning to marry it to Revenue Management.

With the other steps here mastered, you should be able to take future revenue projections (from your PMS or Revenue Management System) and create an accurate projection of what labor is needed to service that level, and what the cost and profit will look like.

How this Helps

We are looking for three situations when doing this kind of forecasting:
1. Dates where we are projecting high-cost % of sales and potential losses.
2. Periods of time where room levels are at a level where increases will not add more labor.
3. High volume days (especially periods with low turnover) where we can maximize profits.

Our goal is to see these periods of time far enough in the future to have a chance to make plans.

12. Labor Cost % Of Sales

Total Payroll / Total Revenue

Payroll includes Managers, but not Taxes or Benefits.

How this Helps

The most basic and telling of labor measurements. This metric has the most direct relationship to Profit. As it goes up, profit goes down. With a little work, you can determine at what points in labor cost you will lose money, and at what points you will maximize profits.

Being able to understand what is impacting this metric is the first step in determining how to improve.

13. Hours Per Occupied Room

Total Hours Worked / Total Occupied Rooms

Hours include any hours worked by managers, but not holiday, sick, etc. Occupied rooms includes comps.

How this Helps

Increases or decreases in this metric will show how constant your service level is, and if you are flexing staffing with volume.

How well you compare to other hotels and your own history is a good indicator of efficiency.

Awareness is Efficiency, Efficiency is Margin, Margin is Profit.

14. Revenue Per Hour

Total Revenue / Total Hours Worked

How this Helps

When coupled with hours per occupied room, this metric will highlight the impact mix of business and rate, are having on your profit.

The most profitable hotels run the highest Revenue/Hour.

15. Full-Time Equivalents

Total Hours Worked / 8

How this Helps

FTEs are another way to compare staffing levels across different periods of time (month to month), or between properties.

A comparably high FTE count indicates that you simply have more employees in your building than you use to, or your fellow operators are using.

This can be useful to help control staffing from creeping up during high demand times.

16. Overtime Average by Day of Week

Use Excel, or some other reporting service, to track Overtime day by day. Then when you have at least 2 months of data, start averaging the data by day of the week.

How this Helps

Depending on your state laws, you should not accumulate over time until later in the work week if at all.

If you are incurring Overtime early in the week, or on several days of the week, or if you run a high percentage of overtime hours late in the week, you are understaffed.

If the trend continues, you may find it more profitable to find additional employees.

17. Room Attendant Hours per Occupied Room

Total Hours of employees cleaning rooms / Occupied Rooms

How this Helps

One of the most straightforward standards in the hotel business is Room Attendants. If your standard is built to accommodate Stay Overs vs Check Outs, Multiple Occupancy, and Deep Cleaning, then a comparison of actual hours to ideal hours should be very meaningful.

Like the majority of controllable expense, any effort to better control labor begins here.

18. Fixed % of Total Payroll

Total Management Payroll $ / Total Property Payroll $

How this Helps

Perhaps not high on the mid-scale operator’s list, but still worth monitoring. If this value is increasing, or high in comparison to other hotels, it might indicate that your manager is spending too much time functioning as an hourly employee.

Basically, they are working in the business and not on the business. If the number is decreasing, or low in comparison, employees are likely unsupervised.

19. Minimum Payroll, Minimum Revenue, Maximum Coverage

Calculate the fewest hours and accompanying cost (multiply the hours for each position * the average rate of pay for that position) for a single day. Remember to include one day of salary for any managers.

Take the minimum payroll cost you determined above and divide it by the payroll cost you wish to run. For instance, if I want to run a worst case 30% labor cost, and have a minimum daily payroll of $1000; the formula would be 1000 / .30. This would result in minimum revenue of $3333.

Take the minimum revenue from the step above and divide it by the maximum number of rooms this staffing level can cover. 10 rooms, then the rate needed to hit the target would be $333.33 ($3333 / 10).

How this Helps

We discussed this above but will add some additional thoughts.

For many hotels the desire is to keep their employees and fully employed and happy. For others, their staff is already small, and major reductions cannot be made in any event.

The answer to both these problems is to understand 2 conditions, and know how to manage them. First, when we realize how expensive low revenue days are, we need to work hard to avoid them. Secondly, when the hotel runs high volumes, we need to resist the tendency to staff up, if it can be avoided.

20. Day of Week Trends

Use Excel, or some other reporting service, to track the metrics you desire day by day. Then when you have at least 2 months of data, start averaging the data by day of the week.

How this Helps

We look to day of week trends to help us get better at payroll management as a whole. This metric will show if we are using too much fixed-scheduling. If we see certain days of the week outperforming others, then we should be discussing how to replicate that success on more days. Again, metrics will make numbers considerably more comparable.