With today’s political and economic landscape, there might be more pressure put on the components of labor costs rather than the benefits.
REPORT FROM THE U.S.—According to the Bureau of Labor Statistics, the average hourly compensation for a hospitality industry employee increased by 3.6% in 2016.
In the hotel industry, labor costs average roughly 50% of total operating expenses.1 Therefore, with STR reporting an annual revenue-per-available-room growth rate of 3.2% for the year, it is understandable that U.S. hotel owners and operators were concerned about their ability to increase profits. (STR is the parent company of Hotel News Now.)
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% during the year. Given in the 3.6% rise in compensation, the 2.8% 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 hoteliers’ best efforts, labor costs still accounted for 90% of the 1.6% 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 % of the 1.6% 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. They are:
- salaries and wages: non-management;
- salaries and wage: management;
- service charge distribution;
- contract, leased, or outsourced labor; and
- bonuses and incentives.
A sixth sub-category is used to track other compensation data that is not identified, but this totals just 0.6% 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 contain the increase in labor costs to just 2.8%. 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 are going to refer to the entirety of non-benefit compensation as “payroll.”
The salaries and wages paid to non-management personnel comprised 63.8% of payroll in 2016, followed by the salaries and wages paid to management (24.1%). The remaining 12.1% consisted of service charge distributions, payments to contract/leased labor, bonuses and unassigned payroll.
Non-management salaries and wages measured as a percent of payroll was greatest at limited-service hotels (69.5%), while management salary and wage payments were the most at extended-stay hotels (29.8%). 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%) and resort (6.2%) hotels. All-suite hotels allocated the greatest percent of their payroll dollars to contracted/leased employees (6.7%). Resort hotels, the property type that achieved the greatest gain in gross operating profits in 2016, also spent the greatest percent of payroll on bonus payments (4.4%).
From 2015 to 2016, the payroll component that saw the greatest percentage increase was service charge distributions (12.3%). In many jurisdictions, management has limited control of these mandatory payments that must be made to employees. The increase in payments made to contract/leased labor (5.4%) exceeded the growth in salaries and wages paid to management (3.0%) and non-management (2.8%). The slowdown in GOP growth most likely contributed to the 5.5% year-over-year decline in bonus payments made in 2016.
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% 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%. Resort hotels reported the highest incidence payments made to contract/leased employees (67.5%), while extended-stay hotels appear to use contract/leased employees the least (35.7%).
Among the operating and undistributed departments, the greatest use of contract/leased employees in 2016 occurred in the food and beverage department (33.7% of hotels), followed by the rooms (33.3%) and administrative and general departments (17.5%). 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% of the sample in 2015 to 18.1% in 2016. Resort hotels are the property type most likely to pay a service charge to their employees (62.9%). As expected, the distribution of service charges was most frequently observed in the food and beverage department (39.7%), followed by the rooms department (4.6%).
While the aggregate dollar amount of bonus payments made by the study sample declined by 5.5% from 2015 to 2016, the number of hotels that paid bonuses during the year increased. In 2015, the properties that paid bonuses comprised 89.2% of the total sample. In 2016, this metric increased to 89.7%.
Employees in the sales and marketing (91.6% of hotels) and administrative and general (80.1%) departments were mostly likely to be paid a bonus. This is consistent with the typical compensation agreements for GMs, as well as sales personnel. Least likely to receive a bonus in 2016 were employees in the other operated and information and technology departments.
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. In 2016, the number of hotels that enjoyed an increase in rooms revenue was greater than the number of properties the achieved a rise in GOP. Most sales-and-marketing incentives are based on revenue achievements, while GMs are more frequently rewarded for growth in profits.
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. Accordingly, 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.
1Before deductions for management fees and non-operating income and expenses.
Robert Mandelbaum is the Director of Research Information Services for CBRE Hotels’ Americas Research. To benchmark the seven labor cost components of your property(s), please visit https://pip.cbrehotels.com/benchmarker, or call (855) 223-1200. This article was published in the July 2017 edition of Lodging.
The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.