Abstract
Forty-seven cents of every dollar spent to operate a hotel pays for the salaries, wages, bonuses, and benefits of the property’s employees. Therefore, when hotel managers sit down to analyze their financial performance, labor costs rise to the top of the agenda.
Through our annual Trends® in the Hotel Industry research of thousands of operating statements from properties across the United States, PKF Hospitality Research (PKF-HR) is able to track period-to-period movements in the cost of hotel labor. From 1960 to 2010, labor costs have averaged 32.8 percent of total revenue, with a high of 36.7 percent in 2009 and a low of 29.7 percent in 1960. The standard deviation of this measure during this time period was a tight 1.8 percent, indicating that hotel managers can, and will, adjust their labor-related expenditures in response to changes in revenue.
We know that hotel managers are adept at controlling labor cost expenditures. However, to gain a better understanding of the tactics used to control the dollars spent, we embarked on a deeper analysis of the drivers of labor costs.
The Drivers
In general, there are three factors that influence the amount of money hotel managers spend on labor costs:
Business Volume: The number of rooms occupied, or guests served, dictate the number of employee hours scheduled by managers.
Compensation Levels: The hourly wage rates, annual salaries, and benefits offered factor into total labor-related cost expenditures.
Productivity: The third factor is output achieved from each hour worked. In the lodging industry, this could be rooms cleaned by a housekeeping attendant, or customers served by the wait staff in the restaurant.
To perform our analysis, we gathered the following data that enabled us to measure these three causes:
Year-over-Year Change in Total Labor Costs: The annual change in the total amount paid for the salaries, wages, bonuses, and benefits of all employees. These data come from the PKF-HR Trends® database.
Year-over-Year Change in the Average Hourly Compensation Level for a Leisure and Hospitality Employee: The annual change in the average hourly compensation (salary, wage, bonus, and benefits) paid to an employee in the Leisure and Hospitality Industry in the United States. These data come from the U.S. Bureau of Labor Statistics (BLS) and date back to 2002.
Year-over-Year Change in Total Hours Worked at a Hotel: By subtracting the annual change in employee hourly compensation from the annual change in total labor costs at a hotel, we were able to isolate the change in total hours worked at the average hotel in our Trends® sample. For example, in 2007 the average labor costs increased by 7.8 percent and the average hourly compensation per employee grew by 4.7 percent. Therefore, the total hours worked at an average hotel increased by 3.1 percent. According to the BLS, the average weekly hours worked by a Leisure and Hospitality employee has not changed significantly over the years, thus facilitating the preceding calculation.
Exhibit 1 presents the annual changes in these measurements during the period 2002 through 2010.
Drivers of change in labor costs
Analyzing the data presented in Exhibit 1, we make the following observations regarding the tactics used by hotel managers to control labor costs.
According to the BLS, the average hourly compensation paid to a hospitality employee has increased every year from 2002 through 2010.
The level of the compensation increase has fluctuated over time, ranging from a low of 1.2 percent in 2010 to a high of 4.7 percent in 2007. It is not surprising that the big increase in 2007 followed three consecutive years of approximately 8 percent (8%) revenue growth and double-digit annual gains in profits. Conversely, the modest increases in 2010 followed 2009, the worst year of U.S. lodging performance since the Great Depression in the 1930s.
With compensation levels continually on the rise, hotel managers had to cut back on the number of hours worked at their hotels to effect an actual reduction in labor cost expenditures. This occurred in 2002 and again in 2009.
The Compensation Component
To provide additional insight, and to support a forecast of hospitality compensation levels, we explored the historical relationship between changes in leisure and hospitality compensation and changes in compensation levels for all U.S. private industry employees (provided by the BLS). The private industry compensation data were used as a benchmark because Moody’s Analytics prepares a forecast of this data series. Moody’s is the PKF-HR source for historical and forecast economic data.
A model was built using the BLS data for hospitality and private industry compensation, as well as changes in the consumer price index (BLS) and changes in the national lodging inventory from Smith Travel Research. From 1Q01 through 3Q11, we identified a significant relationship between the actual compensation paid to hospitality employees, private industry compensation levels, and the predicted hospitality compensation generated by the model. This gave us confidence in the predictive capabilities of the model (see Exhibit 2).
Historical compensation relationships and changes in lodging supply
When analyzing the historical relationships between the actual and predicted levels of hospitality compensation, we observed some divergence between the two data series. From 2001 through 2003, the actual hourly compensation paid to hospitality employees exceeded what the model predicted that the average hourly compensation for a hospitality employee “should have” been during those years. Conversely, from 2004 through 2006, the predicted compensation levels slightly exceed the actual average compensation payments.
These variances can be partially explained by the changes in lodging supply during these periods. Annual supply changes averaged 1.7 percent during the early 2000s and slowed to just 0.2 percent during the mid 2000s. During periods of industry expansion, the competition for employees is heightened, forcing management to offer relatively higher compensation packages. On the other hand, there is less competitive pressure to raise salaries, wages, and benefits when the inventory of hotels is dormant.
Productivity
As noted earlier, the average hourly compensation paid to hospitality employees had increased each year since 2001. What “return” (ROI) have hotel owners and operators received for this continued investment in their employees?
One way to measure the ROI on increased hourly compensation is to measure the productivity of each hour worked by an employee. To measure employee productivity, we analyzed the historical relationship between the annual changes in total hours worked by all employees and the annual changes in the number of occupied rooms. When the change in hours worked exceeds the change in rooms occupied, this would be an indication of a decline in productivity. Conversely, when the change in occupied rooms exceeds the change in hours worked, it would indicate an increase in productivity. Exhibit 3 displays the historical relationship between these two measures.
Change in total hours worked vs. change in occupied rooms
Analyzing the data presented in Exhibit 3, we are able to make the following observations regarding the changes in productivity at U.S. hotels.
In 2002, the decline in occupied rooms that continued from the 2001 recession was matched with a cut in the number of hours worked.
As occupancy levels began to recover in 2004 and 2005, there was a commensurate increase in staffing (hours worked).
In 2006 and 2007, we saw increases in the number of hours worked grow at a pace higher than the rise in occupied rooms, thus indicating a decline in productivity.
One explanation for this divergence is the fact that hotels were achieving double-digit profit growth during this period, thus easing the pain in the loss of productivity. In addition, average daily room rates (ADR) were growing two to three times the pace of inflation, and hotel managers enhanced the levels of services and amenities offered to justify the increase in ADR.
As the 2008-2009 industry recession took hold, hotel managers once again cut staffing levels in the face of sharp declines in occupancy.
In 2010, the number of rooms occupied increased by 6.2 percent, yet the number of hours worked grew by just 1.5 percent. This is indicative of a very healthy increase in employee productivity.
This increase in productivity is not only evident given the favorable ratio of occupied rooms and hours worked, but for the first time in recent history, hotel labor costs declined when measured on a dollar-per-occupied-room basis, while increasing on a dollar-per-available-room basis. What we do not know is whether the increase in productivity was the result of effective scheduling and training. Or, were hotel managers surprised, like most industry participants, by the strong increase in occupancy and caught short staffed?
Projections
In addition to our compensation model, we developed an approach that allowed us to forecast changes in unit-level labor costs by analyzing changes in real ADR, real hospitality compensation, and rooms occupied. Once again, by subtracting the forecast change in compensation from the forecast change in labor costs, we were able to develop a forecast of changes in total hours worked for 2011 and 2012. Our projections are presented in Exhibit 4.
Forecast Changes in the Drivers of Labor Cost
For 2011 and 2012, 1 PKF-HR is projecting continued enhancements in productivity, accompanied by restrained increases in compensation. This results in relatively modest increase in unit-level labor costs. A series of factors provide the basis for our estimates:
Hotel managers, still feeling the shocks of the 2009 industry recession, remain hesitant to hire additional staff. Instead of hiring new employees, we believe hotel managers will continue to raise compensation for their existing staff, while asking for more productivity.
High levels of unemployment are serving to mitigate the pressure to raise salaries and wages.
Fearful of unemployment, employees are receptive to requests for additional productivity.
While ADR is forecast to grow, the increases will not reach the magnitude seen in the mid-2000s. This puts less pressure on management to justify rate increases with extra levels of service and amenities.
Conclusion
During the depths of the 2008-2009 industry recession, hotel managers instituted tremendous gains in productivity that were sustained as business volume and revenues picked up in 2010. While compensation levels have increased, management has instituted policies and practices that have yielded greater productivity per hour, thus limiting the total amount hotels have paid for salaries, wages, bonuses, and benefits.
It is our belief that the labor-cost-control lessons learned during recent recession will be sustained during the current recovery period. Significant gains in ADR, lodging supply, employment, and private industry compensation are not expected for several years. Until these factors reappear, hotel labor cost increases should remain in check.
Footnotes
Acknowledgements
Aaron Walls and Jamie Lane with PKF-HR provided research assistance.
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
The author(s) received no financial support for the research, authorship, and/or publication of this article.