Per the Bureau of Labor Statistics, the average hourly compensation for a hospitality industry employee increased 3.6 percent in 2016. In the hotel industry, labor costs average roughly 50 percent of total operating expenses. Therefore, with STR reporting an annual revenue-per-available-room growth rate of 3.2 percent for the year, it is understandable that U.S. hotel owners and operators were concerned about their ability to increase profits.
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 just 2.8 percent during the year. Given the 3.6-percent rise in compensation, the 2.8 percent 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 their best efforts, labor costs still accounted for 90 percent of the 1.6-percent rise in total operating expenses from 2015 to 2016. Further investigation reveals that it was the nonbenefit component (payroll) that was the main driver of labor costs during the year. Payroll by itself accounted for 66.8 percent of the 1.6 percent total operating expense growth rate.
The CBRE Trends survey tracks five payroll subcategories 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 (USALI). They are:
- Salaries and wages: non-management
- Salaries and wage: management
- Service charge distribution
- Contract, leased or outsourced labor
- Bonuses and incentives
A sixth subcategory is used to track other compensation data that is not identified, but this totals just 0.6 percent of payroll costs.
Analyzing the salaries, wages, service charges, contact/leased labor and bonus payments made by U.S. hoteliers in 2016 provides insight into how they were able to contain the increase in labor costs to 2.8 percent. 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 nonbenefit compensation as “payroll.”
The salaries and wages paid to nonmanagement personnel comprised 63.8 percent of payroll in 2016, followed by the salaries and wages paid to management (24.1 percent). The remaining 12.1 percent consisted of service charge distributions, payments to contract/leased labor, bonuses and unassigned payroll.
Nonmanagement salaries and wages measured as a percent of payroll was greatest at limited-service hotels (69.5 percent), while management salary and wage payments were the most at extended-stay hotels (29.8 percent). 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 percent) and resort (6.2 percent) hotels. All-suite hotels allocated the greatest percent of their payroll dollars to contracted/leased employees (6.7 percent). Resort hotels, the property type that achieved the greatest gain in gross operating profits (GOP) in 2016, also spent the greatest percent of payroll on bonus payments (4.4 percent).
From 2015 to 2016, the payroll component that saw the greatest percentage increase was service charge distributions (12.3 percent). In many jurisdictions, management has limited control of these mandatory payments that must be made to employees. The increase in payments made to contact/leased labor (5.4 percent) exceeded the growth in salaries and wages paid to management (3.0 percent) and nonmanagement (2.8 percent). The slowdown in gross operating profit growth most likely contributed to the 5.5 percent decline in bonus payments made in 2016, compared to 2015.
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 percent 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 percent. Resort hotels reported the highest incidence payments made to contract/leased employees (67.5 percent), while extended-stay hotels appear to use contract/leased employees the least (35.7 percent).
Among the operating and undistributed departments, the greatest use of contract/leased employees in 2016 occurred in the food-and-beverage department (33.7 percent of hotels), followed by the rooms (33.3 percent) and administrative and general departments (17.5 percent). 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 percent of the sample in 2015 to 18.1 percent in 2016. Resort hotels are the property type most likely to pay a service charge to their employees (62.9 percent). As expected, the distribution of service charges was most frequently observed in the food-and-beverage department (39.7 percent), followed by the rooms department (4.6 percent).
While the aggregate dollar amount of bonus payments made by the study sample declined 5.5 percent 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 percent of the total sample. In 2016, this metric increased to 89.7 percent.
Employees in the sales and marketing (91.6 percent of hotels) and administrative and general (80.1 percent) departments were mostly likely to be paid a bonus This is consistent with the typical compensation agreements for general managers, 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 general managers 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.
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.