Usually expressed as a percentage, Labour Cost Ratio provides revenue managers with a key performance indicator to compare labour costs to hotel revenue. It shows the amount of labour costs required to produce each dollar of sales.
Employee salaries or wages are generally a large percentage of total labour costs. Other examples of labour costs include medical insurance, workers’ compensation insurance, pensions contributions and related taxes, and life insurance.
What is Labour Cost Ratio For?
Hotel managers regularly calculate and observe labour cost ratios to find opportunities to save on salary costs. It is also used for identifying major inefficiencies in labour costs. As the labour cost ratio for a hotel decreases, it can be seen as increasing the efficiency of its labour force. In other words, a lower labour cost ratio is viewed favorably for a hotel’s bottom line.
Benefits of Labour Cost Ratio
The major benefit of calculating the labour cost ratio for a hotel is to see if the hotel is overspending on employee wages or salaries. These ratios can be broken down by department to further analyze labour costs, as well as identify areas in which the company can reduce these costs.
Limitations of Labour Cost Ratio
Employee satisfaction plays a large role in creating a healthy guest experience at a hotel, and also impacts employee productivity — i.e. how much value employees produce per wage/salary dollar paid. Therefore, managers must assess many other methods of increasing sales revenue before solely focusing on reducing labour costs.
How is Labour Cost Ratio Calculated
The Labour Cost Ratio is calculated by dividing labour costs by total sales. The result is then multiplied by 100 to represent the final ratio as a percentage.
Example of Labour Cost Calculation
Labour Cost Ratio = (Labour Costs / Total Sales) x 100
Labour Costs = $840,000
Total Sales = $20,260,000
Labour Cost Ratio = ($840,000 (Labour Costs) / $20,260,000 (Total Sales)) x 100 = 4.15%