• Chapter 7 MANAGING THE COST OF LABOR OVERVIEW This chapter details the techniques used to control costs by establishing and monitoring labor cost standards. In this chapter, you will learn about the factors that affect labor productivity, as well as methods for improving labor productivity. The chapter will teach you how to schedule employees based on established labor standards, as well as how to compute the labor cost percentage and other measures of labor productivity. CHAPTER OUTLINE Labor Expense in the Hospitality Industry Assessing Labor Productivity Maintaining a Productive Workforce Measuring Current Labor Productivity Managing Payroll Costs Reducing Labor-Related Costs Key Terms and Concepts, and Test Your Skills HIGHLIGHTS At the conclusion of this chapter, you will be able to: 䊊 Identify the factors that affect employee productivity.
䊊 Develop appropriate labor standards and employee schedules for use in your foodservice operation. 䊊 Analyze and evaluate your actual labor utilization. Labor Expense in the Hospitality Industry Having the correct amount of food and beverage products in the operation to serve guests is important. Knowing how those products should be pre- 275 276 CHAPTER 7 MANAGING THE COST OF LABOR pared is vital also.
Consider, however, the case of Pauline. She manages the cafeteria of a large urban hospital. Generally speaking, the quality of food she provides is quite good. Both hospital staff and patients’ visitors, who constitute the majority of her guests, have good things to say about the quality of her food.
They complain often, however, about the slowness of her cafeteria line, the dirty tables during the busy lunch hour, and the frequent running out of items on both the beverage and the salad bars. Pauline often feels that she needs more employees. She knows, however, that her current staff is actually larger than it was a few years ago. Of course, business is better today also.
Many more guests are served per day now than before Pauline was the manager. Her question is, “Do I have the right number of employees scheduled at the right times for the number of guests I anticipate today?” Unfortunately, Pauline is so busy “helping” her employees get through the meal periods that there seems to be little time for thinking and planning about the strategies and techniques she will have to apply if she is to solve her labor-related customer service prob- lems. In years past, when labor was relatively inexpensive, Pauline might have responded to her need for more workers by simply hiring more em- ployees. Today’s foodservice manager, however, does not have that luxury.
In the current tight and increasingly costly labor market, you will need to learn the supervisory skills to motivate your current staff, as well as the cost control skills required to effectively evaluate their efforts. When you do, you will be able to accomplish all necessary tasks and stay within your allotted labor budget. At one time, labor-related expenses were much less important to the foodservice manager than they are today. In some foodservice establish- ments, the cost of labor exceeds the cost of food and beverage products.
Today’s competitive workforce would indicate that future foodservice managers may well find it even more difficult to recruit, train, and retain an effective cadre of employees. Therefore, the control of labor expenses takes on a greater level of importance than ever before. In some sectors of the foodservice industry, a reputation for long hours, poor pay, and unde- sirable working conditions has caused quality employees to look else- where for a more satisfactory job or career. It does not have to be that way, and it is up to you to help ensure that in your organization it is not.
When labor costs are adequately controlled, management has the funds neces- sary to create both desirable working conditions and pay a wage neces- sary to attract the very best employees the labor pool has to offer. In every service industry, better employees mean better service and, ultimately, better profits. Labor Expense Defined Payroll is the term generally used to refer to the salaries and wages you will pay your employees. Labor expense includes salaries and wages, but it consists of other labor-related costs as well.
In addition to salaries Labor Expense in the Hospitality Industry 277 and wages, the following expenses are also related to employees and, thus, are considered labor expenses: 1. Group life insurance 5. Pension/retirement plan payments 7. Employee training expense 9.
Employee uniforms, housing, and other benefits 11. Vacation/sick leave 12. Employee incentives and bonuses Not all foodservice units will incur all of the preceding costs. Some will have additional costs.
You can be sure, however, that regardless of the facility you manage, you will incur some labor-related expenses in addi- tion to payroll costs. The critical question you must answer is similar to the one posed by Pauline in the previous example. That is, “How much should I spend on payroll and labor expense to provide the quality of prod- ucts and service that I feel is appropriate?” Before turning to that question, it is important that you fully understand the components of payroll and la- bor expense. Payroll Payroll refers to the gross pay received by an employee in exchange for his or her work.
That is, if an employee earns $8.00 per hour and works 40 hours for his or her employer, the gross paycheck (the employee’s pay- check before any mandatory or voluntary deductions) would be $320 ($8.00 per hour ⫻ 40 hours ⫽ $320). This amount is considered a payroll expense. If the employee earns a salary, that salary amount is also a payroll expense. A salaried employee receives the same income per week or month regardless of the number of hours worked.
Thus, if a salaried em- ployee is paid $500 per week whether he or she works 40 hours in that week or more than 40 hours, we consider that $500 part of the payroll ex- pense also. Payroll, then, is one part of labor expense. Fixed Payroll Versus Variable Payroll When you manage a foodservice facility, you must make choices regarding the number and type of em- ployees you will hire to help you serve your guests. Some employees are needed simply to open the doors for minimally anticipated business as, for example, a manager whose payroll includes one server, one cook, and the 278 CHAPTER 7 MANAGING THE COST OF LABOR manager.
In this case, the cost of providing payroll to these three individ- uals is called a minimum-staff payroll. Minimum staff is used to desig- nate the least number of employees, or payroll dollars, required to operate a facility or department within the facility. Suppose, however, that you anticipate much greater volume on a given day. The increased number of guests expected means that you must have more cooks, more servers, added cashiers, more dishroom person- nel, and, perhaps, more supervisors to handle the additional workload.
Clearly, these additional staff positions create a work group that is far larger than the minimum staff, but is of a size that you feel is needed to adequately service the anticipated number of guests. In this case, your staff size would far exceed that of the minimum staff. Some managers confuse the minimum-staff concept with that of fixed payroll and variable payroll. Fixed payroll refers to the amount an operation pays in salaries.
This amount is fixed in that it remains un- changed from one pay period to the next unless the individual receiving the pay separates employment from the organization. Variable payroll consists of those dollars paid to hourly employees. Thus, variable payroll is the amount that “varies” with changes in volume. Generally, as you an- ticipate increased volume levels in your facility, you will add additional hourly employees.
When lower levels of volume are anticipated, the num- ber of hourly employees scheduled will likely decrease. In a similar man- ner, if increased volume levels are anticipated to sustain themselves over a long period of time, you may determine that additional salaried employ- ees are beneficial to your organization. The distinction between fixed and variable labor is an important one, since you may sometimes have little control over your fixed labor expense, while, at the same time, exerting nearly 100% control over variable labor expenses that are above your min- imum-staff levels. Labor Expense Labor expense refers to the total of all costs associated with maintaining your foodservice workforce.
As such, labor expense is always larger than payroll expense. Foodservice managers must keep in mind that total labor expense will always exceed that of payroll. As the cost of providing em- ployee benefits increases or employment taxes go up, labor expense will increase, even if payroll expense remains constant. Most foodservice operators have total control over their payroll ex- pense.
It is, therefore, often referred to as a “controllable” labor expense. Those labor expenses, on the other hand, over which an operator has lit- tle or no control are called “noncontrollable” labor expenses. These ex- penses include items such as federal- or state-mandated payroll taxes, in- surance premiums, and retirement plan payments. In reality, however, you can exert some control even over these noncontrollable labor ex- penses as, for example, a foodservice manager who works very hard to Assessing Labor Productivity 279 ensure a well-trained workforce in a safe environment and achieves, thereby, a lower rate on accident and health insurance for his or her em- ployees.
In this chapter, we shall deal primarily with payroll-related ex- penses. This is in keeping with the concept that these are the most con- trollable of our labor-related expenses, and the ones most managers will evaluate when they are called upon to control labor expenses. In order to determine how much labor is needed to operate the busi- ness, a foodservice manager must be able to determine how much work each fixed and variable employee can perform. If too few employees are scheduled on any given day, poor service and lack of sales can result, as guests go elsewhere.
If too many employees are scheduled, payroll and other labor expenses will be too high for the day, resulting in reduced profits. The solution is to know how many employees are required given the estimated number of guests anticipated on any given day. In order to determine this number of employees, you must have a clear idea of the productivity of each of your employees. Productivity, simply put, is the amount of work performed by an employee in a fixed period of time.
Assessing Labor Productivity There are many ways to assess labor productivity. In general, productivity is measured in terms of the productivity ratio as follows: Output ᎏ ⫽ Productivity Ratio Input Take, for example, a restaurant in which four servers are employed to serve 60 guests. Using the productivity ratio formula, the output is guests served, the input is servers employed, as follows: 60 Guests ᎏᎏ ⫽ 15 Guests per Server 4 Servers This formula demonstrates that, for each server employed, 15 guests can be served. The productivity ratio is one server per 15 guests (1/15) or, stated another way, 15 guests to one server (15 to 1).
There are several ways of defining foodservice output and input; thus, there are several types of productivity ratios. Some of these will be presented later in this chapter. All of these productivity ratios are helpful in determining the answer to the question, “How much should I spend on labor?” The answer, however, is more complicated than it might seem at 280 CHAPTER 7 MANAGING THE COST OF LABOR first glance. In the preceding example, you know that, on average, one server can serve 15 guests.
But how many guests will a slow server serve? How about your best server? How much do we pay for our best server? Our poorest? Are you better off scheduling your best server if you antici- pate 20 guests or should you schedule two of your slower servers?