CONTROLLING PAYROLL COSTS
(Article published in Canadian Hotel Lodging News)
The most critical cost to control for any operation in North America is payroll…it is the most expensive, the most difficult to manage, determines the greatest impact on profitability, and equally important, will directly govern the quality of the product and service experienced by your guests. Many business operations determine labour cost by using historical data, usually adjusting payroll costs during the annual financial budget. This process assumes that the business was operating at optimum efficiency, and that guest expectations, systems and all other factors have remained the same. The reality in business is quite different; in fact by using past experience and data we are inheriting financial mistakes, repeating poor management habits, and assuming that we do not need to change our product to meet new trends in the market. The management of payroll is a balancing act; it is a process that in the simplest terms requires that the correct number of employees is scheduled to meet the demands of the business. Too many employees and profitability is jeopardized, too few and the level of service and quality of the product is compromised. In principle it appears a simple process, but reality proves to be different
Take for example the airline business. Airlines are one of the few industries that know exactly when their customers will arrive, how long they need to check-in a passenger, and how long it takes to load a plane. They possess all the information they need to process passengers with absolute efficiency and minimum cost…. but how often are you kept waiting in line to check in at the airport?
A misconception concerning payroll, is that senior management control expenditure, in reality they merely record the results. The control of payroll cost in any operation is quite clearly managed by whoever completes department schedules, which is usually at the supervisory level. The supervisory level in any operation is directly subjected to the pressure and demands of the employees which can often influence decisions that may not be in the best interests of the business. Therefore to be effective, any system to control labour cost must guide and limit the decisions made at department level to ensure that the end results are within budgeted parameters.
The Key to managing payroll is an effective model
The key to managing labour cost and maintaining the desired quality of service is to establish an effective Payroll Model in conjunction with a system that will provide immediate feedback on revenue and cost results. A Payroll Model will enable you to not only control labour costs, but also consciously determine the level of service you provide, measure efficiency, and budget more effectively by providing the data and structure to make sound financial decisions. The introduction of a Payroll Model into an operation will effectively justify the validity of each position, identify fixed and variable cost break points, and establish payroll hours and cost for each level of revenue. When established, the model will provide clear and concise parameters for scheduling, facilitate the measurement of management performance by providing a comparison of revenue projections and cost, provide the rationale for annual budgets, and deliver accurate information for cash flow projections.
The development process is as important as the Model
The management process involved in the development of a Payroll Model is as important as the model itself.Success is dependant on obtaining commitment from the management team that will implement and supervise the Model; they have to be an integral part of the process. The difficulty is that in many cases, the management and supervision have often created the current situation, view the process as an audit and are not always inclined to welcome the change that will ensue. A third party is required to lead the development of the Model, as left to the existing management team alone it may end up as a way of justifying an unacceptable situation.
The introduction of a Payroll Model will demand more precise scheduling from the existing management team and in conjunction with a reporting system will provide accurate information by which the operational results and individual performance and contribution of each team member can be measured. Payroll models provide such an obvious solution that you question why so many properties manage by relying on historical information to determine their future payroll costs.
The development process provides the opportunity to examine the cost structure in detail, rationalise payroll costs, and determine specific standards that will ensure consistency in the quality of the product and serviced delivered to the guest. In addition, Payroll Models provide accurate data for measuring the effectiveness of the operational management team, projecting realistic budgets and determining future cash flow requirements.