to Control Labor Costs
two major “cost centers” at your restaurant. One is food and
beverage. The other is labor. Which one do you think is most
If you said labor, either you’ve
been running a restaurant for at least a few months, or you have
some genuine insight into the challenges of running a restaurant.
Labor issues are still the No. 1
concern of most restaurant owners and managers. Food and beverage
costs are held in check through price adjustments, portion controls
and through purchasing efficiencies. On the other hand, labor costs
are not controlled by paying low wages. First, the minimum wage sets
the floor for the price of labor in the United States. Second, and
more importantly, there is a matter of supply and demand. Most
restaurateurs know there are simply not enough qualified applicants
for the positions they need to fill.
Labor costs are controlled through
sound scheduling and improving employee productivity. You increase
productivity through training, better kitchen and dining room
layouts, and the use of labor-saving equipment and products. That
said, this article does not go into those human resource issues as
much as it addresses cost-related issues and ways to increase
employee productivity — the areas in which you have most control. It
emphasizes the importance of scheduling in controlling labor costs
and the ways to collect and analyze payroll data.
The Power of
Numbers and Observation
It is very difficult to fly
successfully by the seat of your pants in any complex business.
Before you can develop appropriate and effective measures for labor
cost control, you must gather the necessary information on which to
make your decisions. Therefore, the accumulation and reporting of
relevant labor cost information is critical. To do this, you need
more than your calculator; you need to look around you.
Productivity and labor cost
efficiency cannot be addressed and assessed only in “quantitative”
terms, i.e., “straight numbers.” If you’ve been tracking your
ratios, you might be encouraged to find that payroll comprises a
lower percentage of overhead or that you are finding the number of
customers per labor hour is creeping up. And these can be good
signs. Just don’t lose sight of the “qualitative” side of these
activities, i.e., the stuff you can figure out by looking around
you, asking questions, and using common sense. If customer service
is compromised, the initial savings of a lower payroll cost can be
negated by a decrease in sales caused by customer defections to
On that note, employees cannot be
viewed and treated as “inputs” without feelings, needs, and fears.
Every time the industry has faced a labor shortage, it becomes more
empathetic to the needs of employees. This is accompanied by a
temporary and short-term shift away from a bottom-line mentality to
one emphasizing employee retention and job satisfaction. We have to
remind ourselves that the two most important groups of individuals
affecting our business’s success are the customers and the
employees. Both must be given the same respect and appreciation.
Don’t Hang Your
Hat on the ‘Payroll to Total Sales’ Ratio
When trying to determine the
productivity of your staff, the traditional ratio of “payroll to
total sales” is not an effective and accurate measure of worker
productivity and scheduling efficiency. Essentially, you pull this
ratio from your income statement to tell you how much sales you are
squeezing out of your payroll expense. What could be more telling?
Well, there are three reasons why additional measures must be used
to analyze labor costs.
First, ratios such as this are not
enough to help you sleep well at night (or keep you up at night,
depending on the figure). The traditional labor cost ratio really
just indicates to management what needs to be addressed, without
providing any specific information. For example, typically, the
monthly income statement shows the payroll for the entire month as a
single figure. Since the figure is a composite of wages from
employees in all job categories, e.g., servers, cooks, and
dishwashers, it is impossible to tell from the percentage which
category is the cause of the variance from standard cost. Further,
it does not tell management which meal period or day of the week the
greatest variance occurred.
Second, the figures reported on the
monthly income statement are historical and after-the-fact. Even if
the completed statement is reviewed by management the first week of
the following month, nothing can be done about what has transpired.
Labor cost must be pre-controlled. This requires labor cost figures
to be compiled at least weekly and preferably daily.
Third, the payroll percentage is
“distorted” by increases and decreases in sales. When business is
good, the percentage of payroll to sales is low. Exactly the
opposite occurs when sales are low. The decline or increase in the
percentage is in no way always an indication that labor productivity
is higher or lower; it is partially caused by the large fixed-cost
component of payroll. In addition, the percentage can be further
distorted by increases in menu prices, wage rate increases, discount
promotions and shifts in the menu sales mix.
So what is the best measure of
productivity? There is no one magic ratio. You need to monitor
several benchmarks, to take the pulse of the house.
“To Measure Productivity, You Need Several Benchmarks” on this
Don’t Just Schedule It
You cannot control labor cost until
you understand that you are not “scheduling” people but rather
“purchasing” the potential to do work. There is a tendency to
schedule more people than are actually needed because of the fear of
being short-handed. If the expected increase in business never
materializes and everyone scheduled shows up, productivity declines.
The only conceivable reason for scheduling an additional employee is
that certain work needs to be done and that person will be able to
do the required job. While many operators are feeling the effects of
the short supply of quality applicants, the scheduling of employees
within their payroll budget is sometimes contrary to their ability
to sustain service quality to the customer.
As you know, the cost of employing
a worker is far greater than his total net pay, regardless of the
worker being salaried or hourly. Labor cost can be defined as any
cost incurred as a result of employing a worker. You can estimate
that an employee’s total compensation, be it deferred or otherwise,
is at least double his earnings before taxes. Additional costs of
employing a worker include fringe benefits like insurance, paid
vacations, profit sharing, uniforms, meals, training costs,
discounts, retirement plans, and the like. Therefore, total labor
cost includes any cost incurred as the result of employing a worker.
You must resist the temptation to
“panic hire.” Panic hiring occurs when you have been working
short-handed for several weeks and the applicant pool does not have
the qualifications you want. However, you have not had a day off in
three weeks and you are fearful that other employees who have been
working overtime are getting close to quitting themselves.
Subsequently, in desperation you hire the “best” of the applicants
you have interviewed instead of holding out for the right person.
You may end up creating more problems by doing this than if you
worked through it until you were able to get the kind of applicant
you really need.
Most of Your Labor
Cost is a Fixed Expense
Realize that the greatest portion
of your labor cost is a “fixed” expense. If you break down your
payroll into “fixed” and “variable” cost labor, you will likely find
that the largest portion of your payroll is “fixed,” i.e., a
constant expense of the business that does not change based on
sales, number of employees, or other variables. The fixed-cost
portion of payroll is not just management salaries that must be paid
regardless of sales volume. It is also the hourly employees you need
to schedule on the slowest hours, meal periods and days of the week.
It is your “skeleton crew” or the bare-bones staff you need to open
your doors even when sales revenues fall to their lowest levels. It
can only go lower if you start having management and other employees
doing more than one job like cooking, bartending or waiting tables.
At this point, labor cannot be further reduced without lowering of
The employees who are added to the
fixed schedule as business increases are your “variable cost
employees.” Few restaurants bring in the entire shift of employees
at the same time. They arrive in half-hour intervals and schedules
are staggered to correspond to the arrival of customers. On busy
nights additional servers, bussers and kitchen staff are scheduled
to handle the increased volume of business. It is having too many
variable-cost employees on the schedule that puts payroll
percentages over standard costs.
Labor cost does not increase
proportionally with sales increases. This will cause labor cost
percentage to fluctuate without management doing anything with the
schedule. For example, an increase of 50 customers an hour will
require one or two more servers to be added to the schedule while
other job categories remain constant. Additional bartenders or
hostesses may not be added to the schedule until customer counts
increase by 100. Subsequently, payroll costs will increase in
incremental steps, not in direct proportion to sales.
As customer counts reach their
maximum and the restaurant is on a wait, the maximum number of
employees is scheduled. No additional employees will be added
because productivity will not be increased and they may even get in
each other’s way. Technically, labor cost is “fixed” at the maximum
as well as the minimum business volume. However, unless the
restaurant opens to a wait and remains on one until closing,
scheduling will include both fixed- and variable-cost employees.
The take-home point: Set up a
reporting and evaluation system to monitor labor costs. Analysis of
labor cost begins with the assembly of data and its organization in
a format that can be readily interpreted by management. Without cost
data, there can be no analysis. The data required is already
assembled in your payroll and sales reports. It needs to be put into
a format that allows you to see the relationships between the
numbers. When customer counts are broken down by meal periods and
days of the week and cross-referenced with labor hours, sales
revenues and payroll costs, the format will reveal the days, meal
periods and job categories that are not within your standards.
The measurement criteria used to
analyze labor productivity must be held constant over time. If the
criteria are changed, interpretation of current data with historical
records will be distorted. For example, customers or covers, the one
inflation proof criteria used in scheduling and labor cost
productivity analysis, must clearly define what constitutes “one
cover.” Do you count small children? Do you count adults that do not
order a full breakfast? Do you count “seats” or “orders”? What you
do is your decision. What is most important is that customers are
counted in a consistent manner.
A coffee shop in a motel decided to
stop counting “coffee only” customers that came in every morning
after they had been counting them for several years. This gave the
impression that customer counts were down about 20 percent. This
made the historical breakfast customer counts relatively useless.
What they should have done was to simply count “coffee only”
customers separately, but keep a tally of them so overall customer
counts could be compared.
Any cost analysis system requires
that standards of scheduling be based on forecasts of customer
counts over the payroll period. Typically, forecasts should be made
for a 10-day period to a two-week period of time. The time frame
should correspond to your restaurant’s payroll period. The heart of
the labor analysis is the measurement of actual labor hours and
customer counts against the forecasted figures. Organizing weekly
payroll data into a format that will allow you to see how payroll
costs are broken down will greatly improve your insight into
controlling labor cost. The comparison of current figures with past
periods will indicate where variances in labor cost standards are
occurring. Total aggregate figures by themselves will not provide
the detail needed for cost analysis. By monitoring the labor cost
per cover by job category, you can quickly determine where over
scheduling took place.
Costs Through Better Scheduling, Not Lower Wages
As noted, one does not control
labor cost by keeping salaries and wages low. In fact, operations
paying less than the going wage rate in their locale will find it
difficult to hire and retain the more productive employees. Think
about it. If you felt you were a very good bartender, cook or
manager, would you quit your current job and go work for someone who
paid you less than you were making? I don’t think many of us would
work for less.
It is not unusual to find low
productivity and inefficiency in operations where low wages are paid
relative to other operations of its type in the immediate area. This
is because a low wage scale will primarily attract marginal
employees whose efficiency, work ethic and temperament disqualifies
them from getting identical positions in companies paying
above-average wages to above-average applicants. The better
employees will go where they will be better compensated for their
skills and abilities.
A regional fried chicken operator
seeking to sell franchises asked me to help him develop a franchisee
manual. When I went over his job categories and wage rates I
discovered that the highest-paid hourly employees were making only
10 cents to 20 cents per hour more than the starting hourly rate. I
asked about this and was told that employees quit when they were not
given raises, and that did not concern the manager since he could
just hire someone else at a lower rate. He believed that paying
lower wages was a way to control payroll.
About one-third of all employees
who leave a job voluntarily, leave for better pay. You may have
heard that money cannot be a motivator for increasing productivity.
Well, it is probably true that just increasing the wages of an
employee will not necessarily mean they will be more productive, but
when money is used as a reward for outstanding performance, it can
be an effective motivator.
There are a number of scheduling
methodologies you can use that will reduce your labor costs just by
adjusting when you have employees arrive and depart from work.
Efficient scheduling must reflect the variations in business volume
that occur during the day and even meal period. Your goal is to
accomplish the necessary workload with a minimum number of labor
hours while maintaining your level of service.
Productive employees should be
rewarded with pay increases and earn more than average employees.
Treat your valuable employees like you do your most valuable
customers. Realize that the labor cost per cover and the number of
covers per labor hour can be improved only with productive
employees. If productive employees are treated no differently from
marginally productive ones, there is no benefit to the employee to
do more than average for he or she will get the same enumeration
Measure Productivity, You Need Several Benchmarks
No single measure can be used to
evaluate labor productivity; management must employ multiple
measures collectively. Management must have a better index of labor
productivity and no single measure can efficiently accomplish that.
Therefore, additional measures are needed to properly analyze labor
costs. The additional information needed is readily available as it
is compiled on a daily or weekly basis. These measures are:
Where do you start? Each time
payroll is processed, total labor hours by job category are tallied.
Management will compare actual hours worked to those originally
scheduled and look for variances. If hours worked are greater than
scheduled hours, they will investigate to determine the job category
where the variance occurred.
Employee schedules are determined
not by revenue but by customer counts, aka “covers.” The “covers per
labor hour” is perhaps the most “inflationproof” indicator of labor
productivity compiled by a foodservice operation because it is not
distorted by the way sales are affected by price increases and
discounts. Although some drops in customer counts occur in the long
run when prices are increased, covers per labor hour remains the
most effective indicator of employee productivity. The number of
covers per labor hour is calculated for each job category as well as
for the entire payroll by dividing total labor hours by the customer
The “labor cost per labor hour” is
another productivity index. It is calculated by dividing total
payroll by total labor hours. When calculated by respective employee
job categories, one can readily see the wage differentials between
jobs. This information can assist management in establishing wage
ranges for each job category.
The third index of productivity is
the “labor cost per cover.” This tells us how much labor is used to
serve each customer that comes into the operation. The total payroll
is divided by the number of customers. Analysis of this index by job
category will show a very wide spread between categories like
hostess/cashiers, servers and cooks. The averages in each job
category are controlled by the number of employees, the average
hourly wages, and the number of hours worked.
Check out this example:
Total Payroll Cost = $1,400
Total Labor Hours = 200
Total Covers Served = 1,500
Covers per Labor Hour (1,500/200) =
Labor Cost per Labor Hour
($1,400/200) = $7
Labor Cost per Cover ($1,400/1,500)
= 93 cents
Reprinted courtesy of David Pavesic and Restaurant Startup & Growth magazine
(c). All rights reserved
|Dr. David Pavesic is
currently the Graduate program Director of the Cecil B. Day
School of Hospitality at Georgia State University. He is a
former restaurant industry corporate executive, and owner of
two causal dining Italian restaurants. He is the author of
The Fundamental Principles of Restaurant Cost Control;
Menu Pricing and Strategy; and the six booklet
Restaurant Manager Handbook series. He can be reached at