Labor Cost Trends in 2020

In 2020, total labor and related costs were cut by 51.8% to offset the 58.0% decline in total revenue.

By Robert Mandelbaum - Director of Research Information Services at CBRE Hotels and David W. Heath - Principal at Heath & Company Hospitality Advisors

2 August 2021
Robert  Mandelbaum
Robert Mandelbaum
David   W. Heath
David W. Heath

Based on CBRE’s survey of monthly operating performance, U.S. hotels experienced a 58 percent decline in total hotel revenues from 2019 to 2020. This resulted in a decrease of 78 percent in profits at the Gross Operating Profit (GOP) level, along with a 107 percent fall off in Earnings Before Interest, Taxes, Depreciation, and Amortization.

To minimize the negative impact on profits, management had no alternative but to take drastic action. In 2019, total labor costs and related expenses comprised 50.2 percent of hotel expenses through GOP. Therefore, operators naturally looked at controlling employee related expenditures to help limit the declines in hotel profits.

During 2020, thousands of hotels let go hourly associates and enlisted managers to fill line level functions. In other instances, including at least one well-known operator, all middle managers were released, leaving local General Managers and Directors of Sales & Marketing to oversee a skeletal line staff.

Food & Beverage offerings were scaled back dramatically, reflecting unprecedentedly low occupancies, as well as the uncertainties of how to serve patrons safely. Buffets all but disappeared. Spas closed for the most part during much of the pandemic’s duration. The use of contract/leased labor as a percentage of total payroll costs declined significantly as the need for supplemental labor fell off with the decline in overall volume.

In certain circumstances, additional time was needed from employees. Housekeeping tasks became more extensive in sync with enhanced sanitation and safety protocols, thus resulting in increased hours until local restrictions were lifted. The need for security personnel increased as re-opened hotels coped with social distancing mandates and the administration of temperature checks.

To analyze changes in hotel labors costs during 2020, CBRE and Heath & Company Hospitality Advisor LLC examined the operating performance of 3,254 U.S. hotels that submitted detailed 2019 and 2020 labor expenditure data to CBRE’s annual Trends® in the Hotel Industry survey. In 2020, these properties averaged 219 rooms in size, with an occupancy level of 36.3 percent and an average daily rate (ADR) of $133.41.

Cost Cuts

From 2019 to 2020, total labor and related costs declined by 51.8 percent at the hotels in the sample. Burdened with the greatest declines in revenue, along with extensive services and amenities, full-service, convention, all-suite and resort hotels required the greatest number of employees on a per room basis. Accordingly, these properties found it more difficult to cut labor costs compared to limited-service and extended-stay properties.

The decline in total labor costs was driven mainly by the salary and wages component. During 2020, the combined expenditures for salaries and wages, bonuses and incentive payments, contract and leased employees, and service charge payouts fell 55.3 percent.

Concurrently, payroll-related expenditures (employee benefits) declined by just 35.2 percent. A large part of payroll-related expenses is fixed in nature. The health insurance premiums for retained employees and extended benefits to furloughed staff caused this portion of labor costs to rise by 33.7 percent when measured on a dollar per available room basis (POR).Salary and Wage Components

CBRE tracks five discrete components of salaries and wages. In 2020, the greatest percentage declines were observed in service charge payments and bonuses. This is to be expected given the falloff in revenues and profits. Across all property types, the percent of properties in the sample that reported some degree of bonus payment declined from 87.1 percent in 2019 to 78.5 percent in 2020. The greatest declines were reported in the Food and Beverage, Administrative and General, and Sales and Marketing departments.

Among the direct Salary and Wage categories, the declines were greater for non-management personnel (-59.4%) compared to management (-36.0%). Most non-management personnel are paid on an hourly basis, and therefore more susceptible to declines in business volume. Management cuts were made, but minimum levels of management were retained to preserve reduced operations and the value of the physical facility.

Due to labor shortages and the desire to control employee benefits, the use of contract and leased labor was on the rise before 2020. However, with the decline in business volume, the need for contract/leased employees lessened in 2020. Payments made to contact and leased labor declined by 60.4 percent in 2020. This is consistent with the decline in the percent of hotels in the sample that reported contract/leased labor payments from 56.8 in 2019 to 52.3 in 2020. The greatest decline in the use of contract/leased labor was seen in the rooms department. An interesting exception is the increase in reported contract/leased labor payments in the information and telecommunications systems department as properties opted to eliminate fixed staff and outsource technology related functions.

While the incidence of bonus and incentive payments did not decline dramatically, it should be noted that the aggregate bonus and incentive payments made to hotel employees in 2020 did fall off by nearly 80 percent during the year.

Lessons Learned

Looking forward, operators will be challenged to maintain the depth of the staffing cuts made in 2020. Not only will occupancy levels rise, eventually hotels will re-open some of the services and amenities removed in 2020 to compete and justify room rate increases. The factors will result in the direct need for more employees.

Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
Labor Cost Trends in 2020
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Robert Mandelbaum

Robert Mandelbaum is the Director of Research Information Services for CBRE Hotels Americas Research. He is based in the firm’s Atlanta office, where he is in charge of Research Information Services. Research Information Services produces the annual Trends® in the Hotel Industry statistical report, along with customized financial and operational analyses for client projects. On a quarterly basis, CBRE Hotels produces five-year forecasts of performance for six national chain-scales, six national location categories, and 55 major U.S cities using its proprietary Hotel Horizons® econometric forecasting model. Mr. Mandelbaum began his hospitality industry career with Holiday Inns, Inc. in Memphis, Tennessee. He started his career with the firm in 1983 in the Memphis office of Pannell Kerr Forster, where he conducted market and financial feasibility studies and operational analyses for hotel, restaurant, club, and conference center clients. Prior to moving to Atlanta in November 1997, he also worked in PKF’s San Francisco office. Mr. Mandelbaum holds a Bachelor of Science degree from Cornell University. He serves on the American Hotel and Lodging Association’s (AH&LA) Financial Management Committee that is responsible for preparing the Uniform System of Accounts for the Lodging Industry (USALI). In addition, he is a member of the Hospitality Financial and Technology Professionals (HFTP) association. He is on the executive board of the Cornell Hotel Society, the author of articles for industry trade publications, a guest lecturer at college and university hotel school programs, and a speaker at industry forums.

David W. Heath

Dave Heath brings over 25 years of hospitality industry experience to Heath & Company. Dave grew up in the restaurant industry and following his college training at the Hotel School at the University of Massachusetts worked in managerial positions with Hyatt Hotels and the Ritz-Carlton Hotel Company. Dave began his consulting career following completion of his Masters of Business Administration at Northeastern University in Boston. Following assignments with Laventhol & Horwath and later Arthur Andersen, where he managed the firm's Miami hospitality and real estate consulting practice, Dave launched Atlanta-based Heath & Company Hospitality Advisors, LLC in 1994. In 1996, Dave was invited to join the International Society of Hospitality Consultants. Dave is recognized as an authority and hospitality industry leader in the field of hotel labor management and employee productivity.