By Helen Luketic, CHRP

“Your love gives me such a thrill
But your love won’t pay my bills
I want money.”

The Flying Lizards*

Statistics Canada says that the productivity of Canadian businesses declined for a second consecutive quarter.  The housing market in B.C. is falling apart; gas and food costs are rising.

All in all, the cost of everything is going up, including our staff.  StatsCan says that from July 2007 to July 2008, average hourly wages have risen by 4 per cent, higher than inflation itself[1].  The WorldatWork 2008-09 Salary Budget Survey forecasts a similar increase of 3.9 per cent again in 2009[2].

Here’s the translation: even though the economy is declining, it’s becoming more expensive than ever to pay our staff and the trend is expected to continue.

B.C. has one of the most service-oriented economies in Canada and four out of five jobs are in the service industry.[3]  It’s no surprise then, that the cost of labour makes up the majority of our organization’s budgets.  Much in the same way that we’ve had to start counting our pennies at home, we’re seeing an increased need to manage the pay and benefits-side of the budget.  This is HR’s time to show that we can be smarter with our numbers and use some core metrics to monitor labour costs – get ready to snap your suspenders and push up your glasses.

1. Labour Cost per FTE

How to calculate:  Labour Cost/FTE

What it is:  The average labour cost to the organization for each FTE. 

What it tells you:  When comparing year over year or quarter over quarter within the organization, it can show a general trend of growth or decline in labour costs.  Go a step further and compare it to the rest of the economy or industry.  You will want to consider referring to the Consumer Price Index to see how salaries are keeping in check with the rate of inflation.  These rates along with other great stats can be found on the BCStats website.

2. Labour Cost Revenue Percent

How to calculate:  Labour Costs/Revenue

What it is:  The total labour costs as a percentage of organizational revenue, or, the amount of investment in your employees required to generate each dollar of revenue. 

What it tells you:  Whether or not your pay for performance system is working.  Organizations should aim to lower the compensation dollars spent to generate revenue or at the very least aim for a static number.  Ideally, revenue should increase at a faster rate than labour costs.

Since you’re all getting great at metrics and nailing your definitions, guaranteed that you are already wondering about the ultimate question — how to define labour costs, operating cost and revenue?  It’s time to impress your local finance guru with the following primer:

Labour Cost = Total payroll and benefit costs for all permanent employees who receive a T4 directly from the organization.

• Payroll cost should include all employee-taxable income.
• Benefit cost should include:  employer-paid benefits, from perks to health and retirement plans.

Revenue = Total gross revenue from operations during the quarter. 

• Exclude income from investments that are not linked to your operational activities. 
• Revenue should be stated in accordance to GAAP or IFRS.

Operating Cost = Total gross operating cost incurred during the quarter as reported on the Income Statement.

• Exclude one-time charges, depreciation, taxes, and other extraordinary expenses.
• State your operating cost in accordance to GAAP or IFRS.

Towers Perrin in their Global Workforce Study for 2007-2008[4] says that the top retention drives in Canada are “excellent career advancement opportunities”, “satisfaction with the organization’s people decisions”, and “ability to balance work/personal life”.  Therefore, if you can keep your labour costs in check, you can focus your budget on developing focussed programs to keep your staff.  On the flip side, you will have to keep spending to attract new employees as they also say that the top attraction drivers are:

1. Competitive base pay
2. Vacation/paid time off
3. Competitive health care benefits 

Yes, your new employees may ultimately side with the Lizards and want money.  You can’t win them all but you can win your executives over by showing them that you can retain and attract your staff while keeping your eye on the budget.

*Still don’t know who the Flying Lizards are?