Labor Pains

The problem: Labor-related costs are the single largest operating expense for most hotels in the U.S. The costs associated with hiring and retaining qualified hotel workers are rising, due to such factors as increases in the minimum wage and recently negotiated union contracts. Also, sourcing labor continues to challenge human resources, due to the high turnover rampant in the industry, the industry's reputation as a source of dead-end jobs and immigration issues that threaten to reduce the dwindling pool of workers.

The facts: The travel and tourism industry employs 1.4 million hotel property workers and pays $171.4 billion in travel-related wages and salaries, according to the American Hotel & Lodging Association. Latinos hold the bulk of the lowest-paying jobs.

The current federal minimum wage of $5.15 an hour has not increased since 1997. The industry with the highest proportion of workers with hourly wages at or below $5.15 was leisure and hospitality (about 14 percent), according to the Bureau of Labor Statistics.

From 2005 to 2006, PKF Hospitality Research estimates that labor costs rose 6.5 percent, the greatest single-year increase since recovering from the 2001 industry recession. In 2006, an estimated 44.4 cents of every dollar spent by U.S. hotel managers went toward employee salaries, wages and benefits. This equates to 31.9 percent of total revenue.

The solutions: There's not much the industry can do to fight raising wages, which many outside the industry (and some in) look at as long overdue. However, the costs associated with hiring and retaining workers might be reduced by increased wages since turnover rates would most likely decline. Also, fostering diversity programs, grooming qualified minorities and women to move into management and mentoring and skill development could all contribute to lower turnover, and therefore, lower labor costs. Government initiatives to address immigration issues might also ease the sourcing issue.

Labor drives the lodging industry. Service is all about providing guest satisfaction, which “has a direct correlation with price/value, return guest ratios, brand reputation and ultimately, financial performance,” says industry consultant Rick Swig, president of RSBA & Associates.

But it's tough to deliver that service standard when workers feel underpaid and underappreciated. On top of that, we're in a tight labor market. In November 2006, the national unemployment rate remained at the relatively low level of 4.5 percent, according to PKF Hospitality Research, and when unemployment is low, employee recruitment and retention costs rise. “It's harder to attract employees when the economy is good,” says Robert Mandelbaum, director of research information services for PKF. “On the other hand, the industry has been able to raise prices two to three times the pace of inflation, which is necessary because labor costs have been rising at twice the pace of inflation. It's a different economic model than other industries.”

The labor issue is top of mind for most hotel owners and operators, whether it's rising wages, sourcing labor or immigration issues. At a recent gathering of Marriott general managers from around the world, immigration reform was addressed by chairman and CEO Bill Marriott who called for a “sensible and comprehensive approach to immigration reform.” The week before, he expressed frustration in his blog over worker shortages. “At Marriott, we'd like to see a solution that secures the border, of course, and creates a clear, legal channel by which employers can get the seasonal and permanent labor they need, both now and in the future. We want a solution that provides, outside of deportation or amnesty, a deal with undocumented workers already here. Removing 12 million undocumented workers from our economy with near full employment would be an absolute disaster for us.”

For industry consultant Swig, it's pretty simple: “Let's face it, the big elephant in the room is competitive pay. In this industry, for the amount of time and effort we require for our people, we just don't pay enough. And, the interest in cost efficiency presents a myopic viewpoint when you consider the cost of turnover and replacement and training these valuable human resources. That's the whole underlying issue, right there. We cut, cut, cut, minimize pay and go without. Then we wonder why we have high turnover. It deteriorates our services standard, and you can rarely replace the quality of a seasoned employee because you can't transfer memory, experience and relationships from one employee to another.”

While hotel operators and owners bemoan rising pressure to increase the federal minimum wage, some in the industry see offering a “fair living wage” as the only real solution to the current shortage of qualified workers and the increasing costs associated with rampant turnover figures in the industry.

Michael Gallegos thinks that way, and has gone so far as to endorse a living wage for his workers. Gallegos is president of American Property Management, which last month increased wages at the Sheraton Four Points near the Los Angeles International Airport, to $10.64 an hour without health benefits, $9.39 with them, according to an account in the Los Angeles Times. Gallegos maintains the increase will ultimately be good for business. He says elevated wages translate to a more stable labor force and that turnover is less than half the industry average and the company attracts better talent.

Not surprisingly, his stance has not gone over well with area competitors, nor with some of his more skeptical employees, some of whom contend he's “fattened their paychecks solely to keep them from unionizing the hotel, the largest in American Property Management's $1.5-billion portfolio,” reports the story.

So how can operators combat rising labor costs while attracting and retaining quality employees? “Creative HR management is one way,” suggests PKF's Mandelbaum. “This is an industry that historically has appealed to segments of the industry that are hard to employ — seniors, people with disabilities, immigrants. Open the net wider to attract people, which also helps gain tax credits, offer programs like teaching English as a second language, offer job sharing and flexible hours.”

“The human resources challenge is both systemic and far-reaching,” says Swig, “yet what is most important is the recognition of the issue. It may be time to review initiatives on many levels — organizational, financial and political — to enable the hotel real estate sector to continue functioning with satisfactory pricing and profitability for owners, as well as price/value and service satisfaction for guests.”

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