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  • Writer's pictureThinkSight

The Labor Cost of Doing Business

Your people are your most valuable business asset, your path to competitive advantage, and your largest line item. How can you build and invest in your workforce while maintaining cost-efficient labor spending? With timely, reliable, and actionable people analytics.

In this time of high inflation and workforce shortages, it is more crucial than ever to make confident, data-driven decisions regarding your workforce, and this begins with understanding the ins and outs of your labor costs.

What are labor costs?

Labor costs encompass every penny you spend on your employees. This includes salaries, benefits, related taxes, and all costs associated with recruiting, hiring, training, and retaining employees. Labor costs are also known as the total cost of workforce (TCOW) and frequently account for up to 70% of a company's overall budget.

With such a significant investment of resources, keeping close track of labor costs is essential. To calculate the percentage your company spends on labor, use this equation:

Labor cost percentage = (total labor cost / total gross sales) x 100

If it’s surprising to see how much of your budget goes toward your workforce, keep in mind that labor costs are projected to continue rising.

Labor costs on the rise

Why are labor costs climbing? For one, inflation has yet to turn a corner, which makes everything more expensive. As the cost of living increases so will the need for higher wages. More generally, recent years have the workforce calling on companies to be more transparent regarding wages and salaries. While this is an advantage for employees and job seekers, it puts employers under pressure to offer more competitive compensation. Combine this cultural shift with the current labor shortage, and the workforce has significant leverage for negotiating higher wages.

It is still possible to be wise with your labor investment. With the use of reliable people analytics, you can ensure your workforce investments meet both employee compensation expectations and company productivity needs.

So, how can you keep better track of your labor costs, cut unnecessary spending, and maximize your ROI?

Managing labor costs

Begin by taking stock of your labor spending. Before making changes, you need to know how much you currently spend on labor. Thoroughly review your payroll data, contingent workforce data, and HR key performance indicators (KPIs) for productivity and value add. Look into relevant numbers regarding your existing workforce, including revenue and profit per full-time employee, return on human capital investment, and TCOW.

Once you have a holistic understanding of your labor costs, ask these essential questions:

  • How do your labor cost trends compare to your revenue and expense trends?

  • What measures are you taking to optimize your workforce productivity?

  • Are you effectively managing overtime?

  • How do your wages compare to market wages?

  • Does employee attrition result in higher replacement wages?

These questions allow you to start thinking strategically about your workforce from an ROI perspective. This is where insights from people analytics help you answer more specific questions about your workforce as a driver of business success, including:

  • Where can you make adjustments to both cut expenses and increase productivity?

  • What qualities do the most productive members of your team share?

  • What retention strategies keep your highest-performing employees engaged?

  • Are there areas where you can do more with fewer employees?

  • Are you overlooking promising, less expensive talent pools in today’s remote work environment?

As you rethink your workforce management plan, use specific KPIs to link it to your company’s business goals and financial forecasts.

Your employees are your company’s most valuable asset, and with an effective labor cost management strategy, you can consistently connect your human capital investment to tangible business results and a better bottom line.

Visit for more on using people analytics to manage labor costs and improve your bottom line.



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