Minimizing Labor Costs

Minimize Labor Costs with a More Streamlined HR Process


Wages and salaries make up 70 percent of a company’s total compensation. As labor costs across the U.S. continue to rise, employers are finding it increasingly challenging to stay profitable and competitive in the market. The right technology and HR information system, however, can provide businesses key labor metrics to ensure that you are maximizing efficiency while minimizing labor costs.


Company CEOs discussing labor costs Start by Knowing the Revenue Per Employee for Your Company

Calculating your revenue per employee (RPE) is important for measuring the productivity of your employees. This metric indicates if your labor costs are helping or hurting your business. The RPE calculates your total revenue for a specified amount of time divided by the number of employees during that period.

Because labor demand varies from industry to industry, find your industry’s average and compare it to similar sized businesses in your industry for a more accurate evaluation. For example, in 2016, the average revenue per employee in the energy industry was $1,786,000. Marathon Oil’s, an oil and natural gas research and production company, 2016 revenue per employee was $2.2 million, a $414,000 difference for a single employee.

The higher your RPE ratio is in comparison to the other companies in your industry, the more profitable and productive your assets are compared to the competitor. You may also want to add another employee to build better returns. If your numbers are lower than the average, however, you should look into what is causing your high labor costs. Before using this data to make the decision to let employees in your workforce go, start by looking at minimizing other wage and salary costs. By looking at the industry’s RPE, analyzing the difference, and making a few simple changes, Marathon Oil could significantly increase revenue.


Interview candidates for high turnover costs

High Employee Turnovers Comes with a High Price

Maintaining a stable employee workforce is key to reducing labor costs. On average, the cost to replace an employee is more than the leaving employee’s salary. These costs come from recruiting, interviewing, onboarding, and the new employee adjusting and delivering at the former employee’s productivity level. With the cost that goes into replacing an employee, you can often minimize costs by retaining your workforce.

To reduce turnover within your company, you must first identify the cause of your high turnover rate. The three driving factors for employee turnover are lack of competitive pay, feeling stagnant in their current position, and having a negative culture. When an employee chooses to leave your company, the exit interview is the most crucial moment to gain insight into what is causing them to leave. You can gain insight into problems within your organization, and you can improve these to retain more employees. In turn, this will minimize turnover and overall labor costs.


employee working overtimes and driving up labor costs

Avoid Overtime Costs to Minimize Labor Costs

Paying employees time and a half for working over the standard 40-hour work week can significantly increase labor costs. Is having employees work overtime worth the cost of the assignment they are working on? If employees stay late to complete a project and the productivity costs offset the profit then you are losing money.

If the workload is consistently forcing employees to work overtime, compare the costs of paying your employees overtime to the cost of recruiting, interviewing, onboarding, and retaining a new employee. By analyzing the overtime costs with the cost of hiring a new employee, you can determine which costs would be less taxing on your company.


Time and Attendance Errors

If your company is still using paper timesheets to clock employees in and out, you could be wasting money in labor costs. An automated time and attendance tracker reduces human error such as misreading handwriting, inputting incorrect times, and even employees writing down the wrong times, which all can cost you.

A study by the Robert Half Agency and the American Payroll Association (APA) estimates that human error from using manual time cards can cost between 1 to 8 percent of your annual payroll. If your annual payroll cost is $350,000 and the human error rate for calculating time and attendance is 3 percent, you are losing $10,500 in labor costs.

To start minimizing your labor costs, contact ESS to help you build a better, more efficient company. From our attendance tracker to our HR management software, we can help your company improve productivity, management, and automated processing. Contact us today at 225-364-3000.



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