Total labour cost revenue percent

Earlier this year I watched the documentary, Persona. There is a point in the movie where Ben Dattner, an organisational psychologist and executive coach, is interviewed. He justifies the recruitment testing industry with the rationale that "approximately 70 percent of an organisation's expenditures is on human capital" (Hawkins, 2021, 14:18), apparently implying that any strategy to reduce the organisation's exposure to such a significant cost as labour is a no-brainer. My immediate thought was: bollocks.

There was no way that the total cost of labour could be anywhere near 70%. Perhaps if you had a service industry it could be, but only if it was low tech (i.e. required no capital investment that the business would need to fund from earnings). So I went looking online. There is indeed a white paper stating that organisations tended to have "total human capital costs, or total cost of workforce, [at] nearly 70% of operating expenses" (HCMI, 2022). I found the 'technical' term for this, which is "total labour cost revenue percent".

Hmm. To calculate our cost of labour, we need to add all remuneration per staff member (car, insurance, retirement, housing etc), and to include all staff who are overhead (i.e. not directly responsible for production) such as managers, administrators and directors. Costs of hiring can also go into this bucket. But the cost of clothing, health and safety planning, scheduling etc should be part of infrastructure costs, not part of the cost of labour (Stone, 2019). Most of the firms I have had experience with would have had the cost of labour well down the expenses list. For example, a local manufacturing firm's main monthly cost is raw materials, followed by $1m in electricity. Total labour (including fringe benefits) is 11th down the list of costs at about 10% of the monthly total.

My 'instinctive' reaction to the 70% comment - also based on my initial accounting degree - was to have placed labour at around 20% of operational costs. However, I may be underestimating, as "[t]ypically, labor cost percentages average 20 to 35 percent of gross sales. Appropriate percentages vary by industry, A service business might have an employee percentage of 50 percent or more, but a manufacturer will usually need to keep the figure under 30 percent" (Johnson, 2011).

Organisations are keen to automate as much as possible to drive down the cost of labour. It is unlikely that labour costs will ever increase. And - while it will vary across sectors - it will not be 70% of costs.

However, aside from the extremely dubious claim made by interviewee Ben Drattner, the movie Persona (Hawkins, 2021) is a very interesting watch.

I firmly recommend it!

Sam

References:

Hawkins, T. T. (Director). (2021). Persona: The Dark Truth Behind Personality Tests [movie]. HBOMax.

HCMI. (2022). Total Cost of Workforce (TCOW) [whitepaper]. Human Capital Management Institute. https://www.hcmi.co/Resources/White-Papers/Total-Cost-of-Workforce#:~:text=Including%20the%20Fortune%20500%E2%84%A2,nearly%2070%25%20of%20operating%20expenses.

Johnson, K. (31 July 2011).>Employee Sales vs. Cost Ratio. Chron. https://smallbusiness.chron.com/employee-sales-vs-cost-ratio-38936.html

Stone, D. (2019). Estimating, Labor Burden, and Cost of Goods Sold. Construction Program & Results. https://www.markupandprofit.com/articles/estimating-labor-burden-and-cost-of-goods-sold/