Staff turnover and its effect on a hotel’s financial performance
By Mariano Faz, Head of TFG Asset Management
A recently published white paper penned by TFG Asset Management revealed employee turnover in the UAE's hospitality industry measures approximately 25% - 30% per annum, which is a significant figure that can mainly be attributed to deteriorating staff loyalty. The research addresses the main motivations behind staff's intent to leave, creates a hypothetical scenario to measure the financial impacts, and crafts effective strategies to combat this alarming issue. The following article discusses the potential financial impact of a 30% voluntary staff turnover.
Our proposed model simulates the performance of the hypothetical hotel under two conditions, with high and low degrees of staff turnover. Under the base case (Scenario A), the level of turnover is marginal and measures 0-5%; therefore, full productivity, or a 100% contribution, is assumed under the condition that the hotel is able to retain its best staff. We adapt this percentage to our alternative scenario (Scenario B), presenting the high turnover rate and loss in productivity which reduces the staff contribution to performance in comparison to the base case. The primary assumptions within the case study are highlighted below:
- The 4-star hotel comprises 300 keys
- 93 full-time staff
- Full productivity is assumed under Scenario A, or a staff turnover of 0-5%
- Reduced productivity is assumed under Scenario B, or a staff turnover of 30%
In order to isolate the impact of the staff turnover ratio on the profitability of the hotel, the "ceteris paribus" concept has been applied, where it is assumed that all variables, apart from staff turnover, are fixed. In addition, the following conditions relating to the hotel must remain constant:
- For every departing employee, there is a replacement within that year. The time required to find a replacement depends on the role in question.
- Departing employees in both scenarios are voluntary and excellent performers.
- The turnover ratio of managers to entry level positions is 1:4.
- All operating metrics (occupancy, ADR, RevPAR, room nights) are constant.
- No external market variables are considered.
- All departing employees hand over their notices at the beginning of the month.
- No vacancy period is considered.
On the top-line revenue:
There are two main revenue streams: room revenue and F&B revenue. In order to calculate the revenue change in both scenarios, we allocate revenue percentage contribution from each staff member towards total sales. The difference in the weight of their contribution depends on the factors that influence the nature of their role, including their level of seniority, amount of customer-facing time and duties being performed.
In addition to the revenue loss, we also assess the impact on the level of service which directly affects the Average Daily Rate. In order to consolidate this correlation, we have conducted our primary research by analysing more than three hundreds reviews published by Booking.com and TripAdvisor across the three-, four- and five-star hotel categories. The research confirmed that quality of service is the most influential factor in determining a hotel's online rating, outweighing other features such as the property's facilities and geographical location. For example: four-star hotels displayed a variance in average online ratings of 4.0 points, where those with positive reviews received an average rating of 9.5 compared to 5.5 for those at the opposite end of the spectrum. Three-star hotels surveyed demonstrated the lowest average variance of 2.8 points, with positive and negative reviews averaging 9.3 and 6.5, respectively. By applying the findings mentioned above, we assume that a hotel that delivers the best quality of service will achieve an online score of 9.5. This allows us to craft our model to find the new ADR as follows:
The conclusion reveals that room revenue drops sharply by 22%, F&B declines by 24% and ADR plummets 9%.
On the bottom-line profit:
This part measures the effects on the expense line which ultimately drives the profit. There are two types of costs. Tangible costs can be measured and calculated. Intangible costs are more challenging to quantify, and may include factors such as time, productivity, staff morale and customer disappointment. When assessing the impact of turnover rates on costs, the resultant effects should be evaluated thoroughly by considering both types. For this reason, the 30% staff turnover rate does not necessarily guarantee effective cost control.
The main costs considered in the scenario include:
- Payroll – Overall, payroll is reduced, however, its margin is relative to the revenue increase.
- Accommodation cost – In the case of the UAE, accommodation is provided to staff and paid by the hotel owner. Accommodation costs are paid annually and remains fixed regardless of the mobility of staff. This also means its margin relative to the revenue increases in the 30% staff turnover scenario.
- Visa cost - In the UAE, expats dominate the labour market. Therefore, the HR department is responsible for ongoing employee residency visa renewals. In the 30% staff turnover scenario, the hotel must bear the visa cancellation fee for each departing employee in addition to a visa application fee for each new member of staff.
- Medical insurance - The corporate medical insurance policy is renewed each year. Under the 30% staff turnover scenario, it is assumed that the hotel operator has paid for medical insurance for all departing employees as well as new staff recruits. Accordingly, medical insurance is paid twice for every departing employee, resulting in an increase in expenses.
- Vacancy cost - Vacancy costs refer to the amount paid to temporary replacements employed overtime. The cost is calculated by multiplying the total number of staff replaced in a specific role by the hours per week required to cover for that vacancy (extra shifts, overtime), by the hourly pay for each type of employee and by the number of weeks required. New staff members may not be well-equipped to perform the same tasks as the employee they replaced. The period of time required to fill the vacancy can be measured by multiplying the hours per week required to make up for that vacancy by the hourly pay for each type of employee. In an ideal scenario, no vacancy cost will be incurred, in comparison to the margin that results from a situation where there is 30% staff turnover.
- Termination cost - As per UAE labour law, end of service gratuity is calculated by the period of service, where 21 days of wages for each year is paid for the first five years of employment. Based on the industry benchmark, a hotel employee will typically work for one company for a period of two to three years. Under this model, it is assumed that departing staff are employed for a duration of 2.5 years on average, which entitles each employee to 53 days of gratuity. As a result, an end of service gratuity payment in the 30% turnover scenario would accumulate a certain amount, compared to the base case, where no gratuity costs would be.
- Recruitment cost - Recruitment costs comprise both tangible and intangible elements, where advertising expenses and activities would constitute hard costs. Intangible costs are incurred during the recruitment process and include the time taken by the Heads of Departments and Line Managers to complete administrative and hiring tasks, screen resumes, check references and interview candidates. The base case will incur zero cost compared to the 30% staff turnover.
In conclusion, while total payroll costs are lower, the effect of reduced revenues is more substantial than the marginal reduction in salaries. Other than the payroll itself, many staff-related expenses tend to rise in proportion to the staff turnover rate, and may include costs relating to medical insurance, training, vacancies, gratuity and recruitment. Intangible costs such as time, stress, lower staff morale and loss of knowledge can amplify the negative impact on Gross Profit. As a result, the scenario comparison illustrates a drop from 45.4% in the GOP margin to 37.6%, equating to a monetary loss of approximately AED 6 million.
The empirical research findings presented in TFG Asset Management's research paper clearly highlight the implications of a high voluntary turnover rate which leads to a negative impact on top-line performance and ultimately reduces bottom-line profits. HR departments have traditionally struggled to justify the importance of valuing human capital within the business as existing metrics have often failed to provide a clear indication of the potential impact employees can have, not only on the bottom line, but on service quality and brand reputation. It is time for hoteliers to pause and rethink of their people strategies, to pause and embrace changes.
Mariano Faz is Head of TFG Asset Management in Dubai. www.tfgassetmanagement.com. He is responsible for the asset management of the company’s Hospitality and Real Estate portfolio which comprises over 3,000 units in the UAE and an additional 3,000 hotel units under development. During his tenure, Mariano has guided the strategic planning efforts to achieve investment objectives on behalf of owners.More from Mariano Faz
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