Looking for Labor Cost Insights? Master Payroll with 5 Crucial Metrics

HR plays a key role in the success of any business—and that's especially true when it comes to making sure employees are paid for their hard work.

As the builder of employee payroll, you also hold the keys to the castle when it comes to payroll data. Payroll data can give you insight into crucial metrics like labor cost, payroll compliance, software costs, and more.

Every time you run payroll, you’re setting yourself up for a deeper understanding of your company’s finances and organizational efficiencies.

Ignore payroll data, and you could be missing out on a trove of insights that could help you gain organizational efficiencies and save money. For example, an irregular amount of overtime could signal human errors or even system glitches that could lead to over- or underpayment.

Read on to learn how cost of labor can indicate overall company health, as well as other key performance indicators (KPIs) to keep an eye on when it comes to payroll metrics—and how BambooHR Payroll can empower you to do it.

What Is Labor Cost?

In a nutshell, labor cost (also known as cost of labor) is how much you’re spending on your people. From direct costs like salaries and benefits to indirect costs like paid time off, labor cost tells you exactly how much you’re spending on each employee—and how that relates to your bottom line.

Since employee payroll is directly affected by all the different pieces that make up labor cost, your payroll runs provide the necessary data to calculate just how much you’re spending on your people.

What Factors Affect Labor Cost?

Understanding your cost of labor starts with compiling all costs related—directly and indirectly—to your employees.

Your labor costs will include (but are not limited to):

• Salaries and hourly wages
• Medical, dental, & vision benefits
• Paid time off
• Retirement plans
• Payroll taxes
• Employee perks

This list could vary greatly depending on your industry. A tech company may have labor costs that are consistent throughout the year, but consider the hospitality industry whose hiring (and compensation) fluctuates to accommodate for busy seasons.

How to Calculate Labor Cost

Once you’ve listed out all your line items, you can start to do the math on labor cost per employee. Here’s what that might look like for a salaried employee:

Annual Labor Cost = Gross Pay + Annual Costs

Let’s break that down. Say you have an employee, Kelly, whose gross annual salary is $65,000. After accounting for how much you contribute to Kelly’s medical, dental, & vision premiums, you tack another $17,103 onto that amount. And don’t forget 401k contributions! That adds another $4,500.

When you add all that up, the cost of labor for Kelly is actually $86,603—not just the amount of her salary.

Hourly Labor Cost = Annual Labor Cost / Number of Hours Worked

You can get even more granular and calculate labor cost on an hourly basis. This is especially helpful if you employ hourly employees.

Say Kelly has an assistant, Tom, that works on an hourly basis. He receives the same medical, dental, & vision benefits, but you do not contribute to a 401k for him. His hourly rate is $15/hour, and he worked 1,560 hours last year.

After accounting for his hourly rate, how many hours he worked, and the additional benefits you provide, Tom’s hourly labor cost is $25.96.

How Does Labor Cost Affect Your Bottom Line?

As mentioned above, cost of labor accounts for a hefty portion of spending for most businesses—regardless of industry. When looking for ways to tighten your belt from a financial standpoint, people costs are one of the first places businesses tend to look.

As you’re looking at those costs and making hard decisions about where to get more efficient in your spending, it’s essential to account for all the little factors that go into the cost of labor—not just the salary.

Here are some ways to reduce labor costs:

• Use payroll software to increase accuracy and reduce compliance issues that result in costly fees
• Analyze overtime trends to look for ways to cut back—and to maximize efficiency during regular working hours
• Prioritize the benefits your employees really want, and cut out the ones that aren’t high impact
• Craft a time off policy so your team knows what qualifies for vacation, paid, volunteer time, and beyond—and make sure they know how to track that time

4 Important Metrics to Track Through Payroll Data

Payroll metrics are key performance indicators (KPIs) that analyze the relative cost of the payroll process while also indicating whether that process is fully accurate.

Payroll inaccuracies do more than bleed company resources—they can also lead to tax-related fines and strong employee dissatisfaction.

After shoring up your company’s foundation with an accurate payroll process, payroll KPIs then act as tools to measure the performance of your payroll process.

1. Number of Errors (Accuracy Rate)

A payroll admin has to account for a lot of variables to ensure an accurate payroll, including:

• Differences in salary type (salary, hourly, commission, contractor, etc.)
• Accurate time tracking for hourly compensation
• Application of different leave categories (PTO, maternity, sick leave, bereavement, etc.)
• Tax and fee payments at every level (federal, state, county, municipal, etc.)

When it comes to running payroll, perfection matters. The people in charge of payroll need to find every error and correct them as soon as possible to avoid serious consequences. Every other payroll performance KPI depends on the accuracy of your payroll data.

How to Measure: Keep a running tally of payroll errors per pay period. For a long-term payroll accuracy percentage, divide the number of payroll runs with errors by the total number of payroll runs.

2. Overtime

While it’s important to ensure your employees receive compensation for the time they work beyond their official working hours, it’s also important to ensure that poor communication or technology mistakes don’t lead to an inefficient working environment with extra overtime costs on top of everything else.

If you find your employees are consistently posting overtime when you run payroll, this could be an indication that a team needs to revisit their personnel or technology needs.

How to Measure: Add up the total overtime cost paid out, then analyze payroll cost by department and team.

3. Time to Run Payroll

Even with the best software tools, it takes hours to work through every step of the payroll process. Measuring how long the payroll process takes lets you know the expenses involved and helps you find new efficiencies.

Here’s a concrete example: One BambooHR customer used to spend an hour every pay period driving to FedEx to mail physical paychecks to her out-of-state employees. She also had to edit time logs for her delivery drivers who couldn’t be at the office to punch the physical time clock. Talk about room for human error!

She saved hours when she implemented BambooHR and BambooHR Time Tracking, letting her onsite employees punch in with mobile devices and integrating with her payroll provider.

How to Measure: Have those in charge of payroll submit the hours spent for each payroll run, including the time spent reviewing data and fixing payroll errors. Track this measurement to see how seasonal variations such as summer, holiday breaks, and flu seasons affect the time spent processing payroll. If variations lead to a drastic increase in the time to run payroll, it may be worth revisiting your processes for calculating and recording these variations.

4. Cost of Payroll or Cost per Payroll Payment

Completing the measurements for the three meaningful payroll metrics listed above lets you sum up the total monetary cost of payroll errors, overtime paid out, and salaried hours for those preparing payroll.

This should also include the cost of any software services you use, whether you handle payroll in-house or outsource it to a professional employer organization.

How to Measure: Tracking this metric over time lets you see how payroll expenses correlate with your company size, number of employees, pay schedule, and other employee-related decisions.