Awesome Labor Cost Insights: 4 Valuable Payroll Metrics

As the builder of employee payroll, you also hold the keys to the castle for the analytics of your payroll data. Payroll data analysis can give you insight into crucial metrics like cost of labor, payroll compliance, and software costs.

Every time you run payroll, you’re setting yourself up for process improvement, a deeper understanding of your company’s finances, and organizational efficiencies. But ignore the tracking of payroll data metrics, and you could miss out on a trove of insights to help you gain organizational efficiencies and save money.

For example, irregular overtime amounts could signal human errors or even system glitches that could lead to over or underpayment.

Read on to learn how the cost of labor can indicate overall company health, plus other payroll key performance indicators (KPIs) to keep an eye on when it comes to payroll metrics.

What Is Labor Cost or Cost of Labor?

In a nutshell, labor cost 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 calculations tell 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 costs, insights from your payroll runs provide the necessary data to calculate how much you spend on your people.

Did you know?

Cost of labor makes up 70% of spending for US businesses, according to the US Bureau of Labor Statistics.

What Factors Affect Labor Cost?

Understanding your cost of labor starts with gathering all costs—direct and indirect—related to your employees.

Your labor cost calculations will include:

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

Your labor cost management list could vary greatly depending on your industry. For example, the hospitality industry, whose hiring (and compensation) fluctuates to accommodate busy seasons, might have less consistent annual labor costs than a tech company. These factors will impact the cost of labor.

How to Calculate Labor Cost

Once you’ve listed all your line items, you can start to do some employee payroll cost tracking and do the math on labor costs per employee.

Here’s what a labor cost calculation might look like for a salaried employee:

Annual Labor Cost = Gross Pay + Annual Costs

Let’s break that down. Say you have an employee, Employee A, whose gross annual salary is $65,000. Then you account for how much you contribute to Employee A’s medical, dental, and vision premiums ($17,103). And don’t forget 401(k) contributions! That adds another $4,500.

When you add all that up, the cost of labor for Employee A is $86,603—not just the base salary amount. This underlines the value of accurate payroll tracking.

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

You can get even more granular in your payroll data analysis and calculate labor costs on an hourly basis. This is especially helpful if you employ hourly employees.

Say you have another employee, Employee B, who works hourly. Employee B receives the same medical, dental, and vision benefits, but you don’t contribute to their 401(k). Their hourly rate is $15 per hour, and they worked 1,560 hours last year.

After accounting for the hourly rate, hours worked, and the additional benefits you provide, Employee B’s hourly labor cost is $25.96.

These detailed labor cost insights can be invaluable for workforce planning and creating accurate employee cost metrics.

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, cost-saving payroll strategies and other people costs are 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 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 labor cost reduction strategies:

• Use payroll software for error tracking, to increase accuracy and reduce compliance issues that result in costly fees
• Analyze overtime payroll costs and trends to look for ways to cut back—and maximize efficiency during regular working hours. You could even trial a 4-day workweek to see what benefits it could bring for your company.
• 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.

Payroll Data Analysis: 4 Important Metrics to Track Through Payroll Data

Understanding and tracking payroll metrics can be crucial KPIs. Payroll metrics provide analysis for the relative cost of the payroll process while also revealing whether that process is fully accurate.

Payroll inaccuracies and a high error rate 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 payroll optimization strategies and process improvement, payroll KPIs act as tools for tracking the performance of your payroll process.

Check out these 4 key ‌payroll data metrics:

1. Number of Errors (Accuracy Rate)

A payroll admin must account for many variables for improving payroll accuracy, including:

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

When it comes to running efficient payroll processing, accuracy is paramount. The people in charge of payroll need to find errors and correct them as soon as possible to avoid serious consequences. Every other payroll performance KPI depends on the accuracy of your payroll data, and analysis can help improve this.

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

2. Overtime

It’s important to ensure your employees receive compensation for the time they work beyond their official working hours.

But it’s also important to ensure that overtime payroll costs aren’t due to poor communication or technology mistakes. Factors such as these can lead to an inefficient working environment with extra overtime costs on top of everything else.

If you find your employees consistently post overtime when you run payroll, this could indicate that a team needs to revisit their personnel or technology needs.

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

3. Time to Run Payroll

Even with the best payroll compliance software, it takes time to work through every step of the payroll process. Measuring how long the payroll process takes helps you learn the expenses that are involved and allows you to identify your payroll processing challenges. It also helps with discovering new efficiencies.

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 calculating processes. Record these variations to help with efficient payroll processing.

4. Cost of Payroll or Cost per Payroll Payment

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

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

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

Experience the Benefits of Payroll Software and Tracking Software

Cut costs and set your HR team free with the right payroll and time tracking software in BambooHR^®. Make sure your people leaders can access the information they need, when they need it, without sacrificing data security. Give your team access to what they need (and not what they don’t) to get the most out of your data.

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