Employees – Investment or Expense?

How to you view your employees? Do you see them as a resource that you invest in or as an expense you seek to minimize? Or is it possible to see them as both?

NACS 2007 SOI for its same store sample that wages represented 36.37% of total gross margin dollars for the average of the 2nd, 3rd, and 4th quartile locations, but only 33.6% for the top quartile c-store companies. This might lead you to believe that the top quartile companies spend less money on wages, but that is not the case. In fact, they spend an average of almost $7,000 per month per location more! Could it be that they know something the rest of us don’t.

Federal minimum wage went up this Summer for the first time in 10 years. That’s the good news. The bad news is that is it scheduled to go up each of the next two Summers until it reaches $7.25 in 2009.

Did this force you to raise your wages or were you already paying your people more? Did you have to raise your entire pay scale? If so, did you simply give every a raise or did you take the time to evaluate each person’s contribution? We encouraged our c-store clients to determine the impact of keeping everyone’s compensation relative to the new minimum wage and then if they were comfortable in the number evaluating each employee and giving more to those who earned it by their actions. Made for some tough conversations, but ensured that those most deserving were compensated accordingly.

Back to the question of “is it possible to seek to minimize your labor cost and see employees as a resource to invest in”? I believe the answer is yes.

No one questions the need to control the cost of labor, but the question is how do you measure it. We advocate the application of the “total cost of acquisition” concept for labor. This looks are not only the hard labor cost items on the store P&L, but all associated expenses.

Additional hard costs include recruiting and training. We have seen reports that this ranges from a low of $375 to as much as $1,000 per employee. However, the total cost includes “soft” or “hidden cost.”

They are harder to measure, but no less real. These include, but are by no means limited to, the impact of turnover on turnover (that is the more turnover you have, the more likely other employees are likely to leave) to poor customer service to declining sales/margins to the lack of knowledge of your employees to management time to shrink. C-store retailers have reported that these can add up to as much as 1X the annual salary of the person being replaced.

What would happen if you invested some or all of these non-P&L costs in your employees? Many c-store retailers have found that by spending more on their personnel, they lower their turnover rates and the total cost of labor.

For example, QuikTrip pays some of the highest store level wages in the industry, but the investment certainly pays off. Go to their website and look at their employee offer. Clearly they are investing in their employees. That does not mean that they, and many other leading companies in our industry, don’t work to control labor expense, but they have learning that investing in your employees may be the best way to control your labor cost