After the recent financial crisis on Wall Street, the U.S. economy experienced a major setback affecting salaries and jobs across the nation. Along with the fiscal firestorm in New York, the U.S. Department of Labor reported the largest decline in jobs over the last five years, a loss of more than 159,000 employees in September and 240,000 in October--the 10th consecutive month that U.S. businesses have decreased their payrolls.1 The SHRM Leading Indicators of National Employment® (LINE®) report also notes that hiring in the manufacturing and service sectors, which collectively employ 90% of private-sector workers in the United States, is at its lowest level in four years.
The metric of salaries as a percentage of operating expense is related to two important factors that drive any business—the base salary costs associated with human capital and all other costs required to operate the business. In addition to the cost of keeping the business running, operating expenses include research and development, supplies and equipment, general and administrative costs, and salaries. Excluded from operating expenses are mortgage payments, improvements to buildings and expenses associated with entertainment. The metric of salaries as a percentage of operating expense is calculated as follows:
The three industries with the highest median percentage of salaries as a percentage of operating expense were health care services (52%), for-profit services (50%) and educational services (50%).2 Durable goods manufacturing (22%), construction/mining and oil/gas (22%), and retail/wholesale trade (18%) had the lowest median percentages of salaries as a percentage of operating expense.
Industries that have large infrastructure costs—such as utilities and durable goods manufacturing—have lower salaries as a percentage of operating costs. This is because capital equipment expense is relatively greater than salary costs. An extreme example may be seen in the costs associated with operating an off-shore drilling platform. Although it may require the salary costs of 20-30 employees to operate, the actual costs of the equipment and infrastructure for the platform are many millions of dollars more than salaries. Conversely, consulting organizations that generate revenue by billing out their consultants’ time to clients and do not have high infrastructure costs typically have a much higher salary as a percentage of operating expense metric.
HR professionals and other business executives can use this metric to evaluate how competitive their salaries and operating expenses within their industry. Such evaluation can be especially helpful during unstable economic times. For example, when your salaries as a percentage of operating expense metric is greater than that of your competitors, it could mean that your salaries may not be as competitive or that you may not have enough staff relative to your competitors to achieve business results. To ensure that their organization can attract and retain key talent, HR professionals may consider conducting salary surveys. In addition, they may want to discuss this metric with executives in finance and operations to see if their organization’s operating expense is competitive for their industry. For additional benchmarking data and to learn how the SHRM Customized Benchmarking Service can take your HR department to the next level, please visit our web site at www.shrm.org/research/benchmarks/ or call 1-800-283-7476 ext. 6366.
Endnotes
1 The U.S. Department of Labor, Bureau of Labor Statistics. BLS study: September 2008.
2 SHRM 2008 Human Capital Benchmarking Study [unpublished data]
Project Team
Project leader: Olivia Majesky, strategic research analyst
Project contributors: John Dooney, manager, Strategic Research; Steve Williams, Ph.D. director, Research
Copy editor: Nicole Gray, copy editor
Disclaimer
This article is published by the Society for Human Resource Management (SHRM). All content is for informational purposes only and is not to be construed as a guaranteed outcome. The Society for Human Resource Management cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information.