Payroll costs vary widely according to business type and size. Different business sectors have different acceptable levels of payroll as a percentage of revenue. Examining the issue of whether payroll costs are at an acceptable proportion of revenue is, ultimately, a subjective judgment. For example, payroll is not the only personnel-related cost for business, personal injury insurance, health and safety and training costs are also factors that need to be counted when assessing a business's total outlay on its workforce.
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The term “payroll” applies only to the money paid in wages, overtime payments, sick pay, pensions contributions and bonuses to the employees of a business. This factor does not include employer National Insurance contributions, or expenses paid to employees. The size of the workforce and their skill levels are factors that influence the size of payroll. The physical location of employees also affects payroll. Workers living in an expensive country or city will expect to be paid more. The UK is a high income developed economy, and so its businesses’ payroll costs, on a direct like for like comparison are higher than in countries like India or Kenya. Within the UK, it is difficult to attract employees in London without offering higher wages than those available in other areas like Newcastle because of the higher cost of living. Finally, industry standards of wages and skills shortages can also make payroll rise.
Assessing payroll as a percentage of revenue depends entirely on the business's profit margin and turnover. If the company lowers the prices of its products to address competition, payroll will rise as a percentage of revenue, unless the price reduction stimulates turnover. Increasing revenue, either by increasing prices or turnover, or both, will reduce the percentage of revenue that payroll uses up. These arguments apply equally to all forms of business costs.
No business should judge its payroll costs by comparison to a general national figure. Software houses and IT businesses in general have very high payroll costs as a percentage of their revenue, and almost no other operating costs. The percentage of revenue dedicated to payroll is lower in utilities and heavy engineering companies. Even within sectors, the size of the business and the quality, or exclusivity of their products alters the calculation. Restaurants have a higher payroll as a percentage of revenue than bars or fast food outlets.
Any business needs to find statistics for businesses similar to their own in order to judge a proper level of payroll as a percentage of revenue. This is the same indicator expressed by “profit margin” because payroll costs are only meaningful as a contribution to all costs (both capital and operating costs). An example of how difficult it is to judge a reasonable profit margin exists within mass manufacturing. The tobacco industry has been criticized for excessive profits in the UK, where Imperial Tobacco has a 67% profit margin. As mass producers, their payroll would be a small percentage of their operating costs and so an even smaller percentage of revenue. However, Ford in the USA, another mass producer, but of a different product, was very pleased to post a record profit margin of 12%.
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