Pay, gross, net and labour cost
Remuneration is all that a worker receives for work. Gross pay = basic pay + bonuses + overtime. The worker's own social contributions (pension, health insurance, tax at source) are taken off, and what is left is net pay, the take-home amount.
The employer also pays employer social contributions on top of gross pay, and sometimes benefits. So labour cost (staff cost) = gross pay + employer contributions + benefits. In the 3D, the red block is the part the worker never sees.
Payroll and the average hourly rate
Payroll (the pay bill, "masse salariale") is the total gross pay of all staff for a period. It is the biggest cost in a hotel or restaurant.
The average hourly rate tells the cost of one hour of work: average hourly rate = payroll (or labour cost) ÷ hours paid. A manager uses it to price a service and to compare teams.
Staff cost and productivity ratios
Two simple ratios check if the pay bill is wise.
- Staff cost ratio = staff cost ÷ revenue × 100. In a restaurant it is often around 30%. Lower means staff cost is a smaller share of what is earned.
- Productivity = output ÷ labour. Revenue per employee or revenue per hour worked are common.
If pay rises but revenue per employee rises faster, the firm is fine. If not, profit shrinks.
Seasonality and flexible working time
Hotels, tour firms and ice-cream sellers have busy and quiet seasons. Paying a fixed team for fixed hours wastes money in the quiet months and burns staff out in the busy ones. Flexible working time helps: annualised hours (more hours in the busy weeks, fewer in the quiet ones, same total over the year), part-time and seasonal contracts, overtime with extra pay or time off later. The aim: cover demand without a big payroll all year.
Individual and team bonuses, fringe benefits
A bonus is extra pay for a result. An individual bonus rewards one person (sales target met). A team bonus rewards a group (the kitchen team keeps waste low), which encourages helping each other.
Fringe benefits are rewards besides money: meal vouchers, company car, phone, extra health cover, training. They show care, may be taxed less, and help keep staff. They are still a cost to the employer.
Collective pay: profit sharing and employee savings
Profit sharing gives all staff a part of the firm's profit, often split equally or in proportion to salary. It links pay to the firm's success. Employee savings schemes let staff put the money (and often the employer adds to it) into a locked savings plan, which builds long-term savings and loyalty. These are called collective pay because everyone shares, not one person.
Try it: read a payslip
In the 3D, set the bonus to 0 and then to 800. How much does labour cost rise for each 100 of bonus? (Hint: more than 100.) At home, look at a sample payslip online and find gross pay, deductions and net pay. Predict the employer's cost first, then check with the sliders.
Key formulas and definitions
- Gross pay = basic pay + bonuses + overtime
- Net pay = gross pay − worker contributions
- Labour cost = gross pay + employer contributions + benefits
- Average hourly rate = payroll ÷ hours paid
- Staff cost ratio = staff cost ÷ revenue × 100
- Productivity = revenue ÷ number of employees (or hours)
Worked examples
1. Basic pay 2000, bonus 300. What is the gross pay?
Gross = 2000 + 300 = 2300.
2. Gross pay is 2300. Worker contributions are 20%. Find the net pay.
Deduction = 20% of 2300 = 460. Net = 2300 − 460 = 1840.
3. Gross 2300, employer contributions 30%, benefits 200. Find the labour cost.
Employer contributions = 0.30 × 2300 = 690. Labour cost = 2300 + 690 + 200 = 3190.
4. A cafe pays 46,000 gross for 3,200 hours in a month. Find the average hourly rate.
46,000 ÷ 3,200 = 14.375, about 14.38 per hour.
5. A restaurant has staff cost 90,000 and revenue 300,000. Find the staff cost ratio and the revenue per employee if it has 10 staff.
Ratio = 90,000 ÷ 300,000 × 100 = 30%. Revenue per employee = 300,000 ÷ 10 = 30,000.
6. A profit pot of 12,000 is shared among 8 staff. How much does each get if shared (a) equally, (b) by salary, for a worker earning 2,000 when all salaries total 20,000?
(a) 12,000 ÷ 8 = 1,500. (b) Share = 2,000 ÷ 20,000 = 10%, so 10% of 12,000 = 1,200.
7. A hotel works 40 hours a week for 20 busy weeks and 20 hours a week for 20 quiet weeks. What is the average weekly hours?
(40 × 20 + 20 × 20) ÷ 40 = 1,200 ÷ 40 = 30 hours a week on average.
Common mistakes
- Thinking net pay is what the employer pays. The employer pays labour cost, which is higher than gross.
- Forgetting employer contributions when working out labour cost.
- Using gross pay instead of labour cost to find the true average hourly cost of staff.
- Calling fringe benefits "free". They cost the employer even when the worker pays no tax on them.