Whether you call it Labor Cost, Payroll, or something else, the money you spend to compensate your employees is precious. Every dollar you invest in your people is a dollar you can't invest in areas like products, marketing, or capital.

Rule one of business is that you must get a greater return than your investment. It goes without saying that without a positive ROI, your business will fail. Labor cost is the number one cost for most non-retail companies. But how many businesses truly understand their labor cost and the corresponding return on investment?

Labor cost is simply defined as money paid to workers during a defined period, including wages, benefits, and related taxes. It should not be confused with payroll as that does not include the full scope of Labor Cost.

The value of understanding Labor Cost goes beyond the awareness of expense. It is critical to strategic decisions such as pricing and product mix as well as staffing and development. It also provides a measuring-stick view of productivity and efficiency.

Let me give you one example of using labor cost to make strategic decisions based on an experience I had.

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