Metrics That Matter: Revenue Per Employee

How efficiently are we using our labor force?  When can we afford to hire more help?  Why has my operating profit margin dropped?  Are we using our staff as effectively as our competition?

You can get insight into these questions by measuring and trending a key performance metric, Revenue Per Employee.

For years, investors have loved this metric.  They use it to compare companies within an industry to see who is using their personnel most productively.  Shareholders like when this number is trending up each year.  Some companies may go as far as freezing  hiring or reducing  staff to get this number up to please stockholders.  Stop, companies need to remember there is a numerator and a denominator in this metric!  You can make the ratio trend up by increasing Revenue in the numerator OR decreasing the number of employees in the denominator.  As with all metrics, you need to understand what is driving the trend.

 Some proponents of this metric like it because it minimizes the effect of size when comparing two companies.  When you compare a $1 Billion company with  2,000 employees and a $100 Million company with 200 employees, you get the same $500 Thousand of revenue per employee as your result.  In reality, economies of scale exist with employees as they do with most other corporate resources.   It is still difficult to compare any one given metric between companies with large size differences and make an absolute statement.

 What I like about this metric is its focus on BOTH growth and efficiency.  Often, management gets too focused on one or the other.  Used in conjunction with other key metrics, Revenue Per Employee can keep your Sales and Marketing people from getting too far ahead of operating capacity, and can keep your Operations people from getting too carried away with the “lean transformation” project, becoming incapable of reacting to an unexpected sales bump.

 Here are the metrics that I think you should measure along with Revenue per Employee to get some balance.

Revenue per Payroll Dollar:  This keeps payroll costs in check so that overtime wages, bonuses, and variable pay aren’t being used in lieu of hiring.  It also helps you measure how efficiently you are using your payroll dollars.   Are employees wages in line with their responsibilities?  Do you have your CFO doing what a staff accountant could do, or an Engineer answering the phone?   In these cases, even though Revenue per Employee is trending up, payroll expenses are increasing, operating margins are decreasing, and perhaps your employees are being over worked or used inefficiently.

 Revenue Growth %:  This will let you know if your Revenue Per Employee is increasing due to growth in sales, not just by cutting staff.  It is helpful to look at the percent your Revenue Per Employee grew compared to the percent your revenue grew.  Are you really becoming more productive, or did the ratio bump come only from increased sales growth?  Was the revenue growth due to a windfall or a non-labor intensive sale?  Is this ratio level sustainable?

3 thing I like about Revenue per Employee:    

1. Tracking this ratio can keep youy company from getting staff heavy
2. Trending this ratio can help keep your team focused on your strategy.  Do you want  increased growth? Increased efficiency? Both?
3. It is a great ratio for benchmarking since the data is usually easy to get, even for private companies

 4 things that concern me about Revenue per Employee.  If you begin managing your company to this ratio you can make some bad decisions! 

1. Delay hiring in key areas like customer service  or help desk will keep your employee count low, but at what cost to customer loyalty?
2. Asking staff to work longer and harder to avoid adding staff can eventually cause lower productivity and dissatisfaction.
3. Squeezing more from your sales staff to keep employee counts low can cause you to miss opportunities
4. Being too lean can hamper your ability to react quickly to a changing market

 Before making decisions based on any  metric, remember to read last week’s blog about Metrics and follow the Do’s and Don’ts! https://jembusiness.wordpress.com/2011/10/02/welcome-to-the-my-favorite-metrics-series/