What is 'Revenue Per Employee'
Revenue per employee is a ratio that is calculated as company's revenue divided by the current number of employees. This ratio is most useful when comparing it against other companies in the same industry. Ideally, a company wants the highest revenue per employee possible, because it indicates higher productivity and effective use of the firm’s resources.
BREAKING DOWN 'Revenue Per Employee'
One of the largest expenses for a company is salary and benefits for the workforce, and profitable companies leverage the investment in people by developing workers who are very productive. Helping workers operate productively is similar to asset utilization, an accounting term measuring how well a company uses assets to grow revenue.
Factoring in Company Industry
To evaluate revenue per employee, a business compares its results to other companies in the same industry. Some industries, such as banking, require a large number of employees to staff physical locations and answer customer questions. The banker should compare his company's results to competitors in the same industry.
How Employee Turnover Impacts the Ratio
Revenue per employee is affected by a company’s employee turnover rate, and turnover is defined as the percentage of the total workforce that leaves voluntarily each year and must be replaced. Turnover is different from employee attrition, which refers to workers who retire or whose jobs are eliminated.
Turnover requires the company to interview, hire and train new workers, and the company is less productive during the process. Until the replacement is ready to work in the position, other employees must take on the work and company productivity declines. If employees are satisfied with their jobs, they are less likely to leave. It's important to interview, train and manage employees properly to ensure that workers can advance in their careers.
Examples of Leveraging Fixed Costs
Profitable companies succeed by leveraging fixed costs, and increasing revenue per employee is an example of using leverage. In addition to employee costs, companies attempt to maximize the revenue the firm produces using each asset. A delivery company, for example, strives to maximize the number of package deliveries the firm can make with each company truck. The truck is an investment of company resources, so a company that can leverage its resources can operate with fewer dollars invested in assets.
The special order concept states that, once a company covers all of its fixed costs for a month or quarter, any additional orders that the company receives only require the variable cost of production. Assume, for example, that a towel manufacturer has enough revenue during the month to pay for all fixed costs, including salary and benefits. During the last week of the month, a customer replaces an order for towels and wants a price quote. When computing the costs related to this special order, the manufacturer only considers the variable costs of production, which means that the firm can drive more revenue per employee without adding any additional payroll costs.