What Is Revenue Per Employee?
Revenue per employee—calculated as a company's total revenue divided by its current number of employees—is an important ratio that roughly measures how much money each employee generates for the firm. The revenue-per-employee ratio is most useful when comparing it against that of other companies in the same industry, or looking at historical changes in a company's own ratio.
Why Does Revenue Per Employee Matter?
Revenue per employee is a meaningful analytical tool because it measures how efficiently a particular firm utilizes its employees. Ideally, a company wants the highest ratio of revenue per employee possible because a higher ratio indicates greater productivity. Revenue per employee also suggests that a company is using its resources—in this case its investment in human capital—wisely by developing workers who are very productive. Companies with high revenue-per-employee ratios are often profitable.
Factors that Affect the Ratio of Revenue Per Employee
A company's industry
Because labor demand varies from industry to industry, it is most meaningful to compare a business's revenue per employee with that of other companies in its industry; especially with its direct competitors. This ratio has little value out of context.
Banking, for example, requires many employees to staff physical locations and answer customer questions; so it has a high ratio of revenue per employee. A banker would want to compare its company's revenue per employee ratio with that of similar types of banking institutions. Companies in labor-intensive industries, like agriculture and hospitality, typically have lower revenue-per-employee ratios than companies that require less labor.
Revenue per employee is affected by a company’s employee turnover rate, where turnover is defined as the percentage of the total workforce that leaves voluntarily (or is fired) each year and must be replaced. Turnover is different from employee attrition, which refers to workers who retire or whose jobs are eliminated because of downsizing.
Employee turnover typically requires a company to interview, hire, and train new workers. During these onboarding processes, companies frequently become less productive because existing workers may need to mentor a new employee and share part of the workload.
Age of company
Young companies that are hiring to fill key positions might still have relatively small revenue. Such firms tend to have lower revenue-per-employee ratios than more established companies that can leverage hiring for those same key positions over a larger revenue base.
If a growing company needs to take on more help, then ideally management would be able to grow its revenue at a faster rate than its labor costs; which often is reflected in steadily rising revenue-per-employee ratios. Ultimately, increased efficiency in managing its revenue per employee should lead to a company's expanding margins and improved profitability.