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.

Revenue Per Employee

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.

RELATED TERMS
  1. Employee Engagement

    Employee engagement is a human resources concept that describes ...
  2. Performance Management

    Performance management is the supervision of employees and departments ...
  3. Employee Contribution Plan

    An employee contribution plan is an employer-sponsored savings ...
  4. Exempt Employee

    The term “Exempt Employee” refers to a category of employees ...
  5. Employee Stock Ownership Plan - ...

    An employee stock ownership plan (ESOP) is a qualified defined-contribution ...
  6. Employee Trust

    An employee trust is a fund that an employer establishes on behalf ...
Related Articles
  1. Personal Finance

    What's Your Employee Value?

    Have you ever wondered how much you're worth to your boss? Here's a method for calculating that value.
  2. Personal Finance

    Top 10 Companies with the Best Parental Leave Benefits (NFLX, ADBE)

    Ikea just announced it will offer its 13,000 salaried and hourly employees in the U.S. up to four months of paid parental leave. Here are the other companies that offer the best benefits around. ...
  3. Financial Advisor

    The Cost Of Hiring A New Employee

    Hiring a new employee means more than just a salary ... a lot more.
  4. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  5. Financial Advisor

    Understanding Rules on Defined Benefit Pension Plans

    Defined benefit plans offer advantages to both employers and employees. Employers must understand the federal tax rules when establishing these plans.
  6. Financial Advisor

    Why Do Businesses Benefit From Life Insurance on Employees?

    Companies can buy life insurance on their employees and collect the benefit proceeds. Find out why companies want to benefit from the death of their employees.
  7. Financial Advisor

    Beware Of Company Stock In Qualified Plans

    While this strategy does have a few advantages, it can also pose some substantial risks to employees.
  8. Small Business

    How Small Businesses Can Hire & Keep Top Employees

    Here is how small business owners can find the right employees, help them succeed and stay engaged at the company.
  9. Small Business

    5 Unique Ways To Increase Office Morale

    The five techniques outlined in this article provide well-researched ways to improve employee morale and productivity.
  10. Small Business

    How Corporate Culture Affects Your Bottom Line

    Here's a look at how companies can be successful financially by promoting a positive work atmosphere for employees.
RELATED FAQS
  1. Can LLCs have employees?

    Discover how limited liability corporations (LLC) can have an unlimited number of employees and the legal steps required ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center