What is Revenue Per Employee
Revenue per employee is a ratio that is calculated as a company's total revenue divided by its current number of employees. It is a rough measure of how much money each employee generates for the firm. This ratio is most useful when comparing it against other companies in the same industry, or looking at changes in a company's own figure over time. Ideally, a company wants the highest revenue per employee possible, because it indicates higher productivity and effective use of the firm’s resources.
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. This is sometimes known as investment in human capital. Helping workers operate productively is similar to asset utilization, an accounting term measuring how well a company uses capital assets to grow revenue.
BREAKING DOWN Revenue Per Employee
Factoring in a Company's Industry
To evaluate revenue per employee, a business compares its results with other companies in the same industry, and especially to its direct competitors. 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 with competitors in the same industry. In general, service industries rely more on human capital than other industries, such as manufacturing, that use a lot of physical capital.
How Employee Turnover Affects the Ratio
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 due to downsizing.
Employee turnover typically requires the company to interview, hire and train new workers, and the company is less productive during this onboarding 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 without interruption to the firm's productive activities.
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 its fixed costs for a month or quarter, any additional orders that it 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.