A competitive labor market has placed enormous wage pressures on employers over the last few years. The result has been a material increase in labor costs for employers looking to backfill vacant positions, retain key personnel, or grow their business with added human resources. More than ever, organizations are counting on the people they bring on board to be well worth the investment.
Business entity revenue per business entity employee is a metric that helps to measure the productivity of the labor force and is an important data point used by many organizations to gauge the return on labor investment. To calculate this metric, divide your total annual business entity revenue by the total number of business entity employees. Tracking this metric over time will help you gain insights into how prudent and profitable your previous hiring decisions have been over different fiscal periods.
Among the 25% of organizations considered to be the best performers on this metric (the 75th percentile in the figure), annual business entity revenue per business entity employee is $561,152 or more. Bottom performers (those in the 25th percentile) generate $171,131 per employee or less. At the median are organizations bringing in $306,849 in revenue per employee each year.
According to the U.S. Bureau of Labor Statistics, a median full-time employee’s pay is $1,041 a week, or about $54,281 annually. If you add a 30% benefits load to cover the employer’s share of Social Security and Medicare, unemployment insurance, workers’ compensation coverage, healthcare insurance premiums, and pension costs, the cost of each employee grows to around $70,565 per year.
At a median organization, per the metric above, a median full-time employee would bring the company $236,284, more than three times the amount of his or her pay in annual revenue. In other words, that employee’s job would pay for itself three times over.
There are many factors that could explain a high return of revenue per employee, but ultimately, it means that increases to your organization’s headcount are being added to productive areas of the organization and are leading to revenue increases. Lower revenue per employee may mean that your employee base has become less engaged or productive. In some cases, a lower figure sustained over multiple quarters or years may signal the need for a reduction in headcount.
Measure and Maximize Productivity
The first step you should take with this metric is to measure your company’s performance against its own standards. Then, you can compare your company to others within your industry. Revenue can vary quite a bit from one industry to the next, so it’s important to be cautious when comparing your company’s performance to another company in an entirely different industry. For example, comparing your hospital to a university or a professional sports team will not provide you with good decision-making support, you would be much better served comparing yourself to other healthcare organizations.
If your performance on this metric is not where you want it to be, you may need to take a hard look at overhead and resource allocation to ensure that the balance of administrative and revenue-generating positions is appropriate. In addition, it’s important to ensure all employees have the tools they need to maximize productivity. For example, can employees easily find and access desktop guides or other resources that they might need to carry out their work? If not, they might spend hours each week looking for these resources or creating resources that already exist elsewhere. Either way, productivity will suffer as a result.
Benchmarking is key for optimizing productivity and increasing revenue. A good starting point is to identify, measure, and track key performance indicators (KPIs) related to employee productivity. Selecting the right KPIs can help an organization prioritize work, align work with overall organizational strategy, and measure progress toward established targets. KPIs not only help organizations track employee and organizational performance but also identify areas for improvement and help to monitor progress toward short- and long-term goals.
Establishing performance measurement systems and tracking KPIs gives organizations the intelligence they need to ensure they make the most of each employee’s time, knowledge, and experience. By tracking progress toward productivity goals, and ensuring that employees have what they need to meet those goals, an organization can move closer to the top-performer category in terms of revenue generated per employee.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston, Texas.