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What is a Revenue Per Employee?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 12 September 2016
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Revenue per employee is the calculation used to determine how productive employees are in a business. Companies use the formula Total Revenue/Total Number of Employees to determine the revenue per employee. This formula indicates how productive each employee is in generating revenues for the company. Companies may also use this formula on specific business division or functions, rather than the entire company revenues. Using this ratio to benchmark against the industry standard or major competitors can also help determine how productive employees are in the company.

Employee productivity is an important part of business operations. Payroll wages and taxes usually represent the highest business expense for most companies. To offset this expense, companies need to have employees who generate high levels of revenue. Overpaying employees who cannot generate high revenues or fail to complete tasks effectively and efficiently may lead to a business bankruptcy. Tracking the revenue per employee can help companies ensure consistent revenue-generating operations.

Companies with consistent levels of high revenue per employee usually indicate a company with solid management and production operations. Revenues for each employee in these companies are generally much higher than the labor cost of employees, leaving companies with more revenues to advance business operations. Companies in different industries or business sectors usually have different revenue benchmark.

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The service industry is a common example of lower revenues per employee. This industry usually takes more man-hours to complete tasks, which can lead to lower numbers. Companies may attempt to correct this by streamlining operations or creating specialized tasks for each employee in the service process. Specialized tasks ensure that employees remain as productive as possible since they only focus on one task; this allows employees to improve their skills at one task and become more efficient.

The professional industry includes companies like information technology, public accounting and legal firms, which usually have higher revenue per employees. These companies typically have high rates per hour charged for services completed in a set amount of hours. This allows companies to ensure high revenues from each employee by using project deadlines to eliminate wasted man hours and company resources.

The manufacturing and production industry may have lower revenues per employee since their companies function by the number of goods produced. Production methods can be labor intensive operations that require several individuals working on jobs at one time. Rather than using the revenue per employee calculation, companies may use cost of labor per good produced calculation to determine employee productivity.

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indemnifyme
Post 6

@ceilingcat - That does sound quite unfair. Most of the places I've worked, there are specific sales people and specific customer service people. It's strange your agency had you doing both.

I understand why companies look at revenue per employee, I do. That doesn't mean I don't hate the whole idea though! It sounds like revenue per employee would be a great excuse to start laying people off at a big company.

I can imagine some executive saying "hey, I don't like those numbers...let's fire some people and I bet they'll go up." Somehow I feel like that wouldn't work too well though.

ceilingcat
Post 5

I worked for a small insurance agency once that only considered us productive if we were selling. So all the work we did towards customer retention didn't count for anything! The only thing they cared about was whether you made a sale.

I always thought this was rather short sighted. The agency itself made money off of continued business. So when someone called up with a problem and I solved it, I was helping the agency keep them as a customer.

There were a lot of things wrong with that agency though. Their ideas about revenue per employee were just the tip of the iceberg!

David09
Post 4

@NathanG - We work in the service industry and periodically review our budget. Our biggest expense is by far employee wages, because we are producing services not manufactured products.

We have a time tracking application where we have to indicate by the hour what we’re working on. Management uses this to determine who the real money makers are, and who is proverbial dead wood.

It’s not a pleasant way of looking at your personnel, but the business market works by the numbers.

NathanG
Post 3

@allenJo - I work for a large corporation. While I am sure that they use revenue per employee, I think their benchmark is more in keeping with what the article is talking about.

The examples you give are billable man hours for an employee. I think the article is talking about simply taking total revenue and dividing by total employees to get revenue per employee, not how billable an employee is.

Frankly, in one sense I feel comfortable with our arrangement and in another sense I don’t. When I’m not so productive, on days with a lot of downtime, my numbers don’t change from the company’s perspective.

They’re the same as when I’m very productive. However, if layoffs start making the rounds during my downtime, and they look at my numbers and how much work I’m getting done (or not getting done), that’s when I become expensive.

allenJo
Post 2

@everetra - Yeah, I worked for a software firm where I got pulled into a development project for a client. I went way, way over budget.

We lost a lot of money on the deal, and frankly I am surprised I still had a job at the end of it. However, like you I had other deals where I made money so I was able to justify my continued presence.

Companies don’t fire you (generally) over one deal that went over budget. They look at the general trend of what you’re producing. Besides, it’s the job of the project manager to step in and find out why a project took longer than it should have. It’s not all the programmer’s fault.

everetra
Post 1

While I think that the revenue per employee benchmark is an important benchmark for business, it sometimes makes me a little nervous.

I work for a small company, and you better believe that we use revenue per employee to justify each head on the payroll. For that matter, some of the service work that I perform is billable to our buyers.

They bill me out at $200 per hour (they certainly don’t pay me that) to clients, and the more hours they can bill the better it is, and the more secure my job is.

We try not to inflate the hours, but if I go over the projected hours on a project, I feel the heat in a hurry. At that point, I am losing money for the company. Still, overall I think I’ve been a money maker for them but it’s not an easy job.

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