Revenue Per Employee: How to Calculate RPE and Knowing What a Good RPE Is
Revenue Per Employee is a good metric for linking employee productivity to organizational performance. But how do you calculate Revenue Per Employee and what is a good Revenue Per Employee result? In this article, I'll look at the different ways to calculate revenue per employee (RPE). I'll also touch on the ratios that are used to calculate the RPE and how employee retention affects it. How does employee retention affect RPE? How do you know if your current staff is worth keeping? As we look at RPE, you'll see that in general the higher the number, the more profitable the business is likely to be.
Calculating Revenue Per Employee
Calculating revenue per employee is pretty straight forward. It is simply taking your revenue and dividing it by your total number of employees. However, there are some finer details that you can consider to be as accurate as possible with your RPE metric. For example, the time frame you use for the calculation will impact the value you get back. Most financial statements cover the entire year, so using an end of year revenue number makes sense, but you can also calculate revenue per employee for each individual business quarter. Another thing to consider is what to use for the count of employees. Your business will most likely experience an ever-changing employee headcount figure throughout the year, so what number you use has a great impact on the RPE metric. I recommend using your yearly average for headcount. So if you started the year with 100 employees, and finished with 150 employees, use 125. It will not be perfect, but at least directional. A caveat to that might be if you hired all 50 of those new employees in December. Certainly they have not had an impact on revenue yet, so then it might make sense to use 100. However you choose to do the calculation, the key is to remain consistent so you can look at a year-over-year trend.
Additionally, the age of the company can have an impact on the revenue per employee ratio. Newer companies will generally have lower revenue per employee than older ones. Also, the benchmark used to compare the revenue per employee will be drastically different for each industry. As a result, you should use an industry-specific benchmark when comparing companies.
What is a Good Revenue Per Employee Goal?
So now that you know your Revenue Per Employee, how do you know if it is good or not?
Let’s conduct some simple math to get an answer to that question.
According to the US Bureau of Labor Statistics, median weekly earnings for the nation’s 112 million full-time workers was $989. That comes to $51,428 annually. Then add 30% for loaded benefit costs that an employer has to cover, so in this case, an additional $15,428. So all together, the average US employee costs a business $66,856. As a general rule of thumb, an employee should generate between three to five times their loaded salary. So an employee who costs $66,856 should generate between $200,500 and $330,000 annually. Every business and industry is different so you will have to find what is most appropriate for your business.
The above example uses the median salary of an employee in the United States. To find your specific range of Revenue Per Employee that you can track over time, you will want to find your company’s median salary and use that.
As a general rule of thumb, revenue per employee should be between $250,000 and $550,000, but there are exceptions. If your ratio is below $250,000, you may need to decrease your headcount. Likewise, if your ratio exceeds $550,000, you'll likely need to increase your staff to reach the target. So, if you want to keep your revenue per employee high, you need to look at historical trends and adjust your strategy accordingly. And remember that all of this varies depending on industry and business model.
Revenue Per Employee Can Help with Your Staffing Strategy
Revenue Per Employee is not just a vanity metric. It can help you with determining if your staffing strategy is working.
If you have a high revenue per employee (say for example, between 3-5x your company’s median salary), that could be an indication that the company is meeting revenue and productivity goals efficiently. Any higher than 5x and that could be a sign that you need to hire more employees, perhaps starting in the human resources department to help with staffing up, because your growth might be starting to outpace your capacity.
If you have a low revenue per employee, that may be an indication that your company’s performance might be struggling and you may need to consider adjusting your headcount down, as you might be overstaffed in some areas of the business. I believe adjusting headcount down should be a last option, and recommend starting by looking for areas of your operation that might be ripe for process improvement.
Impact of Employee Retention on Revenue Per Employee
A high employee turnover rate can be detrimental to a company's bottom line. It can cost a company more money in recruitment and redistribution than the company can achieve through a high retention rate. A low retention rate can cause existing employees to think twice about staying. If attrition is high, new employees are required to be recruited, which means more time is wasted on training and onboarding. Retention rates are a crucial part of any business strategy.
An ideal work environment is one of the most important factors that contribute to high employee retention rates. A supportive workplace encourages employees to work to their potential. Employee retention can be improved by providing adequate on-the-job training, practicing effective communication, and offering perks and benefits to employees. Employees need to feel appreciated, as a lack of appreciation can lead to high turnover rates. To retain top employees, a company must recognize an employee's hard work and performance with appropriate perks and rewards.
Low turnover helps keep costs low and boosts the bottom line. A low turnover rate also increases the value employees bring to an organization. It makes average performers into rising stars. While it is impossible to predict the exact percentage of employee turnover, minimizing turnover rates is crucial for any organization. It is critical to implement strategies to improve retention rates for all employees in order to achieve a high level of staffing stability. When done correctly, employee retention can dramatically improve your bottom line and lead to increased revenue per employee.
As I mentioned earlier, the second variable to consider is the number of employees active during the calculation period. You can ask your human resources department for the number of employees employed during the calculation period. The time frame for both the census and revenue should be consistent. A lower retention rate will lower revenue per employee. When it is high, the revenue per employee will be higher. If you are concerned about employee turnover, consider making changes that will increase your revenue per employee.
Retention and engagement are tied. Both are directly related, and employee engagement measures the quality of the workplace. In the past, exit interviews were used to gauge employee engagement. The exit interview questions were designed to measure employee satisfaction and the company as a whole. Today, employee engagement is measured through a survey system, which asks questions more frequently and gives you information on employee issues before they quit. When you can identify what employees are unhappy with, you can develop an effective plan to address them.
High turnover rates can also distract the workforce. High employee turnover rates can decrease the effectiveness of different teams, which in turn slows down the company's growth. The rate of turnover also affects the company's bottom line, as new employees are not always as productive as those who remain. In addition, high turnover rates can make employees feel burnt out and look for better opportunities elsewhere. The cost of training new employees is high, which can be difficult to recover.
Get Started Using the Revenue Per Employee Metric
If you want to improve your company's efficiency, start by calculating revenue per employee. Not only will you be able to see how efficient your employees are, but you can also use this figure to plan improvements or change in your company. If you feel your revenue per employee could be higher, you can recommend training programs or better technology for your staff. If you're in business to grow, calculate revenue per employee to determine whether your payroll and staffing practices are effective.
If you want to get started determining your company's RPE, you should do some research to find RPEs in your industry and companies about your same size. Figuring out your average employee size is crucial, as this is the divisor in your equation and will impact the final result the most.
From there, start to look for ways to improve your business and track RPE over time to see if your efforts are working.
