Description: This is one of the most closely watched of all performance measures. It is based on the assumption that employees are at the core of a company’s profitability, and so high degrees of efficiency in this area are bound to result in strong profitability. It is also a standard benchmark in many industries.
Formula: Divide revenue for a full year by the total number of full-time equivalents (FTEs) in the company. An FTE is the combination of staffing that equals a forty-hour week. For example, two half-time employees would be counted as one FTE. The formula is as follows:
Annualized Revenue
Total Full Time Equivalents
A variation on this ratio is to only divide annual revenues by those FTEs who can be categorized as direct labor. This measures the productivity of those personnel who are directly connected to the manufacture of a company’s products or services. This measure should be used with care, since it is not always easy to determine which employees can be categorized as direct labor and which ones fall into the overhead category instead. The formula is as follows:
Annualized Revenue
Total Direct Labor Full Time Equivalents
Cautions: This formula is subject to a high degree of variation, depending upon how personnel are counted. For example, shifting away from employees to an outsourced solution or to the in-house use of temporary employees can artificially reduce the number of FTEs, as can the use of overtime by a smaller number of employees. Also, comparing the number of FTEs to revenue has a less direct bearing on profitability than comparing revenues to the total of all salaries and wages expenses; for example, one company with a large headcount but low pay per person may be more profitable than a company having a lesser headcount but a much higher salary per person. Also, some capital-intensive industries have so few employees in relation to the sales volume generated that this measure has much less significance than other measures, such as sales to fixed assets.