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Revenue Per Employee: A New Measure of Capital?

Written by: Morgan Franklin

Business leaders understand that a true insight into corporate performance can’t really be achieved by looking only at bottom line numbers. While undeniably crucial, those figures don’t really tell us much about the story behind the story; a company’s potential for sustainable longer-term growth, for example, is especially tricky to assess from turnover alone.

Despite this being more or less an accepted truism, McKinsey & Co. director Lowell Bryan observed the following in an essay adapted from his book Mobilizing Minds: Creating Wealth from Talent in the 21st-Century Organization:

“The vast majority of companies still gauge their performance using systems that measure internal financial results – systems based on metrics that don’t take sufficient notice of the real engines of wealth creation today: the knowledge, relationships, reputations, and other intangibles created by talented people and represented by investments in such activities as R&D, marketing, and training.”

Instead, argues Bryan, firms ought to be paying closer attention to an alternative but increasingly valued metric: revenue per employee (RPE). Defined in its simplest terms as overall revenue divided by number of full-time staff, a higher RPE figure indicates a business is closer to achieving maximum productivity through optimally effective use of existing resources.

The most immediate way to boost the results of any RPE equation would, of course, be to divide that bottom line turnover by a smaller pool of employees. However, numerous studies have shown that downsizing isn’t an effective way to keep your RPE figure buoyant longer-term. In recent years, the tech industry in particular has often been cited as highly illustrative here: as this infographic on Top Tech Companies Revenue Per Employee clearly shows, the correlation between RPE and overall staffing levels at many successful tech firms is frequently unpredictable at best. The numerical figures representing the revenue per employee featured in the infographic are in British pounds, today the conversion rate for pounds to dollars is £1 to $1.24. For example, the revenue per employee for apple is £2,136,273 compared to $2,638,831.

Despite (and indeed because of) this, paying closer attention to RPE can yield some key benefits for your company. If nothing else, it’s becoming fairly clear across numerous industries that simply reducing staff numbers and increasing demands on those that remain isn’t the way to keep your RPE calculations high for very long. As Kris Dunn, Chief Human Resources Officer at Atlanta-based recruitment specialists Kinetix, noted in a piece on RPE for the website HRexaminer.com:

“Your HR leader influences the biggest cost center in most companies – the people. If revenue takes a hit, he/she should always have their eye on the denominator of the RPE formula. That’s the expense side of the equation, and while it’s easy to make the number look better for a couple of quarters by cutting heads, the RPE metric makes the short-term focus be balanced with a view towards what’s going to deliver revenue over the next year – or five.”

In fact, staff turnover level (of workers who leave and need to be replaced, as distinct from employee attrition) has repeatedly been shown to impact significantly on RPE over time. Positions becoming vacant, followed by the inevitable processes of interviewing, hiring and training new workers up to full productivity, will almost always put a dent in output figures for the period during which other employees are required to pick up the resulting slack.

Obviously, keeping employees satisfied in their positions longer-term, and thus reducing turnover by making them less likely to leave, is a strategy that requires forward planning. In many cases, it necessitates hiring people into posts that offer suitable progression routes within the company or business unit (check out our guide to employee motivation and Behavioral EQ Training for more on enhancing workforce engagement).

Clearly this is worth bearing in mind for some companies far more than for others: indeed, one of the key qualifiers to be aware of when thinking in terms of RPE is that comparisons are only meaningful across comparable fields. Firms that require larger workforces – perhaps to populate numerous high street outlets or provide direct customer service – cannot usefully compare their RPE figures to that of a specialist tech firm with a single head office, irrespective of how comparable their annual turnovers may look at first glance.

Nevertheless, increased focus on individual companies’ RPE metrics is becoming an increasingly important tool for gauging success (or, at least, of being on the right track) in modern corporate culture. As much as any of the other numbers we tend to obsess over, RPE formulae can tell your HR leader far more about what’s going on behind those bottom line revenue figures, and why. Indeed, as Bryan went on to state in Mobilizing Minds:

“Increasingly, companies create wealth by converting these ‘raw’ intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that raise profit per employee and ROIC. These intangibles are true capital, in the sense of delivering cash returns, even though the sources of those returns are intangible. Indeed, the most valuable capital that companies possess today is precisely intangible rather than financial. Companies should redesign their financial performance metrics for this new age.”

*Most data included in this blog were taken from 2015.

Morgan Franklin is a writer and content creator who is interested in business ethics, workplace equality, startups and entrepreneurship. You can find Morgan on Twitter @MorganPFrank

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