What Is Revenue Per Employee? (And How To Calculate It)

Indeed Editorial Team

Updated 13 October 2022

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The revenue per employee ratio measures the amount of money each employee generates for a company. It is an important metric for shareholders and employers to evaluate the performance and efficiency of an organisation. Professionals use these numbers to measure the productivity of employees and employees can analyse their contribution based on the average amount they make for the company. In this article, we discuss what the metric is, how to calculate it, its importance and the factors that can affect it.

What Is Revenue Per Employee?

Revenue per employee is an analytical tool to determine the average amount employees earn for an organisation. It may help companies calculate the contribution of employees to their profitability. A higher ratio indicates a business is profitable and suggests that a company is using its resources effectively. For example, this may include annual bonuses and training investments in the development of employees to increase productivity.

Companies compare this average number with other firms in the industry to identify solutions to increase employee efficiency and generate more revenue. They often combine this ratio with other data, such as annual sales, loss and profit generated in the company to measure its overall performance.

Related: What Is Revenue? Definition, Types, Examples And More

How To Calculate The Ratio?

Calculating this ratio can provide insight into an organisation's financial performance. Consider the following steps to calculate the ratio:

1. Determine the total revenue of the company

Determining a company's total revenue for a particular period is important to find the ratio. You can use annual financial records of a firm or quarterly reports to find the total revenue. To calculate the ratio for a year, you can use annual revenue numbers, and for determining the employee revenue for a quarter or a month, you may use the total revenue data for a particular month or quarter.

You can use the total revenue numbers of a particular period for which you may want to calculate the ratio. For example, if you want to know the employee revenue numbers in the last quarter, find the company's total revenue in the last quarter.

2. Find the number of active employees

Another important metric is the number of employees in the calculation period. This number might be available on an organisation's website or employee database. You can ask HR professionals or consult the company's annual financial reports to find the number of employees working during a particular period. For example, if you want to find the ratio of the last financial year, ensure to use the number of employees in that specific year for accurate calculations.

3. Calculate the ratio

You can calculate the ratio by dividing the company's total revenue by the number of employees at an organisation. For example, if there are 80 employees in an organisation and the total annual revenue is ₹20,00,00,000. You can calculate this ratio as:

Revenue per employee = 20,00,00,000 / 80 = 25,00,000 per employee

This indicates that each employee is making ₹25,00,000 on average for the company annually.

4. Analyse the ratio

You can use this ratio as a parameter to analyse employee productivity. It is beneficial to compare your average calculation with similar businesses to improve the use of resources and train employees for better results. Typically, companies with higher ratios operate more efficiently than their competitors and have lower overhead costs. You can combine other metrics with the ratio, such as sales, cost and profit per employee, to calculate multiple financial assessment characteristics of an organisation.

Related: What Is An Employee? (Definition, Types And Benefits)

Benefits Of Calculating This Revenue

You can acquire valuable information about a company by using metrics from this ratio. Here is how this metric is useful:

Employee analysis

Human resources and managers can use this calculation to analyse employee performance. It helps them understand how they are deploying employees with their productivity ratios. You can use the results to implement initiatives to optimise employee competence by managing their workload and stress levels and promoting a healthy working culture for higher throughput.

Workforce planning

When a company's revenue increases or decreases more than expected, this ratio can help in workforce planning. For example, a company is not achieving targeted results and its revenue to employee ratio is low. In that case, it can hire more employees to meet demands or remove specific departments to decrease overhead costs. You may assess if you can achieve the same revenue with a lower workforce and better employee policies to reduce additional expenses for the organisation.

Competitor analysis

You can compare ratios with similar companies to determine which business areas are weaker in your employer's company. For example, the company's numbers are lower than the industry average. In that case, you could identify improvements, such as investing in technology or training to increase awareness of new software or project policies. This exercise gives you a better understanding of a company's financial performance compared with the industry norm.

Examine cost per hire

The cost per hire is the average cost a company spends on recruiting a candidate. The ratio depends on the size of the organisation. You can analyse the company's investments and returns in human capital to devise ways to optimise employee expenses. For example, if you are spending ₹25,000 on average on hiring a candidate, you can use the ratio to determine the profitability of the company's initial hiring investments.

Related: What Is Performance Management? A Comprehensive Guide

Factors Affecting The Ratio

The following factors can affect the ratio and your final assessments:

Employee turnover

The employee turnover rate defines the number of employees leaving an organisation in a particular period, including voluntary resignations. A higher employee turnover ratio can decrease an organisation's revenue to employee and profit ratios. Employee turnover may indicate the reasons why employees may choose to quit. Human resources professionals can suggest measures to retain employees and improve the ratio or decrease the workforce to cut expenses that may not be viable for a firm.

Related: Top Business Analyst Tools For Improving Efficiency

Industry in consideration

Labour-intensive industries such as construction, textiles and hospitality typically have lower ratios. Some businesses may generate profit with a lower ratio because of their higher workforce requirement. In such cases, the ratio may be ineffective, as every employee may not directly impact the company's profit metrics. It is useful to measure this ratio in organisations where employees directly affect the company's performance.

Occasionally, it is important to consider the daily operations of a business when calculating the ratio because a remote-based company may have lower overhead costs compared with a company with a physical office. To verify the accuracy of such ratios, compare organisations with similar operations.

Age of an organisation

A well-established organisation usually has lower costs per employee and a team of professionals who may generate a higher profitability ratio. In comparison, a recently established start-up may spend more on hiring, retaining and training employees. The minimum age of a company directly affects the ratio and profitability of an organisation. As a company gets older, its overhead and other costs decrease, resulting in higher revenue and, consequently, a higher ratio.

How To Improve The Ratio?

Here are suggestions you can follow to improve this metric. It is advisable to use this ratio with other metrics in annual financial reports, such as an investment-to-profit ratio and revenue-to-overhead ratio for accurate insights into a company's performance:

1. Enhance the hiring quality

Companies can improve their hiring policies for better ratios. They can establish quality hiring standards for a better workforce, offering satisfactory salaries, bonuses and employee benefits. Advanced hiring tests during the interview stage might help recruit the best workforce. Recruiting efficient and competitive employees can help exponentially increase this ratio.

Related: How To Calculate A Bonus In 3 Easy Steps (With Types)

2. Invest in technology and improve the workspace

Investing in better technology and employee engagement tools to assist employees in reaching their maximum potential is important for generating higher revenue. Companies can invest in providing opportunities for new candidates to grow, improve feedback mechanisms and make offices an interactive workspace. Such practices may improve employee productivity and enable a company to sustain consistent revenue growth.

Related: Why Employee Motivation Is Important: A Complete Guide

3. Improve training and development

Organisations that remove underperforming talent at early stages may struggle with maintaining employee retention. Investing in training and development during different phases of an employee's career might upgrade their skills. For example, regular training or interaction with senior managers can guide them in their work and help firms develop valuable employees.

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