Treasury Practice

Employee ratios

Published: Mar 2009

Employee ratios have become of particular importance over the last 18 months as companies have been obliged to review costs and make redundancies where appropriate. Investors also frequently use employee ratios to measure how efficient a business is. In this article, we look at some of the most commonly used employee ratios as well as their application in today’s business environment.

What are employee ratios?

Employee ratios are often used as a rough measure of the productivity and efficiency of a company’s workforce, and as such they are sometimes referred to as productivity metrics. There is a range of employee ratios available for companies to use and the ones that are most appropriate will inevitably vary according to the company’s line of business. Some of the most commonly used metrics are:

Profit per employee:
\(\frac{Profit\: before\: tax} {Number \: of \: employees }\)
Operating revenue per employee:
\(\frac{Operating\: revenue}{Number \: of \: employees }\)
Working capital per employee:
\(\frac{Working \:capital}{Number \: of \: employees }\)
Shareholder funds per employee:
\(\frac{Shareholder\: funds}{Number \: of \: employees }\)
Total assets per employee:
\(\frac{Total\: assets}{Number \: of \: employees }\)
Average cost of employee:
\(\frac{Total\: cost\: of\: employees\:salaries\:+\:compensation\:+\:benefits}{Number \: of \: employees }\)

Why use employee ratios?

Although the application of employee ratios varies between industry sectors, they are frequently used in the service industry, where staffing levels are high. These ratios can assist in determining the level of sales that a business needs in order to ensure that the workforce is functioning efficiently, ie that employees are working to maximum capacity and that the firm is not either over- or understaffed.

Employee metrics can also have a financial impact on the company: for instance, if productivity can be increased without employing extra staff, this should in theory lead to a rise in profits.

Points to consider

As with many financial metrics, there are several factors which can affect the relevance of employee ratios, particularly when comparing one company with another. Factors to consider when using employee ratios include:

  • Industry sector. The number of employees required in a labour-intensive retail environment will differ greatly from, for example, an intellectually based company, such as a software development house. Therefore, it is important to compare like-with-like, rather than across industry sectors.
  • Whether employees are working full or part-time. Where the company has part-time employees, it will be necessary to calculate approximately the number of full-time equivalents. This figure can be estimated by dividing the total part-time employees’ working hours per week by those of one full-time employee, say 40 hours a week. For example, if Pedro works 20 hours a week, and Margaret works 25 hours a week, they are equivalent to 1.125 full-time employees:\(\frac{20\:+\:25}{40}\)
  • Contract workers. Companies using temporary or contract workers will also need to take into account that these workers should not technically be included in such calculations as they are not employees of the firm. This will of course affect the outcome of the metrics, particularly if a large proportion of the workforce is made up of contractors.
  • Timeframe. Employee ratios can also be used to monitor ongoing performance and/or trends within a single company or between companies. It is advisable to use a timeframe of at least three years to ensure that trend patterns are reliable.

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