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October 29, 2012

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Helen

Based on the example in the article - comparing the growth in revenue to the growth in labour costs - it sounds like the better metric is Labour Cost Revenue Percent.

It more simply details the amount of labour cost to generate $1 in revenue. If the metric is going up, labour costs are growing at a faster rate than revenue; down and revenue is growing faster than labour costs. The latter scenario is likely the one preferred by CEOs.

It's essentially the same metric as Revenue per Employee except that headcount is a simple counting of bums in seats and isn't literally a $ expense. You can have the same ten employees for years and Revenue per FTE can look great. But if your labour expenses are out of control (think crazy bonuses that are out of line with true revenue growth and therefore don't represent true pay for performance), then Labour Cost Revenue Percent is the superior metric to show this.

I believe a previous post either on this blog or FOT discussed the rising cost of benefits and how that has translated into capping employee hours to 29 hours/week (e.g. Darden) to avoid having to pay it. Organizations actions were based on the need to control labour costs and not headcount. These companies likely raised headcount to make up for those hours capped.

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