HR Metrics of Note: Revenue Per Employee VS. Profit Per Employee
October 29, 2012
Ok kids... I've talked in the past about the wisdom of Revenue Per Employee being a pretty damn good metric for HR leaders. See what I've written here and here.
So I like Revenue per Employee for a lot of good reasons. BUT - 20 of you will send me an email today saying, "Yeah, I get what you're saying Kris, but I like Profit per employee. You should look at that...."
I don't want to go off on a rant here, but... hell, I'm going to anyway...
Revenue per employee is a act of fractions, people. And the denominator in the Revenue per Employee calculation is... wait for it... Employees! Which is almost every company's biggest expense. Load more people/expense into the revenue per employee calculation and guess what you get? Less revenue per employee for sure, but also reduced profitability if your revenue line doesn't go up as you add people.
Which is a long way of saying the following: Revenue per Employee already includes a calculation that is every HR leader's biggest profitability lever - headcount. Or freaking headcount, if you're into intensifiers.
Still don't buy it? Check out this analysis of Revenue per Employee at Amazon from Seeking Alpha hat tip to @steveboese):
"Operating without stores is a huge bonus to a modern retailer, and you see it right there in the sales-per-employee figures: It was $855,463 at Amazon (AMZN) last year, while each Wal-Mart (WMT) worker generated $201,752. That's a heck of an advantage and is just one reason why Amazon shares trade at such a stunning premium to those of Wal-Mart, based on PE ratio.
But the Amazon productivity machine has sputtered of late. It either reflects CEO Jeff Bezos wisely sinking money into added workers and facilities - the company recently agreed to lay out $1.2 billion for part of its headquarters compound in Seattle - or desperate efforts to keep the revenue gains coming and thus keep the stock aloft. Bezos's stake is worth more than $20 billion, and stock options have been a major draw in attracting and keeping talent at Amazon.
The revenue-per-employee figure listed above for Amazon, $855,463, is a steep drop from the prior year, 2010, when each Amazon worker generated $1,014,955. That's a 16% decline, and helps explain why net income has been plunging at Amazon and why its guidance for the third quarter of 2012 calls for an operating loss of between $50 million and $350 million. The profit margin ain't what it was.
The culprit is a huge increase in employment at Amazon, up 67% last year to 56,200. That, while sales rose just 41%. And while many companies keep you waiting for the 10-K to see the total employee number, Amazon kindly provides on its website an end-of-second quarter figure, of 65,600. So Bezos welcomed aboard another 9,400 workers during the first six months of this year. If he adds another 9,400 during the second half of 2012, Amazon would employ 75,000. And if sales rise 31% this year - that's how much they rose during the first six months, and Amazon's 3Q guidance calls for an increase of between 19% and 31% -- sales per employee would drop, slightly, again to $839,745, if our calculations are correct."
Which is someone else saying that you don't need profit per employee. It's already embeded in the Revenue Per Employee metric.
Now go out and use the headcount lever wisely. You don't need no stinking profit metric. You control the biggest hammer to profit there is.
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.
Posted by: Helen | October 30, 2012 at 12:51 AM