Companies, from small businesses to conglomerates, use financial metrics as key performance indicators of how well their business is doing. They compare revenue or how much profit they make and also compare employee metric ratios such as the revenue per employee or RPE.
What is revenue per employee?
Revenue per employee is a human resource metric that reflects the productivity of a company's total workforce. It's true when they say that employees are the company's most significant assets. So it's only fitting to know the return on investment in human capital.
The higher your revenue per employee, the more ideal it is because it means:
- The business has efficient operating systems that reduce downtime.
- Your company has high-value employees who prioritize the best quality for your products and services.
- Career growth opportunities and exemplary leadership in teams result in an engaged workforce.
- The HR professionals have good hiring practices.
How to calculate revenue per employee
To calculate revenue per employee, divide the company's revenue by its current number of full-time employees.
Annual revenue is used when calculating revenue per employee by default. However, it can also be expressed quarterly or even monthly. Investors can easily pull out data from financial statements and annual reports. You'll likely gather rough estimates from the finance and human resource departments if you're a business owner.
For example, let's calculate an annual revenue per employee for Netflix, Inc.
It's important to note that you should look for total revenue and not net income or profit/ As of December 31, 2021, we had approximately 11,300 full-time employees located globally in 60 countries."
Revenue Per Employee Calculation for Netflix Inc. (2021):
Revenue Per Employee = $29,697,844,00011,300=$2,628,127.79
For FY 2021, the revenue generated by each full-time employee of Netflix, Inc. is approximately $2.6 million.
What is a good revenue per employee?
Now you might ask: is an RPE of $2.62 million, like that of Netflix, good?
How much revenue should an employee generate for it to be considered good? The answer depends on several factors.
Factors affecting revenue per employee
Size & Age of Company
Just as you don't compare the progress of a self-made 40-year-old entrepreneur to a teenager from a rich family, the revenue per employee of a small business is incomparable to that of a conglomerate.
A tenured company has a high revenue per employee because it has established efficient operating systems over the years. In comparison, a new business can only hire less than 50 employees. Plus, there'll be lesser revenues since most of the time will be spent on breaking the learning curve — from training the staff to setting tech systems, prospecting new clients, and capital spending.
An organization's turnover rate is the number of employees who voluntarily leave over an appropriate period. From the revenue per employee formula, it may instinctively tell you that fewer employees mean higher revenue per employee ratio.
However, this is not always true. When the HR team keeps bringing in new employees for replacement, it incurs more expenses and downtime for staff training, resulting in less revenue. Thus, it's crucial to help the employees feel fulfilled if the aim is to gain revenue.
Industry or Sector of Business
Just as you would not compare apples to oranges, companies across different sectors will also not have the same revenue per employee — say, energy companies to technology companies. Better stick with your competitors to see how well your company is doing in a niche market.
Ultimately, a good revenue per employee for your company can only be determined after doing market research against your industry peers. Still, you need employee benchmark ranges to know your standing.
As of Q3 2022, the highest average revenue per employee ratios ranked according to business sectors are the energy ($2.85M), utilities ($2.49M), and consumer non-cyclical sectors ($1.07M).
As for the business industries, the largest revenue per employee (average amounts) is from oil refineries ($32.16M), natural gas utilities ($9.20M), and financial companies in the life insurance industry ($7.38M).
There is no hard fast rule regarding revenue per employee benchmark ranges. The average numbers change with the market landscape.
Example 1: Comparing revenue per employee in the tech sector
Let's compare the three biggest software and technology companies in the market.
Revenue Per employee, as of 2021= $4.39M
Revenue Per employee, as of 2021= $1.02M
Revenue Per employee, as of 2021 = $1.65M
Considering that the average revenue per employee for tech companies is around $700,000, it shows that Apple, Microsoft, and Google are the top companies making the most in the industry. Just that by comparison, Apple, Inc. has the highest annual revenue per employee for 2021.
How to improve revenue per employee
If a company has a lower revenue per employee compared to its peers in the same industry, then there are two options to improve this — increase revenue or reduce to a smaller workforce.
Here are a few strategies to jumpstart your ideas of boosting your company's revenue per employee.
Hire talented employees.
This goes without saying, but it's a good reminder to have a well-equipped recruitment team. Good hiring practices must include having an efficient recruitment system in the first place. One that focuses on matching the strengths and weaknesses of the applicant to the vacant position.
The high-value employees that could bring revenue are not only smart and capable, but they are also creative and resourceful. Not all knowledgeable applicants fit the company's team, so there should be an emphasis on looking for talent over know-how. Although technical skills are standard, it's the soft skills that are hard to spot.
Promote managers with good leadership skills.
Although all leaders are good managers, not all managers are good leaders. A talented team without a driven yet compassionate leader is a considerable expense. Therefore, choose managers who will not just "manage" the team's tasks and meet deadlines or quotas.
Choose effective managers who can help any average employee outgrow his limiting beliefs to unlock his potential. He/She must know how to handle people, nurture their talent, believe in them first, so they gain confidence in themselves too, and remind them always of the team's goals.
Invest in your employees' growth and empathize with their needs.
As company assets, employees should be given the space to be seen and heard as valued team members. They are less likely to feel burnout when given room to grow.
An engaged workforce takes the initiative to deliver the best performance, eventually manifesting into revenue. These can be done through team building activities, training, employee perks and benefits, flexible time schedules, job rotations, promoting open communication, aligning the team's goals to their career goals, and the like.
Invest in technology to automate tasks
If there are tasks that can be done repeatedly, invest in automation. As digital tools become more available, businesses can access better solutions for back- and middle-office operations.
For example, using chatbots not only give quicker results to customers but also streamlines the employees' tasks. Other examples are using analytical and management tools. Adapting these technologies could be costly at first, especially for SaaS applications. But it would be worth spending to give your team better tools to focus on customer satisfaction.
Why should you track revenue per employee?
Revenue per employee is no good when used merely as a ratio. The best use for the revenue per employee is to:
- Compare historical changes within a company by tracking the revenue per employee year on year.
- Compare how a company is doing competitively in a particular niche industry.
Tracking how much revenue each employee generates first brings awareness of the employees' productivity. Then, it will give direction as to what HR initiatives can improve employee productivity. It places even more value on each member of the organization. Quality over quantity matters. When leaders focus on improving the quality of employees they hire and keep, then revenue will follow suit.