September 29, 2016    4 minute read

Why The Revenue Per Employee Is The Key Performance Indicator

The Human Capital    September 29, 2016    4 minute read

Why The Revenue Per Employee Is The Key Performance Indicator

In any valid assessment of corporate performance, those bottom line income/turnover figures – while undeniably hugely important – are not always particularly enlightening as a reflection of sustainable growth or long-term stability.

This is especially true for smaller start-ups in attempting to gauge their early impact alongside the biggest fish in any given pond. Instead, calculating a company’s Revenue Per Employee (RPE) has become an increasingly important measure of success – or, at least, of being on the right track – in modern corporate culture.

As one has doubtlessly already gathered, the calculation in question is a fairly simple one: divide one’s company or business unit revenue by the number of full-time employees, and the result is the RPE figure.

Achieving a higher RPE figure bodes very well for a company of any size, because it indicates that the firm is maximising its productivity through the optimally effective use of existing resources. More so than many other numbers commonly obsessed over – returns on invested capital (ROIC), for example – the RPE calculation can tell an HR leader far more about what is going on behind those bottom line revenue figures, and why.

Cuts Will Not Cut It

Of course, there are a couple of qualifiers to bear in mind when crunching those RPE numbers. Most importantly, it is only really useful as a comparison with other companies in your industry. Banking firms, for example, generally require a large number of employees due to their high number of high street outlets and the equally high volume of customers requiring dedicated one-to-one service in person or over the phone. RPE for a bank, therefore, is likely to be fairly unhelpful when compared to RPE for a successful tech firm with a single head office, however comparable the two companies’ end-of-year figures may look from a distance.

Speaking of tech firms, take a look at this infographic detailing the Top Tech Companies Revenue Per Employee. It is certainly enlightening, and some of the results may be surprising – if nothing else, it is clear that simply reducing staff numbers and tasking them all with twice the workload is not the way to go.

In fact, employee turnover – as distinct from employee attrition, and defined strictly as the number of employees who leave over the course of a year and subsequently need to be replaced – will impact significantly on RPE, which is worth bearing in mind for some companies and industries far more than for others.

Vacant positions, followed by interviewing, hiring and training new workers up to full productivity will dent productivity figures during the period in which other employees are required to pick up any resulting slack. Obviously, keeping employees satisfied in their positions longer-term – thus making them less likely to leave, and reducing employee turnover – is a strategy that requires planning. In many cases, this necessitates hiring people into posts that offer suitable progression routes within the company or business unit.

HR And Those Key “Intangibles”

In an essay adapted from his book Mobilizing Minds: Creating Wealth from Talent in the 21st-Century Organization, McKinsey Director Lowell Bryan notes that:

“The vast majority of companies still gauge their performance using systems that measure internal financial results – systems based on metrics that don’t take sufficient notice of the real engines of wealth creation today: the knowledge, relationships, reputations, and other intangibles created by talented people and represented by investments in such activities as R&D, marketing, and training.

He also adds:

“Increasingly, companies create wealth by converting these ‘raw’ intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that raise profit per employee and ROIC. These intangibles are true capital, in the sense of delivering cash returns, even though the sources of those returns are intangible. Indeed, the most valuable capital that companies possess today is precisely intangible rather than financial. Companies should redesign their financial performance metrics for this new age.”

Kris Dunn, Chief Human Resources Officer at Atlanta-based recruitment specialists Kinetix, puts it even more directly in his piece on RPE for the website, noting that “your HR leader influences the biggest cost centre in most companies – the people. If revenue takes a hit, he/she should always have their eye on the denominator of the RPE formula. That’s the expense side of the equation, and while it’s easy to make the number look better for a couple of quarters by cutting heads, the RPE metric makes the short-term focus be balanced with a view towards what’s going to deliver revenue over the next year – or five.”

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