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Revenue Per Employee

What is Revenue per Employee?

Revenue per employee (abbreviated as RPE) is referred to as the approximate amount of revenue generated by each employee of a company. This metric can be easily calculated by dividing a company’s total revenue by the current number of employees for a specific period. Revenue per employee cannot be used as a statistical figure to make decisions. But, this metric can be used along with other financial metrics (such as return on equity (ROE), profit margin, etc.) to strategize for business growth.

If the company’s revenue per employee is increasing, but the total headcount of employees is the same, it indicates that employee productivity and efficiency are also increasing. However, if a company’s revenue per employee is declining, it might be due to two main reasons. The company might have an excess of employees diluting the overall value of RPE, or some employees are not being allocated any productive work. Both these situations are highly undesirable for any company.

Some confuse ‘revenue per employee’ and ‘profit per employee.’ Revenue is the total income earned by a company from sales of products and services. Profit is the net income left after deducting operational expenses, fixed costs, debts, etc. To calculate the RPE, make sure that you consider the total revenue of the company and not the total profit.

The formula for Revenue per Employee is as follows:

RPE  = Total Revenue / Existing number of employees

Generally, the RPE is calculated using the total revenue for the last twelve months. But, you can calculate the RPE for another period (such as bi-annual, quarterly, etc.) by adjusting the data for the selected period.

This formula can be further expanded using the Full-time equivalent (FTE) ratio. FTE is a metric that demonstrates an employee’s productivity. This indicator can help a company decide if they need to hire new employees, conduct a structural reorganization, or reduce some current employees.

How to calculate Revenue per Employee:

Let’s learn how to calculate revenue per employee using the formula mentioned above:

Example 1:

Company A is a healthcare startup that earned a total annual revenue of $150,000 last year. During this period, Company A was managed by 60 employees.

To calculate the revenue per employee of company A, we can divide the total annual revenue by the total number of employees during the period.

RPE of company A = $150,000/60 = $2,500 per employee

Example 2:

Company B is a tech company that has a SaaS (software as a service) business model. Last year, company B generated total annual revenue of $50 billion, and the total headcount for the duration was 200,000 full-time employees.

To calculate the revenue per employee of company A, we can divide the total annual revenue by the total number of employees during the period.

RPE of company B = $50 billion / 200,000 = $250,000 per employee

Start tracking your Revenue per Employee data.

Revenue per employee data is an essential key performance indicator (KPI) that is monitored by the human resources (HR) department of a company because of the following reasons:

  • It helps the management to quantify the value of the employees. You can base a hiring strategy on this metric to recruit future employees.
  • It helps to determine the impact of the company’s attrition rate on the financial metrics.
  • It helps to determine the productivity and efficiency of an average company employee.
  • You can compare the RPE of your company with your competitors to understand your standing in the market.
  • It helps to assess any past changes in your company so that you can think of improvements in the organizational structure and operational strategy to boost profitability and growth.
  • Investors consider this metric to analyze a company as a potential investment opportunity.

Factors affecting the ratio of revenue per employee:

  1. Age of the organization

Generally, small businesses and startups with lower revenue will have lower revenue-per-employee ratios compared to big companies with high revenue streams. Even if big companies have more employees, they can still have a higher RPE ratio.

Small companies can scale up their revenues by hiring more employees for additional work. In general, the revenue increases faster than labor costs in these scenarios. This approach to managing the RPE also helps the company to expand its margin and boost overall profitability.

  1. Type of Industry

The labor cost and demand vary from one industry to another. It makes more sense to compare the RPE of various companies of the same industry type.

For instance: A traditional marketplace will need to bear additional labor costs required in brick-and-mortar stores compared to online e-commerce marketplaces. Hence, the revenue per employee of these marketplaces should not be compared. In general, labor-intensive industries (such as hospitality, agriculture, etc.) have lower revenue per employee than industries that require less human capital (such as technology companies, etc.).

  1. Employee Turnover

Employee Turnover is the total number of employees that leave a company over a certain number of employees that leave a company over a specific period and must be replaced. This term includes the workers who resigned from the company voluntarily and who were terminated involuntary (i.e., laid off or fired).

A higher employee turnover indicates that companies are not able to have a higher retention rate of employees. The existing employees are not as productive because they need to mentor and train the company’s new employees. The bottom line is that the company’s expenses increase during the onboarding process of a new employee, and the productivity of existing employees decreases. This hurts the ratio of revenue per employee.