Inside many tech companies last year, widespread layoffs had the desired effect of improving — at least on the surface — what some investors and industry observers consider a key organizational metric: revenue per employee.
This metric is calculated simply by dividing the total revenue generated within a specific business unit or entity by the number of employees in that unit or entity. Calculating and tracking revenue per employee helps organizations (and their investors) assess staff efficiency and gauge the return on labor investment.
Those in management consulting and other professional service industries frequently use this metric to compare prosperity and productivity among peer organizations.
Find a baseline
Based on cross-industry data collected by the American Productivity and Quality Center (APQC), companies earn $310,000 per employee at the median. Top performers (75th percentile) bring in, on average, $564,706 per employee; bottom-tier performers (25th percentile) generate an average of $176,471 per employee.
According to the US Bureau of Labor Statistics, the average full-time American worker earns about $60,000 per year, based on first-quarter 2024 data. Adding 30% to cover benefits, taxes, and insurance brings the total employer cost for an average worker to about $77,000. That means an average worker at a middle-of-the-road company generates roughly quadruple what they cost their employer in revenue each year.
Manage the metric
For organizations scoring low on this metric, improvement often requires taking a hard look at overhead and resource allocation. Is the balance of administrative and revenue-generating positions appropriate? Are employees performing optimally? Can they access the information they need to carry out their work? If not, look for ways to maximize skillset application and knowledge-sharing to increase productivity.
Reducing headcount is, of course, another way to influence this metric.
Layoffs happen for a variety of reasons. Last year, some tech companies that over-hired during the pandemic rightsized by paring down payrolls. Other organizations needed cash fast to pay creditors and stay afloat amid record inflation and high interest rates. In still other cases, organizations pressured by external parties or conditions cut their workforces to improve optics, gaining shiny new metrics and releasing external reports to paint themselves as lean, agile, high performers.
Legitimate rightsizing is sometimes necessary, especially for organizations that snapped up talent during labor shortages, only to find that demand never materialized. The ladder strategy of managing metrics to improve outward appearances, however, can severely impede an organization’s growth potential.
Add labor outside the metric
Some organizations found out the hard way that deep staff reductions can restrict growth. One option in this case is to add vendors, contractors, and freelancers to do work once performed in-house.
This strategy keeps revenue per employee high, but it can raise questions about continuity, information security, and data privacy — it can increase costs in these and other areas. It’s important to have a strong rationale and strategy underlying these types of workforce decisions. HR is a valuable partner for researching and drawing conclusions about the best course of action.
Due to the increasing use of outsourcing and contract labor, organizations looking to benchmark their revenue per employee against peer organizations should consider first seeking out additional data. Understanding the contingent labor costs or total labor costs of the peer organizations you wish to benchmark against will help ensure apples-to-apples comparisons.
New talent aids growth
To increase revenue, organizations often need more people.
APQC, a small nonprofit research center founded in 1977, has long maintained a culture of caution when it comes to increasing headcount. However, our ambitious growth goals led to our strategic decision in 2020 to add skills and capacity to our core. We welcomed several new employees in key areas, increasing our headcount by about 40% over three years.
In the short term, our average revenue per employee decreased. Long term, however, we know our strategic growth will result not only in our producing more high-quality research and resources but also in our improved financial performance.
Conducting an in-depth analysis of appropriate staffing levels for your organization and business goals will help you determine whether your current revenue per employee is high, low, or on target.
In conjunction with tracking this metric, it’s important to thoughtfully establish a balanced set of key performance indicators and to regularly assess individual employee performance. The results of these activities send valuable signals to organization leaders about whether they are taking full advantage of each employee’s time, skills, and knowledge.
Meanwhile, stay focused on exploring new ways to increase revenue and create new revenue streams. Compared with cost-cutting, generating more value through new business units or product lines is a much better and more rewarding method for improving your organization’s revenue per employee.
