The productivity of your workforce is critical to running a successful business. One key metric that helps companies measure this is revenue per employee (RPE). But what exactly does RPE mean, how do you calculate it, and what factors influence it? This article explores everything you need to know about this financial metric and why it makes sense for employers to take a closer look.
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What is revenue per employee?
First things first, RPE is a financial and HR metric that measures an organization’s average revenue per worker. It is expressed as a dollar amount and measures how effective a business is at utilizing its employees to generate revenue. Companies with a higher RPE are usually more profitable than those with a lower RPE.
Now that we better understand the reasoning behind RPE, let’s find out why it’s a metric employers should know.
Importance of revenue per employee
For those first getting familiar with RPE, we spoke with Tom Brock, a licensed CPA and CFA Charterholder, who has over a decade of experience helping small businesses and shares insights on why this can be a metric to keep track of.
Why is revenue per employee important?
In most cases, companies want to achieve an increasingly high RPE over time, because this is indicative of mounting workforce productivity and effective business operations.
— Tom Brock, CPA, CFA
Tom notes there’s other reasons why understanding RPE makes good business sense.
- Measures workforce efficiency: The biggest expense for most companies is the cost of their workforce. Fortunately, workers are also usually the biggest driver of revenue. RPE indicates how efficient you are at leveraging your human capital; it tells you the extent to which the average employee adds to your top-line.
- Tracks growth: In order to get the most utility out of the RPE measure, business leaders should track this metric over time. Doing so reveals whether productivity is trending upward or downward and can help inform strategic decisions.
Pro tip
RPE can also be used to compare profit centers. If a specific product line or geographic region is outperforming others, an analysis could reveal improvement opportunities and help you generate more revenue.
- Facilitates benchmarking: Comparative RPE analysis isn’t merely an internal exercise. A company should compare its RPE metric with those of other businesses in its industry. This can help management determine whether the company is competitively positioned.
- Supports resource allocation: A low revenue per employee figure could mean the organization’s headcount is too high, and a high RPE could indicate there is capacity to hire more people. Thoughtfully assessing RPE can help business leaders decide where to focus their time and energy and how to optimize capital investments.
While RPE is a valuable metric, on its own, it may not always yield useful insights into your business. Be sure to use other financial metrics, such as profit per employee, expenses per employee, and profit margin, to cultivate a more comprehensive understanding of your company’s performance.
— Tom Brock, CPA, CFA
Now that we better understand the importance of the RPE metric, let’s examine how an employer calculates it.
Formula for calculating revenue per employee
The formula to compute revenue per employee is as follows:
Revenue per employee (RPE) = Total revenue of the company ÷ number of employees
Understanding the components of the formula
There are two parts to the RPE formula.
- Total revenue: This is the total sales generated by a business within a specific timeframe. Generally, the timeframe is the trailing 12 months at the point of measurement.
- Number of employees: This is the number of full-time equivalent employees active during the timeframe referenced above. It should reflect W-2 employees and contractors.
Example RPE calculation
Let’s say a firm generates $5.5 million in annual revenue and employs 50 full-time employees and 10 part-time employees that each work 20 hours per week. Using the revenue per employee formula, we compute the following result:
RPE = $5,500,000 ÷ (50 × 1.00 + 10 × 0.50) = $100,000
This means each employee contributes an average of $100,000 to the company’s top-line.
With the basics of calculating RPE in place, you may be wondering if there’s a benchmark you should be striving to reach. Once more we spoke with Tom Brock to get his thoughts on what to look for.
What is a good revenue per employee metric?
A good RPE metric depends on the industry and size of a business. Generally, tech companies have relatively high RPEs due to the readily scalable nature of their business models. Oftentimes, these firms report RPEs in excess of $300,000.
Conversely, labor-intensive industries, such as agriculture and retail, typically have relatively low RPEs. Elevated staffing needs typically put the RPEs for these types of firms into the $75,000 to $150,000 range.
RPE is best used as a comparative metric within an industry/sector, rather than across industries/sectors. A relatively high metric suggests a workforce is highly productive, while a relatively low metric indicates the presence of operational inefficiencies.
However, this is not always the case. A very high RPE could indicate understaffing, which can result in lost sales opportunities, overworked employees and low morale. Conversely, a very low RPE could simply be caused by recent staffing additions that are necessary to propel a business to new heights.
How much revenue should an employee generate based on salary?
“As a general rule-of-thumb, the amount of revenue an employee should generate relative to his or her salary is a multiple of 2.0 to 3.0. In other words, an employee earning $75,000 is generally expected to generate between $150,000 and $225,000 of revenue.”
— Tom Brock, CPA, CFA
In addition, Tom points of that this degree of productivity ensures a company can cover not only an employee’s wages, but also other expenses, including benefits, payroll taxes, and overhead costs, and still produce a competitive profit margin. “That said, the 2.0 to 3.0 multiple may not be appropriate for all types of companies,” he says.
In high-margin industries, an employee may be expected to generate 4.0 times or more revenue relative to his or her salary. Conversely, in labor-intensive industries with tighter margins, a multiple in the 1.5 to 2.0 range may be acceptable.
Good to know: What does a decline in the revenue per employee indicate?
A decline in RPE is generally viewed as a negative, especially if it results from a sustained decline in workforce productivity. However, sometimes a decline in RPE is a fleeting trend caused by changes in a company’s book of business or staff additions needed to drive long-term sales growth.
Factors influencing revenue per employee
The RPE metric will differ based on company size, industry, sector, geographic location and more. Below, we explore some of the primary factors that influence RPE.
Industry dynamics
How do you know if your revenue per employee metric is good or bad? It depends, because RPEs vary significantly from one industry/sector to the next. For example, tech companies typically have higher RPEs than agriculture or retail stores, largely because they are not as labor intensive and tend to generate a relatively higher amount of revenue per sales transaction.
Be sure to compare your revenue per employee metric with those of other similar-sized companies in your industry. If a peer has a significantly higher RPE than your firm’s, it could mean the competitor’s employees are more efficient and productive or that the competitor is better at allocating resources. It may have better hiring practices or more streamlined operations.
You can evaluate and adopt best practices to close the gap.
Employee turnover rates
A high employee turnover rate, which measures the percentage of employees who leave a company in a specific time period, can negatively impact RPE. This is because replacing employees requires time, money, and resources, which can pull focus away from revenue-generating activities.
Company lifecycle stages
Younger businesses and startups often have lower RPE metrics, because it can take a significant amount of time to bring products and services to market and to establish the infrastructure necessary to drive sales growth. Larger, more established companies typically have higher RPE metrics, because they have achieved scale, streamlined their processes, and achieved adequate brand awareness and loyalty, all of which translate to more stable revenue streams.
Pricing model
Setting the right price for your products or services is a key factor in determining RPE. Undercharging for your products or services can lower RPE, whereas a premium pricing model typically results in higher RPE. That said, businesses always need to strike the right balance between competitive pricing and employee productivity.
Now that we understand some of the key elements that affect RPE, let’s explore some of the ways you can bolster this metric. Tom offers a few useful insights below.
How to improve revenue per employee
If your RPE metric is significantly lower than those of your competitors, the long-term resiliency of your business could be at risk. Striving to improve your RPE is critical. The top strategies you can embrace are as follows:
Enhance employee productivity
Invest in tools that help employees work smarter and more efficiently. You can use project management software, automation tools, or AI platforms to streamline workflows and eliminate time-consuming manual tasks. Modest upfront investments can yield tremendous results.
Implement training programs
Implementing shrewd training programs can help employees develop new skills, leverage emerging technologies, and improve overall performance. One of the simplest ways to develop your workforce is to adopt a cross training program.
Skilled employees tend to be more productive, and they can help drive sales growth. Successful businesses understand this and maintain cultures that foster continuous learning and improvement.
Optimize operational processes
Optimizing the skills and abilities of your workforce is of paramount importance for business success. However, you also need to continually assess your processes and procedures to identify inefficiencies and/or redundancies. Depending on the business, there may be opportunities to expedite supply chain cycles, optimize inventory levels, remove production floor bottlenecks, or eliminate duplicative office routines. Even small operational enhancements can have a big impact on your top- and bottom-lines.
Lastly, we asked Tom to explain more on a question many employers tend to have.
What’s the difference between profit and revenue per employee?
Revenue is a measure of a business’ top-line financial performance. It reflects the gross amount of money generated from selling products and services. Profit, on the other hand, is a measure of a business’ bottom-line financial performance. Also referred to as net income, it reflects the amount of money generated after deducting all business expenses from a company’s revenue.
— Tom Brock, CPA, CFA
So, revenue per employee is a top-line metric (revenue divided by number of employees), and profit per employee is a bottom-line metric (net income divided by number of employees).
Measuring success: Tracking RPE can help employers achieve better outcomes
The revenue per employee benchmark is one of the ways to better understand your workforce’s impact on your business. As your business grows, gathering data needed to calculate your RPE can start getting complex.
Tools like OnPay’s payroll software can help you stay both compliant and keep up with RPE with features like workforce tracking, advanced reporting options, and HR integrations. Learn how we can help you manage your people and payroll seamlessly — so you can keep the focus on growing your business!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.