By: Ruth King
Your employees are key to your profitability. If they are productive, then you have a better chance of being profitable.
What do I mean by productive? Their time is billable to your customers. It is not spent in sweeping the floor, gathering in the kitchen or “around the water cooler.” It is also not spent on vacations, holidays, or training.
And, it is NOT taking 2 hours to do a job that you can only bill an hour for or a project that is estimated at 16 hours that takes 20 hours.
The best way to measure this is through your monthly productivity ratio, also called your compensation percentage. It answers the question:
For each dollar of revenue, how much is spent on payroll and payroll taxes?
Payroll is all payroll – your salary, your employees’ salaries, your salespeoples’ commissions, and payroll taxes (FICA, medicare, state unemployment, and Federal unemployment).
It does not include health benefits, retirement benefits, worker’s compensation or any other benefits you pay your employees.
It does not include bonuses at year end. Those are discretionary and not a part of operations.
The monthly productivity ratio formula is:
Compensation % = Total Payroll + payroll taxes
The lower the percentage the more productive your employees are.
If this percentage is over 1, then you are paying more for compensation than you are generating in sales. This is a recipe for disaster.
Where should it be? Generally under 40% on a long term basis. Seasonality affects the ratio. In slower seasons it is higher. In busy seasons it is lower.
If it is too high, then explain the ratio to your employees and ask for ideas how to lower it. They know how they waste time!
Consider giving a bonus to everyone for keeping the ratio under a certain percentage for the quarter and for the year. The lower the ratio the more profit your company should earn; assuming your pricing is correct.