What is Revenue Per Employee?
The Revenue Per Employee ratio measures the sales efficiency of a company by comparing its revenue to the number of its employees.
How to Calculate Revenue Per Employee
The revenue per employee metric is utilized by companies to track the average revenue that each employee contributes, i.e. the sales productivity of an average employee.
While there are limitations to the metric — such as representing an overly broad, lagging indicator of operating efficiency — the revenue per employee can be useful for internal budgeting and setting targets related to sales quotes.
In particular, the metric is more applicable for companies where the primary strategy for driving growth is the sales team (e.g. software-as-a-service, or “SaaS”).
If a company’s revenue per employee increases over time, it is generally perceived as a positive indicator that the team is working more efficiently.
In other words, the company can generate the same (or more) revenue using fewer resources, which in this case refers to the number of employees.
Therefore, a company with higher revenue per employee should expect to see improvements to its profit margins (and more cash to reinvest for future growth) – all else being equal.
But for the metric to retain its usefulness, comparisons are limited to a company’s historical periods and to its closest industry peers.
For example, an industry with high operating leverage like energy and telecommunications would see much greater revenue per employee than retail.
Other factors such as the company’s maturity (e.g. early-stage, growth-stage, late-stage) and size with regard to total revenue must also be taken into account.
Revenue Per Employee Formula
The formula for calculating the revenue per employee metric is as follows.
Revenue Per Employee Formula
- Revenue Per Employee = Revenue ÷ Average Number of Employees
The revenue amount used is the annual revenue brought in for a specific year.
On the other hand, the average number of employees is the average between the beginning and ending number of employees.
The rationale for using the average rather than the ending employee count is to match the numerator and denominator in the duration covered, but the difference is normally marginal unless there is a noticeable amount of employee churn or new hirings.
The metric can be more practical by including only the employees that are directly involved in generating revenue, such as the sales team, yet the information is not always readily accessible.
Revenue Per Employee Calculator – Excel Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Revenue Per Employee Example Calculation
Suppose a SaaS company is attempting to measure the efficiency of its sales and marketing department team by tracking its revenue per employee.
The employee data we’ll be working with here is the following:
- 2018 = 200 Employees
- 2019 = 230 Employees
- 2020 = 300 Employees
- 2021 = 340 Employees
The revenue that corresponds to the periods above is as follows:
- 2018 = $20 million
- 2019 = $30 million
- 2020 = $36 million
- 2021 = $40 million
Starting in 2019, we’ll take the revenue amount and divide it by the average of the ending employee count and the prior year’s employee count, which results in the company’s revenue per employee.
- 2019 = $140,000 RPE
- 2020 = $136,000 RPE
- 2021 = $125,000 RPE
While the average revenue per employee may have declined over time from $140k to $125k, that is not necessarily a red flag, especially considering how minor the decrease is relative to the fact that the company’s revenue doubled.