Profit per person ratio is useful for those enterprises with a high proportion of personnel costs to other costs, such as consulting or other service businesses, where changes in the efficiency of the staff have a direct impact on the profitability of the overall corporation. It is least useful in highly automated entities where the proportion of labor costs to total costs is quite small. This is a more comprehensive measure than sales per person, since it accounts for not only the ability of the staff to bring in sales but also their ability to wring a profit from those sales.
Profit Per Person Ratio Formula
Divide net profit by the total number of full-time equivalents. This measure is more reliable when net profit from operations is used instead of total net profit, since this concentrates attention on actual operating results, rather than other actions that may impact profits.
The formula is:
Total full-time equivalents
Note: A full-time equivalent (FTE) is the combination of staffing that equals a 40-hour week. For example: two half-time employees would be counted as one FTE.
Profit Per Person Ratio Application Example
Lie Dharma Inc.’s president is considering a new bonus plan for the management team that is based on the number of personnel in relation to profits. Because salaries and wages are such a large component of expenses, the president considers this to be a key performance measure. Some managers will attempt to incorrectly enhance their reported performance under this measure, so the president derives a formula that converts the cost of part-time staff, outsourced services, and services from temporary agencies into “full time equivalent (FTE)”. The components are:
- Each salaried person equals one FTE.
- The total of all hours recorded in the payroll system per month divided by 160 hours equals the number of FTEs on hourly pay.
- The total number of hours billed by temporary agencies per month divided by 160 hours equals the number of FTEs from outside agencies.
- The total billings from outsourcing services per month divided by the hourly cost of equivalent positions within the company or industry equals the total number of FTEs from outsourced functions.
This comprehensive formula, when used to plot profit per person on a trend line, allows the president to determine which managers are truly improving the efficiency of their departments and not just attempting to hide the number of personnel reporting to them.
Be ware: In a very-low-profit situation, profit per person ratio is so small that it yields no relevant information. Also, managers can manipulate this number by shifting to outsourcing services or temporary labor services, thereby effectively moving headcount out of the company, although costs are still incurred from outsourcing billings.