How do you know if your your employees are productive?
The productivity ratio, also called the compensation percentage ratio, answers this question.
It tells you, for each dollar of revenue, how much is the company spending on payroll and payroll taxes?
It is a counterintuitive graph. Increasing means that you are spending more money per dollar of revenue. Decreasing means that you are spending less money per dollar of payroll.
Here’s the definition of the productivity ratio:
Total payroll plus payroll taxes divided by sales.
Payroll includes all payroll: field, office, and owners.
Payroll taxes include FICA, medicare, state, and federal unemployment. You might have additional city or state taxes, depending on your location, that you have to pay for each dollar of payroll. These taxes should be included too.
Do not include worker’s compensation, health insurance or other benefits. Do not include bonuses unless you pay them every month. Commissions should be included.
Your trailing productivity ratio should look like the graph above.
Trailing data is a year’s worth of data taken a month at a time. For example, the trailing compensation percentage for January, 2023 is the addition of the compensation percentage for February, 2022 through January 2023 divided by 12.
The graph should be parallel or decreasing. If it is increasing you are spending more money for each dollar of revenue.
A good compensation ratio is somewhere between 30% and 35% for most businesses who have a mix of parts and labor. For consulting, marketing, legal, accounting, etc., the ratio will probably be much higher.
NOTE: You can spend the hours to calculate the ratios and graph them yourself or you can have software calculate the ratios and graphs for you in less than 10 minutes a month.
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