How Do You Know if Your Employees are Productive?

I use a ratio called percentage compensation to determine the productivity of your company. Percentage compensation means that for every dollar of sales revenues how much do you pay for payroll and payroll taxes? In other words, if your percentage compensation is 30%, for every dollar you take in the door, 30 cents is spent on payroll and payroll taxes.

I look at this from month to month. Unfortunately in busier months the ratio tends to increase. You can be busy and earn less profit. The percentage compensation ratio often tells you this. Many times when you are busier your labor expenses are a higher percentage of sales rather than a lower percentage.Why? Because you may be charging a customer regular rates and paying your labor force overtime rates. Or, they get tired and slow down.

Percentage compensation is calculated on a monthly basis as:

Total payroll plus payroll taxes divided by sales.

Include everyone’s payroll: field, sales, office, and owner’s.

Include payroll taxes. Do not include health insurance, workman’s compensation, bonuses, etc.

If your company is departmentalized you can calculate this ratio by department.

Here are the rules of thumb for construction companies:

New construction: less than 20%

Replacement: 25% to 30%

Service: less than 38%

For other industries, check to see what the norm is for your industry.

If your percentage compensation is not in line, then you need to increase productivity. The first place to look is on the time sheets for the people who produce your products and services. How many hours are you paying your employees?

How many hours are you billing customers for?If this number is less than 75%, then start here.