Profit per Employee (PpE), should be a critical metric for you as a leader if your shareholder value is driven by the contributions of your talented people, rather than your capital (ie. a People-centric Business).
If your people costs are higher than your capital costs, you’d better take a look at your PpE. If you’re people costs are 3 times your capital costs, you’re really going to need to look at PpE or an equivalent metric.
The vast majority of companies continue to gauge their performance using outdated, industrial era measures which have not changed to reflect the new weighting in costs between people and capital. People-centric businesses not only need a change in performance metrics, but a change in the management practices used to generate that performance.
A people-driven performance metric is important as well because it has direct connections to overall profitability and market capitalization. Together with ROIC, PpE and the number of employees you have will drive your market capitalization in people-centric businesses.
PpE does not require any complicated calculations and can be drawn directly from your current financials. There are more sophisticated approaches which may reduce some biases or risks, but PpE is an excellent metric to use in running your business.
Once you adopt PpE or an equivalent, you’ll start to see how even small changes in how you manage can have a major impact on returns.
“Consider a typical security and facilities management company in which operating profit is 10% of employee costs and economic profit is 8% of employee costs. In such a case, a 5% improvement in employee productivity increases operating profit by 50% and economic profit by over 60%.”2
So, if you’re a people-centric business, may sure you pay some attention to your PpE and then start making changes to your leadership and management practices to unleash the potential of your people to generate higher PpE and the resulting market capitalization.
Less Noise. More Signal.:
- Calculate your Profit per Employee for the past few years (Total Profit/# Employees)
- Track your total People Costs over the same period
- If your People Costs continue to rise and your PpE isn't rising at the same rate, then Waste & Complexity are likely growing in your organization.
For more research on this subject:
1. The new metrics of corporate performance: Profit per employee
Lowell L. Bryan
McKinsey Quarterly 2007 Number 1
2. The Surprising Economics of a “People Business”
Felix Barber and Rainer Strack
Harvard Business Review June 2005
3. Mobilizing Minds
Lowell L. Bryan and Claudia I. Joyce