Labor Expense as a Percentage of Total Revenue

Labor Expense as a Percentage of Total Revenue

KPI Details

Labor Expense as a Percentage of Total Revenue measures the employee compensation-related expense incurred in relation to the total dollar amount of revenue generated by the company over the same period of time. Relatively high values for this metric can be related to a number of factors, including overstaffing of one or multiple departments, poor recruiting practices (i.e., poor screening policies, interview processes, etc.), inefficient benefits and compensation packages, and sub-par employee training and performance. While companies typically seek to streamline company operations and reduce employee positions and compensation to decrease labor costs, great care should be taken when doing so as too many layoffs and cuts to compensation can have a negative impact on company morale and potentially cause high turnover rates.

KPI Definition

The employee compensation-related expense incurred divided by the total dollar amount of revenue generated by the company over the same period of time, as a percentage.

KPI Best Practices

• Hire part-time employees for suitable positions to reduce benefits costs
• Cross-train employees to handle various activities across their business unit
• Outsource highly repetitive tasks that are not critical to core business operations
• Implement continuous improvement programs such as Six Sigma to identify redundant work efforts

KPI Calculation Instructions Labor Expense as a Percentage of Total Revenue?

Two numbers are used to calculate this KPI: (1) the employee compensation-related expense incurred, and (2) the total dollar amount of revenue generated by the company over the same period of time. Labor expense should be considered to be the sum of all wages paid to employees (includes salaries, commissions, etc.), as well as the cost of employee benefits and payroll taxes paid by an employer. Include both direct (i.e., wages for the employees tied to the production and sale of company goods and services) and indirect labor (costs associated with support functions and overhead, such as the Human Resources Department, Information Technology Department, etc.) costs in this calculation.

KPI Formula :

(Labor Expense Incurred / Total Revenue Generated) * 100