An earlier version of this article was originally published in Forbes.com.
Good leaders who look ahead and benchmark against their peers set the bar higher. One of the most overlooked benchmarks is Profit per Employee, or what I call “Return on People,” because it’s a direct measure of how well you turn the talent in your organization into value for your customers. In other words, it’s an advanced measure for productivity and competitive advantage.
Many firms measure Revenue per Employee, but I consider it one of the most dangerous metrics out there. If you’ve ever had a great year on the top line and not had much to show for it on the bottom line, you already know that revenue doesn’t always indicate success and that many businesses with lots of sales actually go bankrupt. In fact, take a look at this year’s Fortune 500 benchmark and you’ll find that of the companies that increase their revenues in a given year, 40% will decrease in profits. They’re growing… in the wrong direction!
When I speak to CEO groups, many point to having a healthy gross margin as an indicator of success. It’s better than pure revenue, but there are still far too many profit leaks that happen below the gross margin line for it to be a reliable benchmark. Measuring how well you turn talent into value must include everyone’s efforts that either create or destroy value, and that means including overheads and expenses.
Thus, the profit per employee is your net income (not EBITDA, although an argument could be made to use that instead) divided by your number of full-time equivalent employees.
The average profit per employee across 13 Manufacturing sectors is $28K according to this year’s Return on People Report. After the calculations, about 1/4 of those companies aren’t even creating enough bottom-line value per employee to give employees a decent raise, and a dozen of the names on the list – some of the biggest companies in the world – are actually negative when it comes to profit per employee. They’re working for less than free!
Those results speak to gaps in leadership, strategy, execution, and engagement that need to be remedied.
Seeing the Profit per Employee Benchmark as your “Return on People” sets your bar higher.
There’s a lot to be learned from companies earning B’s and A’s on the benchmark because, in some cases, their profit is in the hundreds of thousands per employee – and that makes all kinds of growth and investment possible in a business.
I’m often asked, “But doesn’t industry matter?” Yes, it does – some industries are inherently more profitable than others as shown in the Return on People infographic, and some are more labor intensive than others. That’s why it’s important not only to benchmark against the overall index but to look at your own industry within the index.
What’s even more interesting, however, is that every industry has clear leaders and laggards, and they’re often very consistent over time. Some companies simply do a better job of turning talent into value than their peers, although they all have access to the same skills, resources and technology in a global economy. In many cases, the leaders outpace the laggards by 200-500%! Which one do you want to be?
By using processes and tools to better understand gaps in strategy, leadership, execution and engagement, every company can be not only be inspired to evolve its current practices and achieve more but actually move up a grade or more – often within 1 year. What opportunities would that kind of profit increase create for your business?
Nobody likes to feel like his or her performance rates a C, D or an F. Once you see others achieving high grades, it becomes easier to follow in their footsteps.
Too many business leaders set their annual budgets on the basis of looking backward at last year’s results, adding a bit of a stretch factor, and topping off their budget planning with a bit of wishful thinking in terms of what will happen this year. That’s a recipe for disappointment because profits become merely the leftovers of lower than expected revenues and/or higher than expected costs.
Instead, I want you to shift the conversation to one that’s forward-looking by asking, “If our competitors are achieving X more than us, how can we build a plan to meet or exceed their results?” When you change the conversations, you change your results.
Huge shifts are possible when your people get motivated to want more and engaged in making it happen. One building supplies manufacturer turned a loss of almost $10K per employee into a profit of $29K per employee within two years and then fine-tuned its plan and continued to see results, reaching a new high of $31K per employee the following year. That still has it at a C grade, but they’re on track to continue their progress, it sure beats the F it was earning before, and their improved results has made massive expansion and growth possible.
Next step: Take the profit challenge.
Start by simply setting a goal to improve by one grade from where you’re at today. Contact me for the details of how you can build and implement a proactive profit plan that is focused on driving profitability by delivering more value to your customers more efficiently and effectively. Avoid typical profit-and-loss approaches based on conventional cost-cutting or downsizing (downsizing is the fastest but most short-sighted way to increase your profit per employee), because that reflects the outdated thinking of trying to shrink your way to growth. Is it worth taking the time to find out how to achieve more? Let’s set up a call to explore what’s really possible for you.