Reviewing employee wages is a crucial activity for any business owner. When monitoring and evaluating employee wages, the owner’s wage should be excluded.
Employee wages also excludes all superannuation and bonuses.
Total income refers to the total revenue (being sales and other income) that a business will earn.
Thus, employee wages as a percentage of total income looks at how much of the company’s total earnings are spent on employing people.
How is Employee Wages as a percentage of Total Income calculated
The formula for employee wages as a percentage of total income is:
|Employee Wages & Salaries||x||100|
Note: Employee wages do not include superannuation, owner’s wages, or owner’s superannuation.
When undertaking any calculation, it is important to use the same timeframe. For example, if you calculate the employee wages and salaries for 6months, you will also need to calculate total income for the same 6months.
The Benchmarking Group will always benchmark over a full financial year to ensure the highest quality results. We recommend all benchmarks and calculations are done over a 12month period to capture annual trends.
It is important to run this calculation as a percentage, rather than a figure. By doing so, business owners can compare their results to peers and competitors to assess how well they are performing.
See our Sample Benchmark Report to review all our benchmarks.
Why should a business compare employee wages to income?
By tracking employee wages to total income, business owners can learn how productive their employees are. Employee Productivity rates can greatly vary pending on the industry – particularly between service-based and product/goods-based industries.
For the best insights, business owners should benchmark their results against competitors in the same industry and in the same earnings bracket. This enables business owners to assess how productive their employees are compared to industry standards relative to their situation.
Once a benchmark comparison is completed, consultants and owners can develop productivity objectives and strategies to improve their results.
For example, if the company’s wages as a percentage of income figure is above the norm, it may indicate they have too many employees, or that employees are not performing to their full capacity. Or, it could indicate the business is not charging enough for sales.
If on the other hand, the percentage is below the norm, this may suggest staff are performing at optimal levels. It could also indicate your employees may need a wage increase or that your sale price may be too high.
Therefore, it is always worth checking this metric against other productivity metrics, such as revenue per number of employees and profit margins which are included in the Benchmarking Suite.
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What can I do to improve the employee to income results?
The following list highlights 5 things a business owner can do to improve their employee to income ratio:
- Review employee requirements and job descriptions: if the employee-to-income ratio is high, there is a chance the business is overstaffed. To address this, business owners should first review all employee requirements to determine if any positions are redundant or no longer relevant.
- Invest in new technologies to streamline efficiencies: a high ratio indicates there is a potential the business may not be operating as efficiently as it can be. Investing in new technologies can streamline operations and both save employee time and increase output.
- Review pricing structure: if employees are operating at an optimal level, the pricing structure may be too low. Business owners/consultants can further investigate this by running an in-depth competitor pricing review to assess what other businesses are charging. There may be opportunity to increase the price of goods and services.
- Invest in employee training: regular and focused employee training can increase employee skill levels and lead to improved productivity. Upskilling employees can also open more service and product opportunities for the business. Your business may be eligible for government support to achieve this. Click here for more information.
- Invest in employee wellbeing: research has shown that happy employees are more productive. Investing in employee wellbeing can include: establishing flexible working conditions, conducting health and wellbeing sessions such as meditation and fitness opportunities, developing individual wellbeing plans and hiring wellbeing coaches to address employees on a personal level.