‍Introduction

Organizations are increasingly relying on various metrics to make informed decisions and optimize their performance in today's data-driven world. Employee ratios are key indicators that shed light on the efficiency and effectiveness of an organization's workforce.

This is especially important with the introduction of Artificial Intelligence expected to increase the efficiency of staff (e.g. automated HR services), and many companies looking to reduce their cost base to maintain margins in a tough economic climate.

In this blog, we will walk through the following topics that Human Resources ("HR") professionals should be aware of in 2024:

1. What are employee ratios?
2. The top three employee metrics
3. Who uses employee ratios?
4. Why are employee ratios important?
5. Factors to consider in an HR to employee ratio
6. Example HR to employee ratio calculations

Understanding these ratios can help businesses enhance their strategic decision-making, resource allocation, and overall performance. So with that overview, let's jump straight in to it!

What are Employee Ratios?

Employee ratios are quantitative measures that assess the relationship between the number of employees and various aspects of a company's operations, such as revenue, costs, and productivity.

These ratios help business leaders gain a deeper understanding of their organizational effectiveness and how it impacts the company's financial and operational performance.

The Top 3 Employee Metrics

The top three metrics that you should know in 2024 are:

1. Revenue per Function Employee‍

This is typically used to analyze headcount efficiency in commercial functions, such as Sales, Marketing and even Customer Support. Any part of the business where revenue is the activity driver is an area where you should prioritize this metric. ‍

2. Total Employees per Function Employee

This metric can be used to assess any function, but is most commonly applied to support functions, such as HR departments, finance or legal functions. It is particularly relevant to determine the size of a HR team, as people are the main activity driver for HR services in many organizations.  

3. Cost per Function Employee

Most people working in a company are also a cost for that business (the exceptions are usually volunteers and unpaid interns), so it is only natural to link the two together in a ratio. The costs should be "fully loaded" which refer to the base salary, plus all on costs related to that employee, such as pensions, payroll taxes, insurance, and other benefits.

Looking for employee ratios by function? Search here

Who Uses Employee Ratios?

Employee ratios are valuable tools for businesses of all sizes and across various industries. They are commonly used by highly skilled professionals including consultants, investors, executives, and internal leaders (e.g. HR personnel).

These stakeholders leverage employee ratios to gain insights into the company's organizational effectiveness, identify areas for improvement, and make informed decisions regarding workforce management and resource allocation.

Why are Employee Ratios Important?

There are many reasons why employee ratios are useful. Understanding and analyzing them can provide several significant benefits for organizations, including:

1. Resource Allocation: Employee ratios help businesses determine the optimal number of employees required for each function, allowing for efficient resource allocation and reducing unnecessary costs.
2. Performance Evaluation: These ratios enable organizations to assess the productivity and effectiveness of their workforce within different departments, leading to improved performance evaluation and targeted training programs.
3. Cost Control: Employee ratios, particularly cost related ratios, highlight areas of high expenditure in relation to the workforce. Identifying and addressing these cost drivers can lead to better cost control and increased profitability.
4. Strategic Planning: By considering employee ratios, businesses can develop more accurate strategic plans and forecasts, aligning their human resources with their growth objectives.
5. Benchmarking: Comparing internal employee ratios with trusted industry benchmarks (e.g. CompanySights) allows you to identify the optimal number of employees by function, specifically for your business.

Factors to Consider in an HR to Employee Ratio

As a management consultant I would often get asked what the average ratio of HR employees to total employees was for any given business. The high level answer is roughly 1 HR employee to 100 employees, however the real answer is that it depends on the key factors outlined below:

1. Industry: Different industries usually require different HR staffing levels based on their nature of operations, regulatory requirements, and workforce dynamics.
2. Company Size: Smaller organizations might have a higher average HR staff to employee ratio due to limited resources, while larger corporations might achieve economies of scale with a lower ratio.
3. Technology and Automation: The adoption of technology and automation can impact the HR to employee ratio, as certain tasks may be streamlined with automated HR services, reducing the need for HR staff.
4. Organizational Structure: Companies with decentralized structures may have different HR staff to employee ratios across various business units or geographical locations.
5. ‍Strategic Objectives: Business strategies and growth plans can also influence the number of HR employees needed, especially in cases of mergers and acquisitions.

By considering these factors you will be able to make more accurate interpretations and informed decisions regarding human resource management.

Example HR to Employee Ratio Calculations

This is a common ratio used to determine how many HR employees are required in the HR department for a business. So how do you calculate the ratio?

Total number of HR employees / Total number of employees

For instance, if a company has 4 HR employees and a total of 200 employees, the HR to Employee Ratio would be: 4 / 200 = 1 HR employee to 50 employees.

This means that 2% of the company's total workforce is related to the HR department. Now let's take a look at two examples to understand how the requirement for HR support can vary based on company size.

A Small Business Example

In this hypothetical example we have a small retail business, Balmart, with 30 employees. Balmart has 3 employees dedicated to HR functions, including recruitment, employee relations, and payroll management.

The HR to Employee Ratio for Balmart is: 3 / 30 = 1 HR employee to 10 employees (or 10% of the workforce)

So, Balmart has a relatively higher HR to Employee Ratio primarily due to its small size and also being in a people intensive industry (retail).

An Example for Larger Companies

Now let's explore the HR ratio in a larger organization called Handbook, a multinational technology company with 10,000 employees. Handbook has 150 employees dedicated to HR processes, including talent acquisition, performance management, and employee development.

The HR to Employee Ratio for Balmart is: 150 / 10,000 = 1 HR employee to 67 employees (or 1.5% of the workforce)

As you can see Handbook has a lower HR to Employee Ratio compared to Balmart, indicating a more efficient HR team. This is predominantly due to the scale benefits that come with a larger workforce, and also differences in HR requirements that can vary by industry and business model.

Conclusion

Employee ratios are indispensable tools that offer valuable insights into an organization's operational efficiency, resource allocation, and overall financial health.

The top three metrics that you should know include; revenue per function employee, total employees per function employee, and cost per function employee. With these three ratios any HR professional can quickly assess the efficiency of employees in the human resources department (plus all other departments).

The number of HR staff required in any given business is dependent on multiple factors. Keep in mind that for benchmarks to be effective they need to be relevant. This means that they are ideally tailored to the industry, geography, revenue, and total number of employees.

HR professionals (amongst others) typically get these ratios from a trusted platform like CompanySights, which provide tailored employee metrics for your HR team size and organizational needs. Start your search here from over 100,000 employee data points worldwide.