Monday, August 4, 2008

Clarifying Sales Per Employee (Once again!)

Even after all the years of writing about Sales Per Employee and its use as a ratio I still get calls, even from some of the "experts." A consultant called me the other day and asked me to clarify how to treat a sales rep who was not strictly on the payroll and since he wasn't really paid then he shouldn't be counted in the SPE formula which is simply: Total Annual Sales divided by Total Number of FT equivalent employees.

The answer is that Sales Per Employee has nothing whatsoever to do with salaries and wages. If you look at the formula it doesn't even mention that. SPE is a productivity ratio, plain and simple. An average SPE these days is approximately $125,000. Companies in the top quartile in terms of profitability average $135,000 SPE, while those at the bottom average around $118,000. However, a closer look at the industry finds many companies with SPEs of $100,000 or less and that is a disaster.

So back to the original question. Yes, you count the sales reps as one of those bodies. Well suppose you have two sales reps but both are on commission. One is doing really well, but the other one is just terrible, barely making minimum wage... "But hey, why should I count him, since he really isn't costing me anything unless he sells something."

I would strongly disagree. He is costing you all those sales that would be brought in by a more effective, better trained sales person so he is costing you and so long as his sales remain low it will show up as a lower than normal SPE. But even that response is begging the question. The bottom line is that SPE is a simple way of saying how many "bodies" it takes to produce $XXX in sales. We know for a fact that some companies doing approximately $1.2 million in sales are producing those sales with slightly less than 9 FT employees. At the other end of the spectrum we know there are companies producing the same type of sales but employing or utilizing 11-12 employees to produce the very same in sales! Enough said!


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