Employee Size Doesn’t Count

Someone asked recently if there was a list of employers by headcount.  I suspect the question arose for the usual reason:  the CEO was curious whether it might suggest some justification for an argument about pay.  The consensus answer from the members of the global total rewards association was negative; but the reasons why are more interesting than the simple answer. 

There is no one authoritative source that ranks organizations by employee count because (essentially) no one cares what others are doing.  Headcounts don’t tell you much.

Number of full-time employees is a terribly misleading size metric in this age of automation, technological innovation, subcontracting, outsourcing, contingent workers and temporary employees. The number of people on your payroll constantly changes and is frequently deliberately flexed for maximum responsiveness to current needs.  No study has ever shown any association of headcount to business success, although sheer size does imply a certain base mass and probable inertia.  Not that many nimble dinosaurs out there.

Employee population is less statistically predictive of compensation than operating budget or sales revenue.  One could argue that the number of people on your payroll does affect your organization style and has some impact on office services and HR functions like labor relations; but those dimensions don’t have much influence on executive compensation.  Firms can have the same revenues, similar expenses and identical profit margins with widely varying headcounts due to differences in work design and business methods.  Those executives who can generate the same operating results with a much smaller payroll may have a better argument for higher pay than those who require many subordinates for the same outcomes.  Likewise, when more people are doing a task, the value of each individual job-holder may drop. 

Number of employees is infrequently surveyed and indifferently reported because no one is willing to underwrite the costs of a really accurate count.  When you do an internet search under "employers ranked by employee population", you get popularity contest lists, incomplete lists of firms sorted by sales revenue  or global headcount estimates.  FTE counts are rarely a matter of external interest except to companies trying to sell something based on headcount (frequently outsourcing or subcontracting services). 

Another reason that headcounts are rarely externally compared is that large employers have already spent many years re-engineering their workplaces for maximum efficiencies.  Economic pressures have also justified downsizing and the replacement of people with systems and technology.  Chaotic supply & demand market situations stimulated the creation and implementation of nimble just-in-time manpower planning systems that can better cope with uncertainty, too.  All these responses were internally driven without reference to (or dependence on) what other employers were doing.  Enterprises that want to survive in this new turbulent world can’t afford to look to others to decide what is best for them.  That is particularly true when the most popular path taken turns out to be a mistake leading to a dead end.  Those who find a new and better path may reach the destination sooner than those who are forced to reverse direction, take a detour or finally find their way only to arrive last at the end of the line.

It may be interesting to know how many employees other have, but it doesn’t really affect you, except as a factoid of dubious relevance.

 E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

Creative Commons image "Crowd" by James Cridland

Comments

[Dan Walter]

Jim,

Great post. This is another tangential argument for why the CEO/Employee pay ratio in Dodd-Frank will never provide useful information. Given every business model is different, and every staffing model is different, the numbers will often be random. Great companies might look terrible and vice versa.

Dan

[E. James (Jim) Brennan]

Wish you hadn't reminded me of that malicious ratio, Dan. If they had required "the average" rather than "the median" for the ratio, it would have been merely deceptively irrelevant rather than both deceptively irrelevant and extremely difficult to establish accurately without prohibitive costs. Suspect some Congressional statistician deliberately planted that land mine in the law, because you have to create a rank-ordered list of every single pay number of every employee to establish the median. Very onerous task.

[Jacque Vilet]

Different industries --- and mfg vs biz services. Too much variation to be meaningful. Beware of CEOs or CFOs asking for this ---- you have a lot of educating to do.

[Joe Rice]

Hey Jim, I saw that post on the forum and the same skepticisms came to mind. I gave the benefit of the doubt and thought it may be to benchmark revenue per employee. That was the only valid purpose I could think of.

[Jacque Vilet]

Revenue per employee would vary too depending on industry. Maybe if you looked at it within an industry? But business models, strategy, etc. are still different. Can see no reason to use it in my opinion.

[E. James (Jim) Brennan]

Some nonprofits like charities and municipalities like to use employee count as a proxy size measure, especially if they engage in empire-building, since they lack "sales" or "assets" like for-profits use as dimensional metrics. Even in those nonprofits that try to use headcount as a comparison number, it really isn't as predictive as operating budget, for all the reasons mentioned above.

[Joe Rice]

Revenue per employee is an investor metric so I'd say it's pretty important to track if you're a public company. Industry specific of course. Sure you need context as well but that's no reason to throw it out. IMO.

[E. James (Jim) Brennan]

Good point, Joe, further confirming that it is the revenue generated that is most significant to management. Ironically, that proves there is an inverse relationship with headcount. The FEWEST employees needed to make the same money would create the greatest pleasure among investors and owners. While making sense to insiders, it is counter-intuitive to the general public.

[L.Pe]

Absolutely agree. If you are able to make the same money with less employees, it means that you have more talented employees and implemented innovation than your competitor.