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10/04/2012

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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

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.

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.

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.

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.

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.

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.

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.

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.

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