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Net Income Before Taxes Per FTE
 

   6/3/2008
 

As HR professionals increase their strategic responsibilities, they are expected to provide assistance and advice in formulating business plans and strategies by using their professional knowledge in workforce planning and human resource management. To ensure workforce strategies can be integrated into the goals of an organization, HR professionals may want to analyze how competitive their organization is compared to others. Net income before taxes per full-time equivalent (FTE) provides HR professionals with a way to look at productivity per FTE. While the terms ‘profits’, ‘net gain’ and ‘income’ usually indicate that a company’s earnings are more than its expenses, net income before taxes is standard accounting terminology used on most financial statements. This metric quantifies productivity and efficiency in terms of employees’ monetary contributions to an organization. It is calculated by taking net income before taxes, which is the difference between gross revenue and expenses, and dividing that by the number of FTEs in the organization. Since tax rates vary depending on the amount of income, using net income before taxes, as opposed to after taxes, gives a more accurate representation of employee efficiency.

Several comparisons can be made from the metric. First, it allows HR professionals to make organizational comparisons between different sectors or industries. For instance, Table 1 shows a remarkable difference between the median net income before taxes per FTE for nonprofit ($1,825) and for-profit ($27,273) organizations.1 However, in this example, low net income before taxes per FTE should not be equated with low productivity because quality of services and factors other than revenue may be more relevant barometers of success for nonprofits. Second, this metric allows comparisons between organizations within the same industry. To illustrate, the 25th and 75th percentile of net income before taxes per FTE of the insurance industry are $28,571 and $127,726 respectively, demonstrating that there is a high variability in net income per FTE even within the same industry. While the discovery of large differences between organizations within the industry galvanizes business professionals to find out why, like the previous example, a low number doesn’t always mean there is a problem. For example, an organization may have a low net income per FTE because large expenditures and investments in plant equipment and people were made to modernize its product development and production operation. Although these investments may initially lower this metric, they could pay off in future years by lowering time-to-market costs, increasing product market share and therefore increasing net income before taxes per FTE for years to come.

Table 1: Net Income Before Taxes per FTE (by Industry)

Industry

Net Income Before Taxes per FTE

Number of Respondents

25th Percentile

Median

75th Percentile

Total

346

$501

$12,450

$45,385

 

Educational services

19

-$19

$0

$6,000

Financial services

34

$4,508

$41,557

$54,782

Government

17

$0

$0

$333

Health

36

$0

$2,613

$7,823

High-tech

23

$8,557

$33,833

$116,267

Insurance

18

$28,571

$68,182

$127,726

Manufacturing (durable goods)

35

$962

$14,545

$37,358

Manufacturing (nondurable goods)

13

$7,096

$21,333

$49,180

Service (nonprofit)

28

$0

$2,815

$9,869

Service (for-profit)

24

$2,452

$18,835

$50,000

Transportation

11

$57

$2,532

$53,649

Utilities

10

$29,087

$59,028

$139,796

Wholesale/retail trade

15

$7,846

$52,000

$333,497

 

For-profit (all industries)

221

$6,000

$27,273

$60,060

Nonprofit (all industries)

125

$0

$1,825

$10,761

Source: 2005 Human Capital Benchmarking Study: Executive Summary

It is important for HR professionals to know that it is not sufficient to simply look at net income before taxes per FTE alone. This metric should be examined in conjunction with other metrics to identify, for example, how different HR practices such as retention programs facilitate employee productivity and efficiency. For more information on human capital metrics and to learn how the SHRM Customized Human Capital Benchmarking Service can take your HR department to the next level, please visit our Web site at www.shrm.org/research/benchmarks/ or call 1-800-283-7476 ext. 6366.

Endnote

1Dooney, J., & Smith, N. (2005). SHRM benchmarking study: 2005 executive summary. Alexandria, VA: Society for Human Resource Management.

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