Most Effective Salary to Revenue Ratio

by Eric Novinson - Updated September 26, 2017

A company should continue to hire workers until the revenue that an additional worker provides is less than the expenses that the company incurs by hiring the worker. These expenses include the worker's salary, and the non-salary expenses that rise when the company hires another worker. The cost of goods sold includes both types of expenses, so it can be a more useful measure than salary alone.

Significance

The salary-to-revenue ratio is only meaningful if the company has no costs other than salaries, or its non-salary costs are so insignificant that the company can ignore them. If a software company earns $1,000 in revenue per day by hiring a software engineer and there are no other costs, then the software company can pay $1,000 in salary and break even, so the most effective salary to revenue ratio is 1. This situation is not likely to occur, because a company often has other expenses such as rent and equipment costs that it incurs by employing an additional worker.

Calculation

The company can still compare its salary to its revenue after subtracting these other expenses. For example, if a peach farm hires a worker, and it has to pay an additional $100 per day for the worker's salary, the peach farm needs to calculate whether this decision boosts its income. If the peach farm earns $150 more revenue each day and its non-salary costs increase by $40, then the peach farm earns an additional $10 by hiring the worker.

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Salary Costs

The peach farm should expect its salary costs to gradually rise as it hires more workers. The peach farm may be able to hire several workers at $100 per day, but once these workers have jobs with the farm, the peach farm may need to raise its rates to convince farm workers who work for other farms to switch employers, or convince workers who perform other jobs to help pick peaches.

Break Even

The peach farm may have to pay $110 a day after it hires more workers. Assuming the non-salary costs per worker don't change, this means the peach farm's $150 revenue matches the peach farm's labor costs of $110 and its non-salary costs of $40, so the peach farm should stop hiring additional workers at this point. If the peach farm hires a worker at $120, its total costs are $160, so it loses money even though the worker's salary is lower than the revenue that the peach farm collects.

About the Author

Eric Novinson has written articles on Daily Kos, his own blog and various other websites since 2006. He holds a Bachelor of Science in business administration from Humboldt State University.

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