Economics at The Independent

The Independent has put out an article on how much employees of various multinationals are “worth”:

Tech companies are famous for the high salaries and bonuses potential candidates get when they join their firm. But the true value of the employee is actually much more, according to new research.

Focusing on the top 100 companies in the world by revenue and the number of employees they have, analysts at Expert Market have worked how much each employee is worth.

Expert Market worked out how much each employee was worth by dividing the revenue of a company by the number of employees and found the following:

Oh dear.  Expert Market don’t appear to have much expertise if this is what they’ve gone and done, and nor do journalists from The Independent.  Revenue divided by number of employees doesn’t tell you much: the company might be making catastrophic losses for all we know, meaning all those employees aren’t adding much value at all.

It is profit, not revenue, that is the measure of a company’s added value and therefore to work out what each employee is worth on average you’d need to divide profits by the employee headcount.  Here’s what they’ve done with Shell:

Shell: £2,681,470.00 per employee

Revenue: £252,058,180,010

Number of employee: 94,000

No, just no.  Look here instead:

Shell 2015

Financial Year Revenue(bn) Profit(bn) No. of Employees Profit per Employee
2015 $265.0 $1.94 93,000 $20,860
2014 $421.1 $14.9 94,000 $158.510
2013 $451.2 $16.4 92,000 $178,260
2012 $467.2 $26.7 87,000 $306,896

Bit of difference, isn’t it?

UPDATE

Alex K. makes some valid points in the comments, and Tim Worstall sets me straight on a similar point here.  I’m learnin’.

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18 thoughts on “Economics at The Independent

  1. “Revenue is for vanity profit is for sanity.”

    Just done the calcs on my wages not including bonus:

    – on revenue I am overpaid by a factor of 3
    – on profit I am overpaid by a factor of 250.

    Not looking good for me at the next Remco its seems except we aint a multinational and are a medium sized, rapidly growing, highly geared, capital hungry organisation. Its all about increasing market value for us at the moment and being an executive shareholder is sufficient motivation to keep me well aligned with the organisations performance objectives.

    So the Independent got it badly wrong, the oil filed expat is meaningful but increasing shareholder value is another often unchecked measuring stick, it pays to look after the shareholders after all. If you put Shell staff through this measure they would be upside down.

    http://www.investopedia.com/terms/c/cagr.asp

  2. Socialists don’t really understand money, which is one of the reasons why Labour chancellors are lemons and why they’re so generous with other people’s hard-earned.

    I once worked on a project that for an outlay of some £75,000 a year involving a few staff, materials and energy made half-a-million quid profit p.a. They didn’t raise my salary by way of thanks, but there were times I knew the company was making money elsewhere but still paying me to not make so much money on other maybe less successful projects.

    Often, it’s all about the bigger picture in these things.

  3. “… but cash is king.”

    There was a time when I would have wholeheartedly agreed with that statement but now I would say it depends on where you are in your life cycle as an individual or organizational cycle for a business. A young person should forsake cash flow and plant seed capital and nurture the investment up until say fifty and then, yes, you are on the dash for cash phase of your life cycle and cash trumps growth thereafter. Similarly a shareholder in a young and growing business should forsake dividends in the interest of organisational expansion growing their invested share value and then switch to a high dividend return when the organisation has matured and met its growth target.

    One thing that I have passed down to my children is that its only long term growth that generates real wealth and you cant get wealthy from working at someone else’s business and rarely from high cash flow investments. Time is the key and you cannot recover it.

  4. To make matters worse, The Independent seems to believe that Wal-Mart employs 2,200 people. It’s obviously a typo – it should be 2.2 million – but it jumps out at you at once.

    Revenue per employee can tell you something if you’re looking at a time series for just one firm or a sample of very similar firms. It does not measure the “value” of the average employee, though. But neither does profit per employee. Net income measures what’s left to equity owners after all the expenses have been deducted, including wages. Divided by the payroll, it gives you, roughly speaking, the ratio of shareholder to employee earnings. For similar firms, it gives a feel of which are using labor more efficiently than others. But that’s it – you can’t compare Wal-Mart with Shell on that basis because the typical returns on labor and capital are different in oil and gas and in retail.

  5. It does not measure the “value” of the average employee, though. But neither does profit per employee. Net income measures what’s left to equity owners after all the expenses have been deducted, including wages.

    Yes, which is effectively the added value of the company. So if you take what value the company has added and divide by the number of employees you get an average added value per employee – or put another way, how much profit each employee generates. It’s not a great measure other than to give:

    a feel of which are using labor more efficiently than others.

    Exactly.

    But that’s it – you can’t compare Wal-Mart with Shell on that basis because the typical returns on labor and capital are different in oil and gas and in retail.

    Absolutely, it is only useful to use when comparing companies engaged in similar activities.

  6. Shouldn’t you also incorporate the employees’ salaries in this?

    The profit figure will already take them into account.

  7. “you get an average added value per employee – or put another way, how much profit each employee generates”

    Yes, by definition, it is value added per employee, but “per” does not equal “by” – it’s not labor alone that adds this value but a combination of capital and labor.

    Think about a highly productive piece of equipment that only requires one unskilled worker to operate (let’s say to push a button from time to time). According to your calculation, he’s adding a whole lot of value to the firm, but that’s only because it has invested heavily in the new technology. On that metric, he would also appear to be enormously underpaid.

  8. And just to complicate it further. What if the capital to acquire the piece of equipment was raised by finance. The finance repayments would then be accounted for above the NPAT line, which could actually result in a negative NPAT. Is the machine operator any less valuable, probably not, but again it goes to show the problem with comparisons even between like organisations.

  9. Alex,

    Yes, by definition, it is value added per employee, but “per” does not equal “by” – it’s not labor alone that adds this value but a combination of capital and labor.

    Fair point.

  10. Pingback: No, not quite Mr. Newman, not quite | Tim Worstall

  11. Couple of things;

    Firstly, these sort of measures are useful as high level filters, broad comparisons, for highlighting elements for further investigation. It’s tricky to say that a number of 20,000 is inherently good while 13,000 is inherently bad.

    Secondly, if you’re using profit as the numerator, then, depending on the period, you could assume that any capital investment or finance costs should already be included in the costs/prior charges.

    Thirdly, you could use capital employed as the numerator to get an idea of how much expensive, highly productive kit is required, but that will bring it’s own problems.

    Fourthly, after tax numbers are probably best left alone. But an operating loss is a loss, so a negative number is still valuable in the comparison.

    Fifthly, I can’t think of anything else.

  12. “Profit per employee” is a metric I sometimes trot out, mainly for its shock value.
    My industry can easily have labour costs as Three times net-operating-profit.

    This snippet of information causes furrowed brows galore, even from people you’d expect should know better. (This includes “business journalists”)

    The most common reaction is to try to correct my maths (ie. that I’ve transposed the totals & wages are one-third of profits), when I stick to my guns, they think I’m mad, as this is “not possible”

    I notice most people I tell that to, never ask me for advice again, of any sort.

    Interesting.

  13. My industry can easily have labour costs as Three times net-operating-profit.

    I can well believe it, especially where you are.

  14. The other Tim is talking about GDP – or, rather, Net Domestic Product, which, in a debt-free world, is roughly equal to the sum of wages and corporate profits. (To get to GDP, one should also add back depreciation, or the consumption of fixed capital.) GDP is total value added in the economy.

    Tim N. is looking at the employer’s contribution to the company’s bottom line. Of course profit per employee also includes the contribution of capital, but in labor-intensive industries it could be comparatively modest.

    @Steve at the Pub: “My industry can easily have labour costs as Three times net-operating-profit.”

    In other words, the net operating margin is less than 25% – that’s all I can infer, unless I’m missing something. (NOP = Revenue – 3*NOP – Other_Opex, so NOP/Revenue = 0.25 – 0.25*Other_Opex/Revenue.) It doesn’t tell us whether labor costs are large or small compared to non-labor. If other opex is zero, we have a 25% margin and labor costs come up to 75% of revenue. If other opex is 50% of revenue, we have a 12.5% margin and labor costs at 37.5% of revenue.

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