When I was investing in public companies, this metric was one I used to decide where to put my money. I think it is many times companies settle for hiring as many people as possible to get their profit margins slim. This MO produces companies with a lot of fat who need to lay off employees when the inevitable down turn arrives. They often times over promise and under deliver.
Most public companies I researched had revenue/employee between $100,000 and $200,000. This simply isn't high enough to provide any cushion.
The reason here, that Craigslist is at the top, is because they outsource information management to the community through flagging and karma assignments. Most of the work of the employees is handling the exceptions to the algorithms, which usually result in the form of an email to craig or a post to the feedback or help topics. These may result in a kind email from craig or banning of a spammy account.
They are so good, they already have phone based account validation. None of the other companies on this list have that. CL focuses their employee time and energy on what is important -- stuff only humans can do. The rest is done by computers and this is a brilliant sign that they are doing it right.
Most companies handle exceptions with bureaucracy, filling up revenue with salaries until the boat sinks.
I think it is many times companies settle for hiring as many people as possible to get their profit margins slim.
Do you have any insight about the motivation to settle for slim profit margins?
This seems counter-intuitive, unless by shrinking margins, they make a significant increase in the bottom-line. (i.e. they would rather make 1% of 40 billion than 20% of 100 million)
Is this sort of trade-off common? Does it work out favorably often enough that it can be backed by something other than managerial fashion?
In large organizations, the decisions made by the employees are often not related to the bottom line. They'd rather have more direct reports than increase profit margins. Middle managers feel powerful because they tell many people what to do, not because they do more with fewer people.
Of course the investors want the company to be more efficient, but not always. This is true in the retail industry where razor thin margins are the goal. Software is the opposite. Imagine if Walmart made 35% margins like many software vendors. They'd be seen as gouging their customers and their prices would be too high. Target would create slimmer margins and take walmart's customers.
Also, employee salaries are tax deductible as expenses, so companies that are intent on employee satisfaction -- something seen as beneficial for successful organizations -- tend to pay out much, if not all profits as bonuses. If a company is making lots of profits, they have to put that money somewhere, either investments in either infrastructure or labor and it's fairly easy to hire people. Otherwise, it goes to the government and no one likes that. Employees are expensive and hiring more is a quick way to legitimize a budget. Really, investors care about revenue growth more than anything. A company that is growing revenues and growing the share price is considered good. The profits could be paid out as dividends, but fewer companies are doing that and they are double taxed, so capital is more efficient if left in the organization. Exceptions are very large, old and stable companies, but that's a different kind of investor. Those are income investors, not growth investors like I was.
It seems counter-intuitive because investors seldom have control over this kind of spending and revenue/employee isn't a popular metric for investing like PE, PEG, OM, or PM. For example, look at the key statistics for MSFT at yahoo. http://finance.yahoo.com/q/ks?s=MSFT+Key+Statistics The number of employees appears nowhere and thus calculating revenue/employee is beyond the ability of most investors. Sometimes you can get # of employees on the profile page: http://finance.yahoo.com/q/pr?s=MSFT+Profile
Essentially, the rev/emp metric when making investment decisions is "outside the box." Most investors don't care or even think about using it as a filter, nor is it even really possible without better investing tools.
I don't follow the logic as it pertains to retail. It's quite easy to get revenue per employee to be as close to zero as you want. Simply hire more workers. Investors in retail stocks are not looking for revenue per employee to be as low as possible. They are more focused on things like sales per square foot of their stores.
Razor thin margins are the goal but only if it is achieved through the right process. Hence, people look at other metrics.
Most public companies I researched had revenue/employee between $100,000 and $200,000. This simply isn't high enough to provide any cushion.
The reason here, that Craigslist is at the top, is because they outsource information management to the community through flagging and karma assignments. Most of the work of the employees is handling the exceptions to the algorithms, which usually result in the form of an email to craig or a post to the feedback or help topics. These may result in a kind email from craig or banning of a spammy account.
They are so good, they already have phone based account validation. None of the other companies on this list have that. CL focuses their employee time and energy on what is important -- stuff only humans can do. The rest is done by computers and this is a brilliant sign that they are doing it right.
Most companies handle exceptions with bureaucracy, filling up revenue with salaries until the boat sinks.