Are Your Employees Profitable? The Hard Question Every Business Owner Must Ask

As a fractional CFO, I've seen countless business owners struggle with one of the most uncomfortable questions in business: Are your employees actually profitable?

If you can't answer this question with actual numbers, you might be running your business on hope rather than data. In today's economic climate, with rising labor costs and tighter margins, employee profitability isn't just a nice-to-know metric—it's survival-critical information.

The True Cost of an Employee

The real cost of each employee goes far beyond their salary. Benefits and taxes typically add 25-35% to base compensation, while indirect costs like office space, equipment, training, and management overhead add another 15-25%.

For a $50,000 salary employee, the true annual cost often lands between $70,000 and $80,000.

Measuring Employee Revenue Generation

Revenue-generating roles like sales staff are straightforward—track their sales and subtract returns. Support roles require more creativity, measuring customer retention rates, efficiency improvements, or capacity increases. Overhead roles are most challenging, requiring industry benchmarks to determine appropriate investment levels.

The Profitability Calculation

Employee Profit = Revenue Attributable to Employee - Total Employee Cost

Calculate the ROI: (Revenue - Total Cost) / Total Cost

A 3:1 ratio (300% ROI) is generally considered healthy, though this varies by industry and role.

What the Numbers Reveal

When I run these calculations for clients, I typically find:

• 20-30% of employees are highly profitable

• 50-60% are moderately profitable

• 10-20% are break-even or unprofitable

Beyond the Numbers

Remember that profitability analysis is a tool, not a mandate. Consider strategic value for long-term goals, market conditions that affect replacement costs, and cultural impact from mentorship and leadership.

Making Profitable Decisions

For unprofitable employees, you can invest in improvement through training or better tools, restructure responsibilities to align with strengths, adjust compensation if appropriate, or make the difficult decision to part ways.

The Bottom Line

Every business owner should know whether their employees are profitable. It's about ensuring your business remains healthy enough to provide good jobs for your profitable team members. The most successful businesses treat this as an ongoing process, regularly reviewing employee profitability and investing in their best performers.

Your employees are your biggest investment. Shouldn't you know if that investment is paying off?

Need help calculating employee profitability for your business? As a fractional CFO, I help business owners get clarity on these critical metrics.