5 Ways to Improve Labor Productivity and Boost Your Bottom Line


In honor of Labor Day, here are five ways to increase labor productivity. Increased labor productivity increases your bottom line.

First, you have to track and measure labor productivity using the productivity ratio or compensation percentage. This ratio answers the question, how much did the company spend in payroll and payroll taxes for each dollar of revenue that month?

To determine your company’s productivity ratio, divide total payroll plus payroll taxes by total sales each month. Payroll includes all compensation which is the same as the gross wages number you report to the IRS on your 941 form each month. If you are type of company where owner compensation is accounted for differently than on a 941, then add the owner compensation to the 941 gross wages for the month. Payroll taxes include FICA, Medicare, state unemployment, and federal unemployment. Do not include worker’s compensation, health insurance and other benefits.

Track this number each month. It may go up and down depending on seasonality. This is your base line number.

To increase productivity, you decrease your compensation ratio (you are spending less on payroll and payroll taxes with a decreasing ratio).

Here are some suggestions:

1. Post the compensation ratio each month.

If you have different departments you can calculate and post the ratio for each department. What gets watched gets improved.

2. Make it fun.

Have a contest around decreasing the compensation ratio. For example, if your compensation ratio is 45% and you want to lower it to 35%…and it stays at that level or less for 3 months, have a contest with a great prize when it gets to and stays at/below 35%. This 10% decrease in payroll and payroll taxes for the same sales volume goes directly to your bottom line. You can share in the savings with the people who helped get it there.

3. Increasing sales with the same level of payroll also decreases the compensation ratio.

Your employees might come up with a way to increase sales with the same number of working hours per month. Again, this savings falls to your bottom line.

4. Get accurate project time estimates and track the billed time to those projects.

Many people charge time that they are “wasting” to a project because they have to assign the time somewhere. Then you experience cost overruns…and decreasing productivity.

5. Watch overtime hours.

If someone is spending an hour on social media or personal phone calls and then receiving an hour of overtime per week, cut out the overtime. There is enough time during the day to get the job done…assuming social media and personal phone calls are eliminated. Also, make sure that if communication with employees outside the office is necessary on a daily basis, you issue company owned phones. Then you can monitor the calls.

Happy Labor Day…improved productivity means an improved bottom line.