The Labor Productivity Ratio

As a business owner, you must measure productivity to know if the money you spend on labor is paying off in terms of output. The labor productivity ratio is the simplest way to find out if you're getting the production you need. Use this ratio on a regular basis, and you'll remain aware of your employees' productivity.

Elements of the Productivity Ratio

  1. The labor productivity ratio, in its simplest form, looks like this: output/input. Simply divide the amount of output you're getting by the amount of work you're putting into it. This requires you to assign numbers to both input and output so that you get a meaningful figure.

Assign a Number to Input

  1. The most useful number by which to measure input is the number of hours worked. Examine one full work shift and determine how many hours each production employee is working. Take out lunch breaks, unless they're paid lunch breaks. Leave in coffee breaks, as you're supposed to pay employees for these periods. If you want to measure the input of all employees, combine the hours for your complete crew. If you want to measure one employee's productivity, use only that employee's hours.

Assign a Number to Output

  1. Your output number is the number of units produced. If you don't run a manufacturing business, assign a number to productivity to measure, for example, the number of new customers contacted, number of words written or number of meetings set. Find a number that measures an important task for each employee. You can measure the output of your staff as a whole, or concentrate on the output of one employee.

Divide Output by Input

  1. If an employee's output is 1,000 units and it takes her 8 hours to produce this number of units, 1000/8 equals 125 units per hour. You can measure this figure against those of other employees and determine if you're getting the production you need from any particular individual, or you can use the formula to measure your entire output and the number of hours all employees put into it.

Turn Figures Into Dollars

  1. You can assign a dollar figure to each element of the ratio. Do this after you've applied the formula. If you know, for example, that an employee produces 125 units in an hour, you can assign a market value to those 125 units. You may then use the hourly wage of the employee to find out how much it costs you each hour to produce that value. Example: If 125 units sell for $40 each, you have a total revenue of $5,000. The employee made these in one hour, and you pay that employee $30 per hour. For every $30 spent on this employee's wages, you realize $5,000 worth of income.