Payroll as a percentage of revenue: what is too high?

Key takeaways

Payroll as a percentage of revenue is total employment cost divided by revenue. There is no single correct figure: labour-intensive service firms run far higher than product resellers. What matters is your own trend. A ratio that rises as revenue rises means staffing is growing faster than sales, and it is the earliest warning of margin trouble.

• Formula: total employment cost divided by revenue, times 100.
• Include employer National Insurance, pension and benefits, not just pay.
• Compare with your own past and with similar firms only.
• A rising ratio during growth is the warning sign.

What is payroll as a percentage of revenue?

Payroll as a percentage of revenue is a ratio showing how much of each pound of sales is spent on employing people. It is calculated by dividing total employment costs for a period by total revenue for the same period and multiplying by 100. It is also called the staff cost ratio.

• How outsourcing helps small businesses scale without hiring
• Revenue per employee: the number that shows real scale

How do you calculate it properly?

Use the full cost of employment, not gross pay. Add salaries and wages, employer National Insurance at 15% above the £5,000 threshold, employer pension contributions of at least 3% of qualifying earnings, bonuses and benefits. Include directors' pay at a market rate, or the ratio will look better than it is.

• 1. Total gross pay for the year.
• 2. Add employer National Insurance.
• 3. Add employer pension and benefits.
• 4. Divide by revenue.
• 5. Multiply by 100.

• The true cost of an employee in the UK

What is a normal figure?

Normal depends on what you sell. A consultancy selling people's time may spend half or more of revenue on payroll. A wholesaler may spend a tenth. Published averages are of limited use unless they are for your sector and size. The Office for National Statistics publishes earnings data that helps check pay levels, not ratios.

What does a rising ratio tell you?

A rising ratio tells you staffing cost is growing faster than sales. If the increase is in revenue-earning roles ahead of signed work, it may be an investment. If it is in support roles, it usually means work is being absorbed by headcount that could have been simplified, automated or bought more cheaply.

• Why profit margin falls as a business grows, and the fix
• Overhiring: what it costs a small business when growth slows

How do you bring the ratio down?

Bring the ratio down by growing revenue against a steady payroll, not by cutting first. Hold support hiring, improve the processes that consume staff time, and supply additional routine capacity through a managed team. Outsourced costs appear on a different line, so track total people cost, employed and bought, alongside the payroll ratio.

• The lean team model: a bigger business, the same headcount
• Headcount vs capacity: what a growing business really needs

When is a high ratio fine?

A high ratio is fine when people are the product and they are well used. A firm with 60% payroll and strong utilisation can be more profitable than one with 30% and idle staff. Read the ratio with gross margin and utilisation before drawing conclusions.

• Staff utilisation rate: the cost of paid idle time

What does this look like in practice?

A pattern we see in growing UK firms: the payroll ratio creeps up two points a year for three years. Each individual hire was justified. Together they moved six points of revenue from profit to wages. Tracking the ratio quarterly makes the drift visible while there is still time to choose a different way of adding capacity.

• See client work
• BPO Solutions for UK businesses

Payroll ratio checklist

Review this every quarter.

• Calculate total employment cost, including employer costs.
• Divide by revenue for the same period.
• Plot the ratio for the last eight quarters.
• Split payroll into revenue-earning and support roles.
• Add bought-in people costs for a total view.
• Test each planned hire against its effect on the ratio.

• The KPIs that show whether your business is really scaling
• Workforce planning for growth: roles to hire, roles to buy

Next step

Send us your annual payroll cost and revenue for the last three years. We will calculate the trend and show how planned hires would change it.