Each recession I like to revisit some old gems like this... they never seem to lose their relevance.
Revenue per payroll dollar is a key metric to evaluate the efficiency of any service business and banking is no exception. It's common knowledge that staff related costs are the most controllable of the "big three" categories (staff, premises & equip., systems) that account for the bulk of direct expenses in a financial institution. And in a recession, when revenues become volatile and pressure is on to cut staffing numbers and squeeze down job grades, managing the cost to revenue ratio is likely more important than usual. All this pressure to reduce staffing dollars needs to be managed with care or we run real risks of downgrading productive employees and demoralizing staff to the detriment of our customers and sustainability alike.
Breaking down the cost / revenue relationship into components offers some guidance about which handles you should be pulling to manage keep this KPI ratio in line. By decomposing the ratio into components you can explicitly see what is causing the ratio to change over time. Here's how we do it for fee-based business like investment management:
(Revenue / Balances)
times (Balances / Customer)
times (Customers / staff count aka FTE)
times (FTE / Payroll)
equals (Revenue / Payroll Dollar)
or R/B x B/C x C/FTE x FTE/P = R/P if you like algebra (I do).
The interesting thing about doing this is the components all make business sense and can be managed independently. Here's how I interpret the components:
- Revenue / Balances - pricing
- Balances / Customers - positioning
- Customers / FTE - service model
- FTE / Payroll - staff mix
By breaking down the high level metric into it's components like this you can gain much clearer insight into what actions you can take to manage your revenue / cost ratio and whether or not those actions are working.
Hope this helps someone pull the right handles !
