Profit Per Employee

Position: SUPPORT
Status: PROPOSALS BEING DISCUSSED

Summary
For years, legislators and regulators have used inconsistent metrics to determine whether a company should be classified as a “small business” in the eyes of the law. Measures often used, such as total number of employees and annual sales, fail to recognize the dramatic disparity between low-margin industries (such as those in the service sector) and higher-profit business models in industries such as manufacturing, financial services and technology. A new metric that saves jobs and businesses is needed. Profit Per Employee (PPE) is a more equitable measurement of a “small business” because it measures an employer's ability to absorb the cost of a mandate without the need to cut jobs or close locations.

History
PPE is the best indicator of an employer’s ability to absorb the additional costs associated with legal mandates. By simply dividing a business’ net profit by its total number of employees (numbers already provided by employers to the Internal Revenue Service), PPE provides a simple and more accurate solution to help prevent job loss and encourage job creation.

New research shows the tremendous disparity between PPE in various industries. For example, in 2008, the oil and gas industry’s PPE was $308,686; the software industry averaged $127,200 and the banking industry’s PPE was $60,392. In comparison, employers in the restaurant industry averaged a mere $3,000 profit per employee. These drastically differing PPEs reflect the need to redefine “small businesses” by their ability to absorb the costs imposed rather than selecting an arbitrary number such as annual sales or number of employees.

Position
The CFA supports the PPE metric, as it is the best indicator of a business owner’s ability to absorb additional costs, it provides a more consistent and fair standard and helps protect jobs.