How do you calculate staff cost as a percentage of fee income?

The short answer

Staff cost ratio = total staff costs for the period ÷ fee income for the same period × 100.

In a people business (accountancy, law, consulting, agencies, clinics) staff are by far the largest cost, so this one ratio says more about profitability than almost any other.

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Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.

Staff costs are everything paid to have the team

gross salaries and wages, bonuses and commissions;
employer payroll taxes, such as UK employer's National Insurance or US payroll taxes;
employer pension or superannuation contributions;
benefits, such as health cover and car allowances;
contractors and freelancers who do fee-earning work, shown on a line of their own so the mix is visible.

Decide whether partners' or owners' pay is in. In a company whose directors take salaries, include them. In a partnership, profit shares aren't a cost; many firms add a notional market salary for partners so the ratio compares with incorporated firms. Say which approach you use.

A digital agency spending £546,000 on people runs at 56.9% of fees

An invented agency, the quarter to September:

Item	£
Fee income	960,000
Salaries and bonuses	402,000
Employer's National Insurance	48,000
Employer pension	19,000
Freelancers (fee-earning)	77,000
Total staff costs	546,000

Staff cost ratio = 546,000 ÷ 960,000 × 100 = 56.9%

Without freelancers it is 469,000 ÷ 960,000 = 48.9%. The eight points of freelancers are worth tracking: flexible capacity, at a higher hourly cost.

Read it over three months, not one

A single month swings with a bonus month, an extra payroll week or a large invoice. A rolling three-month ratio shows the trend without the noise.

What a rising or falling ratio tells you

Rising, with fees flat: the firm hired ahead of work, or pay rises weren't passed on in prices.
Rising, with fees rising: fees are growing more slowly than headcount; look at realisation and utilisation.
Falling: better pricing or leverage, or an overstretched team; check overtime and staff turnover.

Many professional firms aim for the fifties or low sixties as a percentage of fees, but targets vary with the profession, the partner model and how much work is outsourced. Compare with the firm's own history and genuine peers.

Three ways the ratio flatters

Employer taxes and pension left out. Gross salary alone understates the ratio by ten to twenty points in many countries.
Fee-earning freelancers hidden in overheads.
A partnership compared with a company without a notional salary for the partners.

Payroll accruals matter too: if bonuses are booked only when paid, the ratio spikes in bonus months. Accrue them monthly if you can.

Magic MIS computes it every month as employee cost to revenue

Magic MIS computes employee cost ÷ revenue every month from the trial balance, the same ratio under its general name. Payroll ledgers are mapped once to employee cost; whether freelancers count depends on where their ledgers are mapped, and the ledger map shows where each one sits. The figure opens to the ledgers behind it.

What people ask about the staff cost ratio

Is this the same as payroll to revenue?

Yes, in most firms. Fee income is simply what professional services call revenue.

Should recruitment and training be included?

Usually not. Keep them in overheads, but track them separately in a growing firm.

Do freelancers count?

Fee-earning freelancers do, on a line of their own, so the mix of employed and flexible capacity is visible.

Have the staff cost ratio computed from your trial balance

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