The hallmark of financial performance in today’s digital age is an expanded ability to earn “rents” from intangibles. Profit per employee is one measure of these rents. ROIC is another. If a company boosts its profit per employee without increasing its capital intensity, management will increase its rents, just as raising ROIC above the cost of capital would. The difference is that viewing profit per employee as the primary metric puts the emphasis on the return on talent. This approach focuses the minds of managers on increasing profit relative to the number of people a company employs. It suggests that the most valuable use of an organization’s talent is the creation and use of intangibles. Fortunately, the opportunities to increase profit per employee are unprecedented in a digital economy, where intangible assets are a rich source of value. Opportunities to improve ROIC to an equal extent are hardly as plentiful.
Another advantage of profit per employee is that it requires no adjustment for accounting conventions. Since companies expense their spending on intangibles but not on capital investments (which are usually depreciated over time), profit per employee is a conservative, output-based measure. And since it is based on accounting conventions, companies can easily benchmark it against the comparable results of competitors and other companies.