Why SER Matters
People are the hardest and most emotional part of a business to change. Growth through talent acquisition must be undertaken with the utmost responsibility. Anyone who has had to reduce a workforce knows the damage it does, both to the company and the individuals affected. This is why engaging with your SER is crucial. If you don’t measure it for yourself, measure it for your employees.
Calculating the SER
The SER is designed to measure workforce efficiency by comparing the total Annual Recurring Employee Expense (AREE) with a company’s Annual Recurring Revenue (ARR). The formula is simple: AREE divided by ARR.
AREE includes all expenses related to employee compensation, from salaries and bonuses to benefits. For example, a SaaS company spending £500,000 per month on employee compensation would have an AREE of £6M.
Why ARR per employee isn’t enough
But what about using ARR per employee to gauge employee efficiency? This metric only provides a snapshot of how much revenue is being generated by each staff member, without accounting for the cost of those employees. It tells you how much revenue is tied to each worker but doesn’t reveal how much you’re spending to achieve that revenue. At first glance, a company with a high ARR per employee might look efficient, but if the compensation costs are equally high, it could still be struggling.
What good and bad SER looks like
- Good SER (< 0.5): Under 0.5 could be considered efficient. At this range, the company is spending less than 50% of its ARR on employee compensation and appears to be balancing labour cost against revenue effectively.
- Acceptable SER (0.5 to 0.8): More established scale-ups would be expected to sit at the lower end of this range, but in fast-growing tech companies, the top end is acceptable.
- Poor SER (>0.8): This range indicates a spend of more than 80% of ARR on employee salaries: way too much! Even in a fast-growing tech business, you’d want that ratio to come down quickly.
Real-life examples
One of the nice things about SER is that we can usually get the rough data to measure how the top-performing SaaS companies are doing. For instance, Salesforce reported an annual revenue of $34.86B in 2024, with an estimated total annual salary expense of approximately $10.9B. This puts Salesforce’s SER at an excellent level for an established SaaS business.
Zoom, on the other hand, reported significant employee-related costs, including Selling, General & Administrative (SG&A) expenses of approximately $1.9B, and Research & Development (R&D) expenses around $814M. This puts Zoom’s SER a bit higher than it might be for its stage, indicating that a recruitment pause may be timely.
How to improve the Salary Efficiency Ratio
If a SaaS company finds that its SER is too high, there are several strategies for improving it:
- Optimise Workforce Allocation: Ensure that teams are focused on high-impact areas that directly drive ARR growth, such as sales and customer success.
- Tie Compensation to Performance: Consider linking compensation to performance metrics like ARR growth, customer retention, or new sales.
- Enhanced Focus on Performance: Keep high performers motivated and manage lower performers out, or give them the tools to improve.
The last five years have held several hard-earned lessons, but key among them is this: if you let your headcount get out of control, you’re going to burn a lot of money very quickly. By keeping an eye on the SER, leadership can maintain a clear picture of the revenue generated by employees against their cost, offering a major puzzle piece in planning for sustainable and responsible growth.
If you want to show off your business’s incredible SER, or share a world-changing idea you think I should know about – get in touch. You can reach me on [email protected]
Edward Keelan is a Partner at Octopus Ventures.
