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Management ratios, Organizational effectiveness
As the economy continues to struggle and we face uncertain world conditions, business decisions are getting tougher, not easier. Managerial effectiveness and accountability remain a strong focus of organizational scrutiny. To achieve business goals and succeed in the current environment, companies cannot be top heavy or have management stretched too thin. Finding the right balance of employees to managers - called span of control or management ratio - can be critical and challenging. Every organization is different. Conventional wisdom on the subject can be a useful starting point, but few hard and fast rules exist.
From a quantitative point of view, management ratio can be calculated by dividing a company's headcount by its management headcount including managerial personnel, from salaried supervisors to top executives. The standard formula is shown in Figure 1,
Historically, management effectiveness experts have recommended that individual managers should have no more than seven or eight people reporting directly to them. However, recent studies conducted by the Saratoga Institute, a 25-year-old firm that has developed the industry standards for measurement and benchmarking, show that the actual number varies considerably - by industry, company size, and type of work being done. The Saratoga Institute Workforce Diagnostic System Benchmarking Reports 2001 found a median management ratio of one to 16 in the healthcare sector, but only one to four in information services (see Figure 2). By company size, the median result also varies considerably - one manager to four employees in companies with 500 or less employees and one to nine in companies with 2,000 to 5,000 employees.
The same type of variance is seen in the dollars invested in the management staff. Management investment factor, another metric used to determine an organization's focus on management, is calculated by dividing a company's management compensation cost by regular FTEs (full time equivalent). It depicts the cost for managers and executives to manage regular employees in the organization. The standard formula for this management measure is shown in Figure 3.
The dollars invested in managing an organization's human capital depends naturally on the company's ability to pay, its management focus as well as industry and company size. In Figure 2, highs are again seen in companies with 500 or less...