Payroll to Revenue Ratio: Understanding the Metrics for Your Business

What’s your ideal payroll-to-revenue ratio? In construction, 20% is the benchmark. But since it’s a labor-intensive industry, most firms aim for 15%–30% ratio. The real question is: should you prioritize profit and spend less on payroll costs? Or should you invest more in your workforce, risking losing money you’ve earned?

In this guide, you'll learn how to find the perfect balance between increasing your revenue and fairly compensating your team. We’ll also show you how to calculate the payroll-to-revenue ratio and reduce the payroll percentage.

Payroll to Revenue Ratio: What It Is and Why It Matters

The payroll-to-revenue ratio is a metric that shows how much of your revenue goes toward paying your team. This number helps you understand the efficiency and profitability of your business.

Why the payroll-to-revenue ratio is important:

Labor cost efficiency. This ratio indicates how effectively you're converting payroll dollars into revenue. A lower ratio often signals cost-effective labor use, while a higher one could mean you're paying too much for each dollar earned.
Workforce optimization. It provides HR with the clear insights necessary to structure salaries and bonuses. It helps to balance fixed and variable pay based on performance plus financial results. This data-driven approach ensures compensation plans are both motivating and cost‑effective.
Strategic decision-making. It empowers leadership to align labor expenses with revenue targets and growth strategies. It becomes a critical tool for resource allocation—determining when to hire, where to invest, and how large your team should be, based on revenue growth projections.
Predicting profitability. HR and finance teams can forecast labor expenses, plan future payroll budgets, and anticipate recruitment costs. This enables a clear view of how labor costs will impact profitability and provides a structured framework for budgeting future staffing needs.
Builds investor & lender confidence. Maintaining a stable payroll-to-revenue ratio shows discipline and financial credibility. It can make businesses more attractive to investors or lenders. In fields such as construction, this is crucial for securing larger projects and securing funding.

Factors that Influence Payroll to Revenue Ratio

Let’s take a look at several critical variables that determine your ideal payroll-to-revenue ratio:

1. Business Model

Businesses that require highly specialized expertise—such as legal, architectural, or medical practices—have higher payroll-to-revenue ratios (up to 40%). This is due to the need for rare skills, certifications, and competitive pay.

Companies that use routine operations (retail chains or manufacturing) tend to maintain lower ratios (typically 10–25%). They achieve this by using standardized workflows, process automation, outsourcing, or part-time labor.

When your model depends on hiring experts from your industry, expect a higher payroll-to-revenue ratio. If it relies on workers performing standard tasks without much prior experience, the ratio will be lower.

2. Industry Standards

Different industries have vastly different norms.

Examples of a good payroll-to-revenue ratio by industry:

Professional, scientific, and technical services — 39%
Construction — 20%
Beauty Salons and Barber Shops — 44%
Retail — 10% to 20%
Health care and social assistance — 41%
Restaurants — 30%
Manufacturing — 12%
Hospitality — 30%

3. Company Size

Larger companies tend to have lower payroll-to-revenue ratios because they leverage economies of scale. They distribute fixed overhead costs, such as insurance and administrative salaries, across a broader revenue base.

Smaller businesses allocate a larger percentage of their revenue to payroll expenses. However, as firms grow, they can invest in automation, bulk purchasing, and more efficient management structures, which reduces the payroll's share of revenue.

4. Geographic Location

In the UAE, payroll-to-revenue ratios can vary between emirates. Let’s compare two major cities: Dubai and Abu Dhabi.

The average annual salary in Dubai (~AED 52K) exceeds that in Abu Dhabi (~AED 42K)^[?].

This occurs because Dubai’s cost of living, including rent, is 21% higher than in Abu Dhabi^[?]. That’s why employers offer higher base salaries to attract and retain staff.

Abu Dhabi has slightly lower base salaries in the private sector, but they are higher for government and oil-related positions. Additionally, it offers more benefits, including housing packages.

5. Market Conditions

Factors such as economic trends, inflation, and labor demand play a crucial role in shaping payroll expenses. In a competitive job market, businesses often increase wages and benefits to attract and retain top talent. Conversely, during economic slowdowns, companies may reduce hiring or adjust pay structures to maintain profitability.

The UAE’s stable economy supports steady and controlled salary growth, enabling employers to plan compensation strategies with greater predictability.

Inflation in the UAE stood at 1.4% in Q1 2025, mainly due to lower energy costs^[?].

How to Calculate the Payroll to Revenue Ratio

Understanding your payroll-to-revenue ratio is essential for controlling labor costs and improving financial efficiency. Here's a clear, simple way to calculate it:

Step 1: Calculate Total Payroll Costs

Add up all payroll-related expenses for the chosen period (monthly, quarterly, or annually). This includes:

Gross salaries and wages. The total compensation paid to employees before deductions (including base pay, hourly wages, and contractor fees). UAE businesses can use ERP tools like FirstBit ERP to streamline this process.
Employee benefits. In the UAE, many packages include pensions, end-of-service gratuities, paid leave, accommodation, transportation allowances, and health insurance.
Payroll taxes and statutory contributions. These may include the employer’s share of UAE medical insurance or pension fund payments for UAE nationals (via GPSSA).
Bonuses and commissions. Any incentive payments tied to performance or sales.
Other labor-related expenses. Overtime, housing allowances, travel stipends, and mobile or vehicle reimbursements.

Tip: In the UAE, expatriate labor often involves unique payroll elements, such as relocation costs or visa fees. These should be included for accuracy.

Step 2: Calculate Your Total Gross Revenue

Determine the total income earned by your business during the same period. This includes:

Project revenues
Sales of goods or services
Any other operating income streams

Make sure the revenue figure is gross, not net (i.e., before deducting expenses).

Step 3: Divide Payroll Costs by Total Revenue

Use this formula:

Payroll-to-Revenue Ratio = (Total Payroll Costs / Total Revenue)

This will give you a decimal figure.

Step 4: Multiply by 100 to Get the Percentage

Multiply the decimal by 100 to express your payroll costs as a percentage of your revenue:

Payroll % = (Payroll-to-Revenue Ratio) x 100

Example:

Let’s say your annual figures are as follows:

Total payroll costs: AED 920,000
Total revenue: AED 4,600,000

Apply the formula:

Payroll-to-Revenue Ratio = 920,000 / 4,600,000 = 0.20 Payroll % = 0.20 x 100 = 20%

Result: Your payroll costs make up 20% of your total revenue—generally considered a healthy ratio in labor-intensive industries like construction.

6 Tips To Reduce Your Payroll-to-Revenue Ratio

A high payroll-to-revenue ratio indicates that you are spending a significant portion of your company's revenue on employee wages. While this is not always a problem, it may reveal inefficiencies—especially if the ratio is considerably higher than industry benchmarks.

Here’s how you can lower the payroll-to-revenue ratio:

Use industry benchmarks. Compare your payroll‑to‑revenue ratio with industry benchmarks and key competitors. If your ratio is higher, you need to make targeted cost adjustments.
Optimize staffing levels by role. Analyze performance metrics and workload data to ensure that the correct number of employees are assigned to the right roles. Adjust team size based on actual demand to prevent overstaffing during low-output periods and maintain productivity.
Employee skill development. Investing in upskilling programs that improve employee efficiency. This will increase output per staff member. Teams will manage higher workloads without adding headcount. That’s why companies with formal training earn over 218% more income per employee^[?].
Choosing the right payroll schedule. Adjust it to better match your company’s cash inflow patterns. For instance, you can time your bonuses or commissions with peak revenue periods. This will help improve cash flow management and also reduce pressure during low-revenue months.
Outsource non‑core functions. Delegate roles such as IT support, customer service, and other administrative tasks to specialized third-party providers. This approach offers greater budget flexibility, allowing you to pay only for the services you need.
Set clear KPIs for your workforce. For example: productivity rates, customer satisfaction scores (e.g., CSAT or eNPS), and OKR progress. Conduct regular performance reviews. Reward top performers, while swiftly addressing underperformance through feedback or coaching. This approach ensures that your payroll investment aligns with measurable business outcomes.

Payroll to Revenue Ratio in Construction

Labor plays a crucial role in construction projects, with skilled workers and adherence to safety regulations being key factors that contribute to higher payroll expenses.

In the UAE, the PTR is typically around 20%, meaning that for every AED 1 spent on payroll, the company generates AED 5 in revenue. However, it can sometimes exceed this industry benchmark due to increased labor costs.

Factors behind high labor cost in the UAE Construction:

Skilled labor shortage. UAE employers often increase pay to attract and retain skilled workers; when they’re not available, existing workers work overtime, pushing labor costs up.
Overtime premiums. Standard overtime = +25%, night shifts (10 PM–4 AM) = +50%.
Safety & compliance. PPE, safety training, accident insurance, and compliance monitoring—all necessary and costly.
Recruitment burden. Skilled-worker visa, recruitment, onboarding, and training costs average ≈ AED 3,404 per worker/year^[?].
Wage Protection System (WPS) & payroll complexity. Construction companies must submit a monthly SIF containing payroll details and proof of salary transfers. Any discrepancies, late, or incomplete payments trigger non-compliance actions.

What Your Payroll to Revenue Ratio Reveals and What to Do

Track your PTR monthly or quarterly to spot trends. Notice when your ratio is increasing or decreasing. Below, we’ll share reasons behind these changes and what you can do about them.

High PTR (> 30–40%)

Reasons:

Overstaffing
Inefficiencies
Wage inflation
High overtime

Consequences:

Lost profits
Low productivity

Actions:

Pause the hiring process until you achieve revenue growth.
Review bonuses and benefits. Consider combining fixed and variable compensation.
Reduce inefficiencies by cross-training teams or automating routine tasks.
Invest in software that helps you allocate labor and control attendance.
Limit overtime. It can increase payroll with extra hours.

Low PTR (< 15%)

Reasons:

Understaffing
Outsourcing
Low payroll expenses

Consequences:

Short-term profits
Higher risk of burnout
Turnover
Inability to scale

Actions:

Invest in strategic hiring to boost your production capacity or enter new markets.
Raise compensation or perks to stay competitive and prevent the loss of skilled employees.
Organize training for your employees to improve their skills.

Balanced PTR (15–30%)

Reasons:

Effective use of workforce to generate revenue
Moderate regional labor costs
Balanced mix of skilled laborers and supervisors

Consequences:

Stable cash flow
No cost overruns on payroll
Profitability + competitive pay

Actions:

Monitor the ratio regularly. Track payroll and revenue trends to stay in range.
Real‑time dashboards. Use software with access to a centralized dashboard, where you can monitor your construction projects.
Cross‑train employees. Boost flexibility without adding headcount.
Embrace automation and AI: streamline your operations.

How To Use FirstBit ERP To Manage Payroll Efficiently

FirstBit ERP is a construction software that can make payroll management simple and hassle-free. Easily handle employee records, monitor attendance, and process accurate, compliant payrolls following UAE Labor Law — all within a single integrated platform.

Automated payroll calculation. Calculate wages automatically by factoring in attendance, overtime, and applicable deductions.
Salary statement. Monitor and administer accrued liabilities, including salaries, overtime, leave payouts, and end-of-service benefits.
Time card. Monitor on-site employee attendance using digital time cards.

Employee contract change. Store all employee information—such as personal details, contracts, attendance, and accruals—in a single, unified system.
Employee expenses. Manage employee expenses, including loans, fines, and other deductions, efficiently within the payroll system.
Payslips. Automatically deliver digital payslips to employees upon completion of payroll processing.

Conclusion

Construction firms often face challenges that can push payroll-to-revenue ratios higher and threaten profitability. Among them are: rising labor costs, overtime, workforce shortages, and many more. However, when managed effectively, a strong ratio brings predictable cash flow and healthy returns.

If you want to gain control over payroll expenses, consider using an ERP software like FirstBit. It can help you monitor labor attendance with time cards, while automatically processing payroll based on attendance, overtime, and deductions. All of the payroll calculations are fully compliant with UAE labor law and WPS requirements.

Tahir Sshabbir Attarwala

Contributing Author

Tahir is a highly dedicated construction writer with over 11 years of experience producing technically accurate, engaging content tailored to industry professionals. He expertly combines deep knowledge of construction practices with insights into market dynamics. Tahir’s goal is to help readers understand the broader economic context behind industry developments.

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