Question

You are a new financial manager and your boss asks you to add together the total compensation of the owners, directors and managers and then divide this figure by total sales. How would you classify this ratio? Who would want this information and why?

Answer 1

The total compensation of the owners, directors and managers divided by total sales can be classified as an efficiency ratio . Since compensation is an operating expense it can be categorized under efficiency ratio under operating decisions.
The shareholders , retail and corporate investors would want this information to understand the efficiency of managers and owners in generating revenues in a particular company A higher compensation to sales revenue would indicate lesser efficiency of the top management and had the compensation been lower it could have been ploughed back to generate more revenue. Higher the retention higher the growth of firm . This can enhance shareholder value. Even banks can use this ratio in lending as higher salaries may reduce the interest coverage ratios which can impact their interest collection.