Definition: The Full Time Equivalent is a measure that allows the company to calculate the equivalent number of full-time employees it would have on a given period of time. In other words, it allows the company to unify all types of employees to understand how its payroll would look like from a full-time perspective.
What Does Full Time Equivalent (FTE) Mean?
The Full Time Equivalent ratio helps the company assess its actual employment figure by adding all hours paid to its employees (full-time, part-time, or any other) and dividing them by the number of hours that a full-time employee should work in that given period. The results will reflect the actual full-time payroll of the company. These metric is particularly important when companies are comparing themselves with industry averages or with close competitors.
By comparing full-time employee’s numbers between industry competitors a company can analyze its current status about staffing, this can lead to conclusions like whether the company is under-staffed or over-staffed. Under normal circumstances, a full-time employee works 8 hours a day for 5 days a week. That would mean that a full-time employee would work an approximate of 40 hours a week and 160 hours a month.
Let’s take look at this example for further illustration
Modern Furniture Co. is a company that manufactures home and office furniture. The company currently has 30 employees on its payroll. Of these 30 individuals, 10 of them work full-time (8 hours a day), 15 of them work part-time (4 hours a day) and the other 15 work 2 hours a day. The company needs to compare its employment figures with two other competitors in the region and in order to do so they need to calculate the Full-Time Equivalent of its current payroll. According to our concept, how can they do this?
On our previous discussion, we stated that the full-time equivalent was calculated by adding all hours paid to current employees, in this case that would be 850 hours a week (( 10×8 )+( 15×4 )+( 15×2 )) x 5days ), and then divide that by the standard 40 hours a week that a full-time worker should do, that would result in 21.25 full-time employees working for the company. By comparing that figure with industry averages the company can analyze its current productivity.