Opinion - Why Use FTE ?

When it comes to "Full Time Equivalence", life becomes somewhat more difficult.  The first major issue is the definition of an FTE.  As with other opinion's posted, they are just that, opinion not fact. Now back to what is an FTE ?

The term FTE unfortunately is used rather loosely and can range from being nothing more than a Head Count to actual worked Full Time Equivalence.  First things first, FTE is not a count of Staff Members as this is more appropriately designated as a Head Count.  Head Count is extremely important, and is also my preference for using in Attrition Metrics (see Opinion - Attrition ). Head Count is also the best measure for basic Demographic Analysis such as Diversity or Organisational.  FTE in effect should be the representation of actual Worked Hours as equated Full Time Equivalent Staff.  The other definition of FTE can also be the Contracted FTE where an Organisation's population can be represented as a sum of the Contracted FTE's where a Staff Member with contracted hours of 20 would be counted as 0.5 of a Contract FTE based on a Full Time Equivalence of 40 hours.

However, the most useful representation is that of the Worked FTE as it deals with all of the Workforce Utilisation issues.  From Worked FTE's you can determine your exact utilisation of Casual Labour. For example, your organisation may have a Casual pool of 100, but on a month by month, or even period by period basis, you're actually using 45 Casuals as an FTE.  It is from this representation that you can determine the level of Casual usage compared to your total Staff FTE.  ie  a usage of 45 Casual FTE's over a total usage of 450 FTE's would show that the business has a 10% Casual utilisation. Now if, as in many cases, Casual Labour comes at a premium it would be desirable for the business to increase their permanent staff numbers to reduce the use of Casuals.

The representation of Worked Hours as FTE's has many other uses, another being in the critical area of Overtime.  When comparing the FTE numbers in an area against the Head Count, alarming results can be found such as where the paid FTE's are significantly higher than the Head Count.  This generally indicates one thing, and that is this area of the business is under staffed. You can almost guarantee that the variance between FTE and Head Count is being made up in Overtime.  There have even been real life examples of this where the variance was as much as 20%.  Now this may not sound that bad, but that 20% was made up of Overtime which is being paid at penal rates ranging from Time and 1/2 to Double Time.  When the 20% Worked Hours are extended to Paid Hours (by applying the Penal Factor to the Hours) the actual variance of Paid FTE over Head Count was closer to 35%.
  Worked Factor Paid
Ordinary FTE 200 1 200
FTE at 1.5 20 1.5 30
FTE as 2.0 20 40
Total FTE 240   270
Head Count 200 200
Variance 40   70
Variance / Head Count 20.00%   35.00%
On the left is a table showing the calculations demonstrating exactly how the 35% under staffing value was calculated. The issues surrounding this metric result are quite significant, well beyond the obvious high average cost of labour.  There are numerous flow on effects.  Many of the employees will be receiving a much higher weekly pay, which in turn will be included in their Holiday Pay Earnings, consequently driving up Leave Liability.  Also, the excessive hours which are now being worked by the staff also brings the risk of Lost Time Injuries and may also lead to an increase in Sick Leave through fatigue.  As well as tracking the FTE by Overtime, the tracking FTE of Sick Leave against Ordinary FTE can also be used to look for such increases in absenteeism.

The other key consideration when using Full Time Equivalence is how you arrive at the FTE value.  How do you handle differences in standard Full Time Hours such as 37.5 for Salaries Staff and 40.0 for Waged Staff.  Even the accepted standard hours between Australia and New Zealand where Australia commonly uses 38 as a standard working week and New Zealand uses 40 hours.  There are two approaches, one is to use a standard divisor throughout to achieve some form of relativity such using a standard divisor of 40 which show that 1.0 FTE of labour is delivered by a Waged Worker and only 0.94 of labour is delivered by a Salaried Worker.

This also helps where there has been standardisation of rotating shifts where the 'average' weekly hours are set at 42 which also includes a degree of overtime. This should in effect be reflected as 1.05 of an FTE.

The other method of calculating and FTE is to use an equated FTE which is derived from the Employees Contracted Full Time Equivalent Hours.  Here, for example using the Salary verses Waged scenario, a Salaried Employee would have their worked hours divided against 37.5 and a Waged Employee would have their worked hours divided against 40.0 to calculate their Worked FTE.  This calculation is the most common as it all staff who work their Contracted Full Time Equivalent Hours will be represented as 1.0 FTE.  The only real issue with this calculation is that there is a lot on reliance on having Employees correctly established in the Payroll/HR System.  This formula for FTE's makes it easy to identify where areas of the business are being run effectively or not and the degree of over or under staffing.

You may have noted that I have now included the identification of over staffing.  There is a common rule around balancing staffing levels, more specifically in the Waged workforce, and that is the level of Overtime being worked should be roughly the same as the amount of unscheduled leave being taken, ideally Sick Leave.  Simply if the amount of Unscheduled Leave is higher that the Overtime, then there is excess staff, and if the amount of Overtime being worked is greater than the Unscheduled Leave then there is insufficient staff.

Now in reality, you could just as easily get many of the ratios discussed in this article by simply comparing the sums of the hours, but equating those hours to FTE's provides a much more identifiable metric.  It has more relevance to present the amount of Overtime being used as 78.5 FTE's as opposed to 3,140 hours, as it immediately puts it into the context of "How many staff is that?".