A 2008 study reported that 40% of sales reps will not attain quota. You may have one or more of these underperformers on your own sales team. Most small business don't spend enough time evaluating salespeople before they hire them and most keep an underperforming rep on board too long. But at what cost to your business? Way more than you'd expect.
Here's what goes into recruiting, hiring and managing a bad salesperson:
- Recruitment/Search fee
- Background checks
- HR department's time and administration costs (for all candidates interviewed)
- Travel and/or relocation costs
- Compensation – base salary plus any commission or bonus paid
- Car allowance
- Office space
- Training costs
- Management costs
- Opportunity costs of missed sales
- Damage to the company's brand/image
- Outplacement services
- Disruption to your business
Now think about the costs associated with each of these. Given that 40% of salespeople turn over every year (as compared to 23% for other positions) and poor performers have the ability to slip through the interview screening process, this turnover can have a crippling impact on a small businesses. Meanwhile, it can take months to figure out that you've made the wrong decision, and you're left with money spent and a position to fill...again.
Knowing these costs is critical to mitigating them. A typical example of the bad sales hire costs for small- and medium-sized business owners in Canada might look something like this:
These will fluctuate depending on how you find this salesperson, but at the very least you or another senior executive will be dedicating time to the search, along with your HR department. There will also be costs if you undertake any third-party performance assessments, background checks and reference checks. If you conduct the search and hire in house you'll have to consider the value of that time if spent on another task. If you paid a recruitment firm and involved multiple departments of your company in the interview process that figure can balloon to upwards of $20,000.
To calculate the compensation cost of a bad salesperson start by determining what value they have brought to your company. It's possible that a bad rep has won new business, but not enough to be considered productive. As a rough way to calculate your cost, use the rep's percentage of quota as a reference point. If your rep has only reached 40% of quota then 60% of the total compensation paid has been wasted.