Calculating the Cost of Hiring Poor Salespeople

I often take it for granted that people are able to calculate the cost of hiring poor salespeople, but there have been several requests to explain how this should be done. In technical terms, it is called “utility analysis”. It involves using statistics to calculate means and standard deviations of performance. However, even though I know of no medical study that links statistics to cancer of the eyeballs, I’ll defer to public opinion and suggest a way to calculate production differences that only requires basic addition, division, and subtraction. Getting Started Let’s take a company with 10 seasoned salespeople. They have equal territories, and annual sales ranging from $1,000,000 to about $250,000. Step 1. Rank-order salespeople based on their personal production (from highest to lowest). Here is our fictional sales team:

  • Bob: $1,000,000
  • Carol: $900,000
  • Ted: $800,000
  • Alice: $700,000
  • Fred: $600,000
  • Ethel: $500,000
  • Ricky: $400,000
  • Lucy: $300,000
  • George: $200,000
  • Martha: $100,000

Step 2. Add production from all salespeople and divide by three. This yields three cut-points that allow us to divide our salespeople into meaningful production levels, or “tiers.”

  • Total sales of $5,500,000 divided by 3 equals approximately $1,800,000 per sales tier.

Step 3. Start at the top of the list of salespeople and assign each salesperson to a production level.

  • Bob + Carol = $1,900,000 (top tier)
  • Ted + Alice + Fred = $2,100,000 (mid-tier)
  • Ethel + Ricky + Lucy + George + Martha = $1,500,000 (bottom tier)

Step 4. Divide production (within each tier) by the number of people in that level. This yields the average production per salesperson by tier.

  • Bob + Carol = $1,900,000 / 2 = $950,000 average top-tier production
  • Ted + Alice + Fred = $2,100,000 / 3 = $700,000 average mid-tier production
  • Ethel + Ricky + Lucy + George + Martha = $1,500,000 / 5= $300,000 average bottom-tier production

Step 5. Calculate the average production difference between a mid-tier salesperson and a bottom-tier salesperson. Using a mid-tier sales “target” provides a conservative estimate of lost production.

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  • $700,000 average mid-tier – $300,000 average bottom-tier = $400,000 average production lost per bottom-tier salesperson.

Step 6. Multiply this figure by the number of salespeople in the bottom tier. This represents the total sales lost each year by the bottom-tier salespeople.

  • $400,000 x 5 = $2,000,000/year

Step 7. Find a bucket and get sick. (Be careful not to get any on the floor.) Some Important Things to Remember

  • No conscientious manager knowingly hires low producers (unless they are blood relatives).
  • We did not use “top-tier” salespeople as our “target” because no hiring system is perfect. If we did that, you would need a bigger bucket. All we want to do is raise awareness of the high cost of low producers when they are compared with a reasonable target.
  • Acquisition and recruiting costs pale when compared with lost production.
  • All the salespeople in this example looked good enough to hire.
  • In addition to lost production, bottom-tier salespeople probably take considerably more coaching time than any other manager activity.

Fixin’ What’s Broken You now have an easy-to-use tool that a) will not cause cancer of the eyeballs, and b) can be used to examine what it costs when poor salespeople slip through the screening phase. We used a simple productivity model in this example. Simple models get attention. But it takes some digging to actually discover the real hiring problem. What, for example, is lacking among the low producers? Is it a motivational issue? Interpersonal skills? Learning problems? Analysis problems? Fact-finding? Market awareness? Discovering the root cause requires some investigation. Investigation involves asking salespeople about their jobs, asking managers about their expectations and asking executives about future changes. All this data is then converted into competencies that are measurable, observable and directly related to job performance. Next, we need to address the problem of how to measure each applicant for the problems we identified. Each problem would require a different kind of solution. Motivation, for example, would require special testing, job previews, and better interviewing. Screening for better interpersonal skills would require some realistic sales simulations. Hiring people with better learning and analytical ability would require some mental-ability testing. You can only decide on the best combination of highly accurate tests, interview technology, simulations, and score cut-points after you know what you need. Quick, Cheap or Good (Pick One) There is an old adage that goes, “Quick, cheap or good…pick any two. If you want something quick and good, it won’t be cheap. If you want something quick and cheap, it won’t be good. If you want something good and cheap, it won’t be quick.” One-thousand-word free-advice columns like this one are no exception. They are quick and cheap, but you will be disappointed if you think they are easy to implement. I don’t mean to be “flip,” but unless you have an in-house expert, this is not a task that’s easy to do yourself. It takes hard work, requires considerable expertise, and takes a few bucks. Anyone who thinks otherwise is either brilliant beyond all comprehension or doesn’t have a clue about what he does not know. What You See Is What You Get Once you have a good system in place, be prepared to do a lot of “frog-kissing” before you find your prince or princess. Good hiring systems will disqualify Ethel, Ricky, Lucy, George, and Martha because they won’t make it through the hiring screen. Could you hire, then train them? Encourage them to be more productive? Motivate them to excellence? Well, if you insist on flogging a dead horse, I encourage you to ponder why, after receiving similar training, coaching, and sales incentives, low producing salespeople tend to remain low producers and high producing salespeople tend to remain high. Whether you agree or not, a cold fact of hiring is that mistakes can only be reduced with study, hard work, and accurate measurement tools. Training is nice, but I’m still waiting to see proof showing training, management, motivation, or incentives consistently turn sow’s ears into silk purses. Quick, cheap, or good ó pick any two.


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