Let’s walk through the total cost of a bad sales hire and S2P2’s ROI model.
Warning: The results may shock you!
1. Initial Assumptions
To calculate the cost of a bad sales hire you will need to know the basic design of the job’s compensation package and make some assumptions based on historic averages for your company.
Start by determining the quota for the job (row a.), the on-target earnings or OTE (row b.), and the OTE mix of base salary and commission (row c.). You should also include the cost of benefits and payroll tax as a percentage of base salary (row d.), which is commonly estimated at 30%, and your recruiting costs as a percentage of OTE (row e.).
Note that recruiting costs can vary depending on whether you outsource recruiting or use an in-house recruiting team. If you use an in-house recruiting team, then you need to consider the cost of your recruiter’s time as well as the costs to promote the job-on-job boards or other channels.
In this example below, let’s assume that a rep carries a $1,000,000 quota and has an OTE of $100,000. The OTE breaks down into 50% base salary and 50% in commission if the plan is achieved. We’ll use the standard 30% assumption for benefits and payroll tax and assume recruiting costs of 20% of a rep’s first-year OTE.
2. Hard Costs
The hard costs represent the costs to fill the role, onboard and enable the new hire, and re-fill the role if the new hire fails. If they last for a year, you have to pay their base salary and benefits, and you will need to pay severance.
Base pay (row f.) is $50,000, benefits and payroll tax is $15,000 (row g.), and recruiting costs are $20,000 (row h.).
Training and onboarding costs (row i.) include travel to live training and the cost of the actual training sessions such as instructor time, training materials, and LMS and eLearning licenses. In our example, let’s assume this equals $10,000.
You also need to include corporate IT costs (row j.), such as Officer 365 or G-Suite, and sales software costs, such as Salesforce.com, Salesloft, Gong, LinkedIn Sales Navigator, ZoomInfo, Calandly, and others. You may be able to roll over some of these licenses to the next user. In our example, we’ll assume this is $7,500.
If a new hire fails, assume you pay 2 months of base pay and benefits as severance (row k.), which works out to $10,333. Then, you pay the recruiting costs of $20,000 again to re-fill the role (row h.).
In total, that’s over $133K in hard costs (row m.), or about 1.33x the first year OTE!
Although this is frightening, hard costs dwarf in comparison to opportunity costs which we will calculate next.
3. Opportunity Costs
In sales, time is money and opportunity costs reflect lost selling production while the role is unfilled and while the new hire is ramping to full production.
In our example, we’ll start by calculating the monthly quota (row n.). Assume it takes 2 months to fill the role (row o.), and there is no production during that time.
Then, the role gets filled and the new hire starts to ramp up. This will vary based on the experience of your new hire and the complexity of your solution. In our example, we’ll use 8 months (row p.) from the time the rep is hired to the time they are firing on all cylinders. Assuming they ramp in a straight line, they will be operating at 50% of their full production (row q.).
This leaves just 2 months in their year to sell at full production (row r.).
Doing the math, the new hire’s expected production in their first year is about $500K (row s.). This means that you lose $500K in quota contribution, which equals the opportunity cost.
Note that the opportunity cost of $500K (row t.) exceeds the hard costs ($133K) by nearly 4x and that the total hard cost and opportunity cost exceeds $630K (row u.)!
4. Soft Costs
Soft costs are a bit more difficult to quantify, but they are real and add up significantly over time. Consider the list below:
- HR time to process the new hire and enroll them in benefit programs.
- Sales manager’s time to interview, hire, and onboard the new hire.
- IT time to set up the new hire and deploy hardware, software, and telecoms.
- Sales enablement’s time to train the new hire, either formally or informally.
- Sales managers’ time to coach the new hire, especially if they start failing.
- Disruption to customers as they adjust to the new hire in the relationship.
- HR time to terminate the employee and remove access from programs.
- IT time to remove access from systems upon termination.
- Sales managers’ time to backfill on key deals and accounts while the rep is replaced.
The time, effort, and distractions caused by bad hires not only cost money, but they also take a hit to morale and sap time and energy from productive activities like closing business.
5. The Business Case for S2P2 and Expected ROI
The power of S2P2 lies in its ability to identify top salespeople with 87% accuracy and poor salespeople with 95% accuracy.
Our State of Sales Hiring Survey tells us that to hire 3 salespeople, you will need 100 applicants. The problem is that screening 100 applicants takes a lot of time and there’s only so much you can assume by looking at a resume. You will be making a lot of guesses to reduce 100 applicants down to 25 who you will hire. There will be many strong applicants in the 75 you screen out, there will be many poor applicants in the 25 you screen in. This is one of the big problems S2P2 solves. If all applicants play the S2P2 simulation, you will know with much greater certainty.
If we just focus on reducing bad hires, look at the number of reps you hired last year and look at the number still employed now. This will give you a good estimate of your bad hire rate. In this example, let’s assume last year you hired 100 reps (row v.) and 30 washed out (row w.). Following our example, this would have cost you $19 million (row x.).
With S2P2, your bad hire rate will drop to 5% (row y.), or 5 out of the 100 hires (row z.). This means your total bad hire costs with S2P2 will be a little over $3 million (row aa.) and you will save nearly $16 million in bad hiring costs (row bb.). And, this doesn’t even include soft costs.
The cost for S2P2 to hire 100 reps is about $100K. Would you spend $100K to save $16 million? It’s a no-brainer!