James MeinckeBad sales hires are expensive. But even highly experienced sales leaders may be surprised to learn just how expensive these bad hires can be.
It’s not just that the company has sunk salary into a salesperson who hasn’t worked out for the business. There’s also a host of other expenses—recruitment costs, lost productivity, potentially lost business, and more.
Given these stakes, avoiding bad hires is critical. But how much does a bad sales hire really cost? And, most importantly, how can companies avoid the problem?
Defining a bad hire
There isn’t a single definition of a bad hire, but there are some common warning signs:
- The sales person consistently ranks in the bottom 20% of all sales performers, even well after the ramp-up period.
- The sales person usually (or always) fails to meet quota.
- The new hire doesn’t bring in significant new business. The new businesses they bring in are low-hanging fruit. The customers don’t have much potential for growth.
- The sales person isn’t willing to put time and effort into ongoing sales training.
- The person’s presence on the team contributes to a negative work environment. They do not work well with others or contribute significantly to group initiatives.
- The sales person does not seem engaged at work. Their lack of engagement may impact others.
- When talking with clients and prospects, the sales person displays unprofessional behavior that hurts the company’s standing.
- The salesperson is consistently late without cause.
If a new hire displays some of these traits, it’s likely that you have a bad hire on your hands.
The cost of a bad hire
So, how much is that bad hire really costing you? The answer to that is complicated. According to some estimates, a bad sales hire costs between 50-75% of the hire’s annual salary. That means an employee who makes $50,000 annually costs between $25,000 and $37,500 to replace.
However, the real costs may be even grimmer than that. There are many factors which need to be taken into account
- Any compensation provided to the bad hire: A bad hire who stays on for a year might earn $40,000 in base salary. Since bad hires usually don’t earn commission, your company won’t be out any commission money, but the base salary alone can be significant.
- Benefits: All expenses paid for an employee’s benefits (health insurance, disability insurance, etc.) are also a sunk cost. The exact figure for this varies depending on your health plan. But in 2018, the average company spent $5,655 on annual health insurance for a single employee. For disability insurance, employers paid $0.11 per hour for sales professionals. That’s $228.80 for a single year for a full-time employee.
- Hiring costs: Hiring a new person isn’t free. Common costs include fees paid to recruitment firms, paid job ads, travel expenses for interviews, background checks, and the work from paid employees who participate in the recruitment process. Depending on your recruitment process, a single hire might cost $25,000 or more.
- Equipment: Many companies buy personalized equipment for new hires, including laptops, desk chairs, etc. Depending on what you provide, that’s an additional $500-$1,500.
- Training costs: Training a new sales person consumes resources. You’re paying for trainers’ time, technology used in the training process, and possibly outside training expenses. $10,000 is a good ballpark figure.
- Severance pay and HR expenses: Terminating an employee means paying severance and covering HR costs associated with the termination. That’s another $10,000 or so.
- Lost productivity: If an average SDR at your company generates $500,000 in revenue annually, then an underperforming SDR who brings in only $200,000 has cost you an astonishing $300,000 in lost business. This can also have ripple effects in future years. The customer you didn’t land in year 1 means lost revenue in years 2, 3, and beyond, even if the bad hire is gone.
The potential cost of a single bad hire: $381,883.80.
That’s actually a pretty conservative estimate. This figure doesn’t account for the bad hire’s effect on other employees and miscellaneous expenses such as catered lunches.
How to avoid a bad hire
With that kind of a price tag, avoiding a bad sales hire is imperative. Follow these best practices to help you prevent this from happening:
1) Create a profile of the ideal job candidate for each position.
Compare all job candidates against the profile. It’s helpful to look at top performers in your company when creating the profile. Use both qualitative and quantitative metrics.
2) Evaluate how well job candidates research your company prior to the interview.
A candidate who didn’t put effort into researching your company isn’t likely to be highly motivated as a sales professional. If you ask the right questions, you can distinguish top talents during the interview process.
3) Beware of candidates who have hopped between jobs extensively.
A spotty employment record can oftentimes be indicative of problems. Someone who has failed to advance despite years in sales is also a cause for concern.
4) Check job candidates’ references carefully.
Research the references to ensure whether they are qualified sales professionals whose judgment can be trusted. Talk to references extensively to make sure you’re getting the whole story and not a canned response.
5) Consult with outside experts during the hiring process.
Someone from outside the company can help confirm whether your impressions of a candidate are correct.
6) Do a mock pitch.
During the interview, ask the candidate to perform tasks that replicate sales presentations, calls, and other critical activities. This is the best way to assess a candidate’s sales potential.
7) Consider hiring reps on a trial basis.
Sometimes, even the most comprehensive interview process isn’t enough to filter bad hires. One way for an employer to fully evaluate the potential of a candidate is by hiring on a temp-to-hire basis. This will serve as an extended job interview wherein both the employer and the candidate can assess if the fit is right before fully committing to a contract.
A bad sales hire costs hundreds of thousands of dollars. Nevertheless, it’s possible to avoid that problem by hiring the right people for your company.
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