The Cost of a Bad Sales Hire: A Million-Dollar Mistake
What is the most expensive decision you can make as a frontline sales manager?
Hands down, it's deciding who you'll bring onto your team as your next sales hire. Let's take the time to figure out what the cost per hire could look like.
We've all heard that a bad hire can cost more than the employee's annual salary. However, I submit the cost of hiring a salesperson that doesn’t work out is many times worse than that.
Let's do the math just to get them hired and onboarded with this example:
- Recruitment costs & fees: 25% of their first-year salary (for simplicity's sake, let's say $100,000 base), so $25,000.
- Time spent interviewing and selecting candidates: 25 hours of interviewing time (multiple candidates, multiple interviewers) at a loaded cost of $100 per hour = $2,500.
- Onboarding training: minimum of $5,000 or more depending on length and program.
- Salary and benefits until productive: First six months salary and benefits, $50,000 + 25% for benefits = $62,500.
So, you're in for a minimum of $95,000 of costs, and they haven't provided any value yet.
But remember, you're hiring a sales rep to produce upwards of a million dollars in bookings once they're fully ramped up. If you figure six months ramp-up period to full productivity, then in the first year you would expect a minimum of $500,000 in new business. So that would be a solid ROI.
Hopefully, if they're not going to work out you determine this sooner, but it's always a difficult decision to make.
If it takes you a full year before you decide to replace this resource, you've now lost an additional $500K of opportunity cost on this bad hire, plus their salary and benefits.
Here's how it breaks down:
- Initial hiring, onboard, and ramp-up: $95k
- Unmet sales quota: ½ of $1M quota for second-half of the year = $500k
- Additional salary: You have to pay the salary for the additional six months it takes to figure out the person isn't going to work out, while you're not getting value. Add another $62.5k
- Client impact: If it's a really bad hire, they may also damage your client relationships and brand. So let's say you lose two accounts due to neglect that would have brought in $50k each = $100k
- Team morale: There is also an intangible impact on the rest of the team while they see a new hire struggle and underperform, perhaps bringing the entire team performance down. Multiply by whatever value you decide.
You're at $757,500 of investment, and now we have to start all over again. You have to recruit, hire, and onboard another rep to replace your mistake.
Add another $95k to start. And now the kicker – you have to wait another six months until that person is potentially at full productivity, so you lose another $500,000 of unmet quota while they ramp up.
You've just lost $1,352,500 in hard dollars and opportunity costs, and up to 18 months of time because you hired the wrong person and/or failed to help make them productive.
Can you afford to make a $1M + mistake? How many more deals will the rest of your team need to bring in to cover this revenue gap and hiring mistake?
The hiring and onboarding process is expensive. Goal number one should be to keep your players onboard. Then make sure you have your recruitment expenses, selecting, and onboarding processes fully optimized. Treat this like the biggest deal in your pipeline, and plan accordingly.
Hiring great sales reps is one of the highest value activities you can do as a frontline manager, and it can also be one of the most expensive mistakes you can make.
About Ray Makela
Ray Makela is CEO and Managing Director at Sales Readiness Group (SRG). He oversees all client engagements as well as serves as a senior facilitator on sales management, coaching, negotiation and sales training workshops. Ray has over 20 years of management, consulting, and sales experience and writes frequently on best practices for coaching and developing sales teams.