The Power of Employee Retention
About a decade ago I was designing a sales-compensation plan for a publicly-traded national software-publishing company that operates within the insurance industry. I was interviewing the newly-minted Chief Financial Officer over lunch one afternoon to make sure that I knew what he wanted the new sales-pay system to do for the company. He instead gave me a bold and shocking recommendation.
He told me that we should terminate all of the high-cost senior sales reps—about 10 of them—and then replace them with junior and less experienced sales reps whose compensation cost (per rep) would be much lower than those just fired. “We would save a whole bunch of money,” he said. He then continued with his salad and smiled with great satisfaction, sure of the correctness of his advice.
In the short run (or about a month or two) he would be theoretically and precisely correct. But in the long run, losing key and experienced sales representatives is a disaster. While that conclusion is intuitive, why is this actually true?
Wilkening & Company has developed the Sales-experience Curve. [see graph below] to help explain this dilemma. The Sales-experience Curve is based upon four conclusions or facts:
- Sales effectiveness can be defined as the ability of a sales representative to take a given sales territory or portfolio of accounts and be able to achieve an expected level of production or performance measured against management’s assessment of the potential of those accounts. Hence, a territory may be adjudged to have a $2 Million potential by management. If I get $2 Million from that portfolio of accounts my sales effectiveness is 100%.
- Sales effectiveness will increase over time (with tenure) as the sales representative increasingly learns products, client needs and the sales process. We assume all new reps are hired with fully developed sales skills and are capable as a sales representative at the start. Of course, sales-skill training—as needed—may need to be supplied.
- On average, it takes roughly two years for the average newly-hired sales representative to become fully experienced and capable within the territory or with their portfolio of accounts—and able to achieve 100% sales effectiveness. This conclusion is based upon studies conducted in the software industry by a national consulting firm during the 1990’s.
- Sales effectiveness can increase to levels in excess of 100% as experience and expertise are gained over time. In fact, Wilkening & Company experience shows that after about three years on the job a sales rep will start to produce at premium levels of performance as they provide extra value added to the sales process and account base. For example, if you look at the experience curve the following sales-effectiveness increases occur after the third year—
Will an experienced sales rep exhibit—on average—130% sales effectiveness at 5 years of tenure? While there is no data to show the exact number, we all know that this premium exists; or should exist. Further, we all know that an experienced rep is going to perform better than a rookie—with the same book of accounts.
“…he would be throwing out roughly 5-10 times that amount in contribution margin because of reduced sales…”
So why was the CFO wrong for wanting to throw out 10 high-cost and experienced sales reps and replace them with 10 cheaper rookies? While he would save about $200,000 in annual pay cost, he would also be throwing out roughly 5-10 times that amount in contribution margin because of reduced sales – 130% sales effectiveness for an experienced rep, versus 60% sales effectiveness for a rookie (after a year).
What does your Sales-experience Curve look like?
The Sales-experience Chart also provides answers to many other sales-management questions or dilemmas. Like, what is the ROI of sales training or the cost of hiring the wrong candidate? Let’s talk more about those questions in August.