Get the Facts

Replacement Costs Calculator

We could get anal about the process costs … dollars spent on advertising and training, plus the many hours spent by management, HR, administration and others while shortlisting, interviewing, documenting, inducting, etc.  But you may be surprised to know that those costs - while not insignificant - are trivial compared to the ‘unseen’ opportunity costs of delays, unfilled positions, poor decisions, and the ramp-up of new starters.

So this calculator will show you a way to quantify the insidious ‘unseen’ costs.  And if you will answer some questions about your particular circumstances, the calculator will estimate your own costs.

This is a relatively simple model which doesn’t capture all the variables exactly, but will give you 80% of the answer for very little input.

To give you a context for answering the questions … please consider the situation where you already have a performer in place, and they resign.  Typically, there will be a period of time between their last day at work and the first day of the new starter.  The new starter may turn out to be a satisfactory performer, or not.  Even once they start, it will take a while for them to ramp ‘up to speed’.  They may plateau at sub-par performance, in which case you may keep them anyway, or you may dismiss them and look again for a replacement, with possibly more time in between when the job is vacant, and certainly more ramp-up time.

Depending on how quickly and how effectively you find and pick the right replacement, your true costs of replacement can fluctuate greatly; because the main determinant of those ‘unseen’ costs is the revenue and profit that is being lost to the company while the job is vacant or not being performed adequately.

There is a common misunderstanding that while a position is vacant the company is ‘saving’ money by not having to pay wages; so ‘taking your time’ to find a replacement is sometimes recommended.  But in revenue generating roles like sales - including supporting roles in marketing, administration and management – if you are better off with a vacancy then you shouldn’t even have a role, or be hiring, because such roles are supposed to be ‘positively geared’ ie each appointment should generate more gross profit and net profit than it costs.  And don’t forget, a certain level of turnover is necessary to cover overheads, so vacant revenue generating roles can endanger a whole organisation.

Calculating

Calculating the true cost of replacement is really about quantifying the ‘performance gap’ which has 3 main components:

1. vacant time, during which a 100% gap exists between 0% performance and 100% performance that is expected from a suitable incumbent
2. ramp-up time, during which a new starter reduces the performance gap from 100% to 0% as quickly as they can
3. unsatisfactory time, during which an unsuitable incumbent fails to reach targets but remains employed anyway eg if they only average 60% achievement against targets there is a 40% performance gap for as many months as the employer resists dismissing them

 

Below we describe an example situation.  We’ve entered some typical numbers, and you can view the corresponding calculation in a separate window by clicking the button above.

When you’ve understood what we’ve done, you may like to enter some numbers that reflect your own situation, and see how things calculate for you!

So here’s an example scenario …

Jane has been successfully performing in her sales role for 3 years, reliably hitting her annual revenue/sales target of $1,200,000 pa across a range of product/service lines which on average generate a gross profit contribution (after deducting the costs of goods sold) of 50% which equates to $600,000 pa. (in this description, numbers in orange are variables you can input, and numbers in blue are calculated from your inputs)

To employ Jane costs the company $60,000 pa regardless of her performance (ie the grossed up costs of employment including salary, car allowance, super, insurances, other benefits) plus $120,000 pa in grossed up ‘performance related’ components (eg commission, bonuses, prizes, trips, etc) for hitting 100% of target, meaning the total cost of her remuneration package is $180,000 pa when she hits target.

[Note: grossed up means pre-tax eg include the costs of income tax, FBT, etc.]

[In this model we ignore seasonality, describing flat monthly sales targets.  You could use an average.]

So in a successful year, after covering the costs of her own employment, Jane brings $420,000 pa into the company as a contribution to overheads and net profit.

The fixed marginal overheads associated with a sales person are usually negligible eg office space, desk, phone, computer.  Let’s say in Jane’s case they are $20,000 pa which means her annual contribution to net profitability (before tax) is $400,000 pa.  (in your company maybe there is demonstration equipment, retail space, travel costs, etc which need to be added)

Jane generates 2.22 times as much income for her employer as herself ie $400,000/$180,000

Next month Jane is to be transferred to another division (or for any other reason is leaving) and you are tasked with finding her replacement.

You have already worked out that every month (on average) Jane has been contributing $400,000 / 12 = $33,333 pm to the net profit of your company/division/department/store/site, so she will be sorely missed, and you have to get cracking, because …

… every month the job is unfilled your employer loses $33,333

1. How long will it take you to fill that position?

Allowing for updating the position description, drafting an ad, getting it published, making direct approaches, receiving applications, shortlisting, scheduling first interviews, conducting first interviews, conducting various selection tests, scheduling and conducting subsequent interviews, documenting offers, negotiating terms, missing out on applicants because they take other jobs, medical tests, reference checks, notice periods until start date … in Jane’s case you had 1 month’s notice, and it took you fully 3 months until her replacement John started, so the job was vacant for 2 months in between, costing your employer $33,333 x 2 = $66,666 straight off the bottom line, which is the equivalent of 37% of the annual target remuneration package for the job.

But that is only the first of 3 elements of the ‘performance gap’ cost of replacement.

2. How long will it take John to ramp-up to speed?

Few sales jobs permit a new starter to hit target from day one, or even month one.  Even those who are ultimately successful can take months to establish themselves … getting a pipeline; building relationships; understanding products, needs and benefits; learning how to get things done within the company; etc.  And that’s all assuming they are fundamentally competent at the type of selling role you appoint them to eg new business sales, account management, inbound sales, etc.
Unfortunately John is not ‘working out’!  He is a ‘bad hire’.  He’s been with you for 12 months now.  You know you should have acted sooner; because this is his performance history to date …

He started out performing pretty much as anticipated; but by month 6 you expect new starters to be hitting target, and John seemed to plateau around 60%.  If you keep him on like this, you will keep paying him about $11,000 per month and …

… every month he underperforms your employer loses $16,000

In the last year, keeping him employed for 12 months has caused your employer to lose $260,000

That is 226% of what you paid him to be with you!

John only generated 1.21 times as much income for his employer as himself ie ($400,000-$260,000)/$115,000

It would take 1.83 John’s to replace your original performer in Jane!

Even if you had sacked him after 5 months your employer would have lost $142,000 from the bottom line, simply because of a bad hiring decision.  Now that’s a replacement cost!

No wonder sales managers are concerned about their ability to attract, select and retain talent.  It’s a huge responsibility.  If you do nothing it costs $33,333 a month; and if you get it wrong it costs nearly as much every month, and you have to start again!

Happily, you get it right the second time around, because you engage the Sales Recruiters to help you appoint Mary!

3. But how long will it take Mary to ramp up to speed?

John’s replacement, Mary, has been with you now for 12 months.  Her performance history is as follows …

Mary followed the typical pattern of a successful new recruit.  She has been a ‘good hire’.

As always, there is still a cost of ramp-up, which is why you should be focusing on retention more than replacement!  But at least the Sales Recruiters could fill your vacancy quickly, within 1 month.  And your company is back to achieving its net profit targets.

After 12 months Mary’s performance gap was $116,000 which is still a cost, and it does put the value of induction into perspective!  That’s 77% of her annual package.

Is there any way Mary’s Manager can accelerate the ramp-up of the next recruit?  Or reduce the incidence of resignations among performers?  You can see the Sales Recruiters about that too.

Total true cost of replacement

Adding up all the components of the scenario above (or your own scenario based on your own inputs) we arrive at the following …

Losing and replacing a performer in Jane has cost $357,999 straight off the bottom line.  That’s 199% on top of the money a performer already gets paid each year.

Getting back to the original situation you enjoyed with Jane has cost you 3 times what you would have paid Jane in 1 year.

How much does your employer pay you each year as a Manager?  Other than getting paid to get retention and hiring right; is there anything else you do that will save your employer $358,000 this year.  How does that figure compare with paying the Sales Recruiters to help you?

Now it’s your turn.  Click here to enter the details of your own situation and calculate the true costs of replacement, delays, poor decisions, or no decision at all.