The Truth About Turnover
Many sales executives boast about their managerial excellence, citing low turnover as proof. Sure, a high employee-retention rate can be evidence of a manager's ability to foster a great and productive workplace. But those turnover numbers also might suggest the opposite-a culture of entitlement, one that fails to challenge employees, or one that simply does not demand excellence.
What is the right rate of turnover for your sales organization? Recently we spoke with a manager from a company with a 300-person field sales force. Annual turnover averages 2 percent. His question to us was, "Is this too low?" That very same week we had a conversation with a vice president of sales at another company. His sales-force turnover was 27 percent, and his question was, "Is our turnover too high?"
On the surface it might appear that 2 percent is too low and 27 percent is too high, but is there a rational way to arrive at the optimal number for your organization? Admittedly, in some companies determining the right number is not a debatable question. One sales manager told us that in his company the right number was 10 percent. "How did you arrive at that?" we asked. "Simple," he replied. "Our CEO told us that 10 percent is the right number, and I am not about to tell him any different."
His CEO held a similar view to that of Jack Welch, the dynamic and revered former chief executive of General Electric. Welch said on many occasions that every year the bottom 10 percent of his organization needed to be replaced. Our observations and The Gallup Organization's data suggest strong reasons to agree with Welch's main point. Of course, the key word in his statement is the word "bottom." That leads us to the first question you need to ask about your sales force turnover:
"Who?" not "How many?"
It is critical that you determine who is leaving -- your top producers or your hangers-on. If your overall turnover number is 10 percent, but the people heading for the exits are from the sales force's top tier, you have a serious problem. On the other hand, if the 10 percent who are leaving are from the bottom end of your sales force, your turnover situation could actually improve the quality of your organization.
One of the first things we recommend to clients is to track turnover by performance quartile. To do this, you must have a clear and objective measure of productivity. Some companies use total dollar sales for their productivity index; others emphasize new product sales or sales growth, year over year. Still others consider some combination of factors. The key is that the productivity index must make sense for your business, relate strongly to bottom-line outcomes, and be completely objective. Some companies exclude the performance of brand-new salespeople until they have been with the company long enough to pass through the learning curve for that industry.
Below is typical example of what a productivity index chart looks like.
Productivity index by quartile (business increase year over year).
Here's how to use a chart like this to evaluate turnover by performance quartile. This chart shows that the top 25 percent of this sales force generates 57 percent of the new business gains, the productivity measure used by this company. The bottom quartile was in negative territory, losing more business than they gained.
This chart clearly shows that you cannot afford to lose the salespeople in the top quartile. Further, you can use this information to evaluate the policies and practices that might drive retention of your best performers.
Turnover among top performers can indicate one of two problems. You might have a compensation problem, which applies to about one-third of the cases we see. Your commission plan might not adequately reward your best performers, or your pay plan may no longer be competitive within your industry.
However, in the majority of the other cases, we see a breakdown between sales representatives and their managers. Sometimes, this happens when top-producing salespeople are suddenly assigned to new managers. Other times, managers are asked to supervise many additional salespeople, which makes it difficult or impossible for them to maintain steady, meaningful interaction with star performers. Typically, turnover in the top quartile indicates a bottom-driven culture in which star performers are actually -- albeit inadvertently -- made to feel unwelcome. These high producers are normally a challenge to manage, and not all sales supervisors want to deal with them.
In comparison, turnover among your least productive salespeople is usually healthy for an organization. This is especially true if you have excluded new salespeople from your productivity analysis. Even if your lowest performers are productive, the only way to improve the quality of your organization over time is to bring in more people who have similar talent profiles to your very best performers. And the only way to make this happen is by deliberately weeding out your bottom performers. However, companies will only improve the quality of their sales force if they use a selection system that enables them to recruit and identify highly talented sales representatives as replacements. In the absence of a good selection system, your organization will simply experience all the costs of turnover, without gaining all of the potential benefits.
Turnover of new salespeople is a separate issue. Typically, high turnover from this group indicates that you have a selection problem or an initial training problem, The first place to look is at your selection methods. Talented individuals often find a way to succeed, even when they receive inadequate training. But the best training program in the world cannot compensate for a lack of talent. And please, do not confuse experience with talent.
The right turnover number
Is there a "right" number for turnover? Based on our studies, the turnover goal for the top 75 percent of your sales force should be as close to zero as possible. How much turnover you should tolerate in your lowest quartile? Examine the employee enagement level of your sales force. Try to determine what percentage of your sales force is engaged. More specifically, what percentage of your sales force is "actively disengaged" -- that is, is fundamentally disconnected from their work?
When we look at world-class selling organizations, Gallup usually finds that 10 percent or less of the sales force is actively disengaged. If this is the case for your organization, then annual turnover in the 10 percent range would seem appropriate and right on Jack Welch's number.
If your percentage of actively disengaged sales representatives is higher than 10 percent, you have your work cut out for you. Your company has not arrived at world-class status yet. But you are not alone. In the average sales force Gallup studies, 20 percent of its representatives are actively disengaged. In most cases, turnover is already higher in these organizations.
The real problem, however, is not turnover -- it is that too many of your salespeople are actively disengaged. Our studies show that if you tackle the problem of actively disengaged employees, turnover will usually decrease as a result. In this instance, turnover is merely a symptom of other problems.
You are likely to find much higher levels of disengagement in some sales districts than others. Because low engagement scores are usually concentrated in just a few districts, it's not easy to find a blanket solution that will work for your whole sales organization. Improvement must occur district by district, and it is largely the responsibility of the front-line sales manager. Often organizations put pressure on managers to reduce turnover. But doing so without increasing employee engagement simply means your organization will become more willing to hang onto poor performers for longer periods of time. This is hardly an improvement!
Low engagement and high turnover can become a vicious cycle. Generally, your worst managers have the highest turnover. Consequently, your worst managers are filling the majority of your sales rep openings. These managers seldom bring in high-caliber individuals, or manage them well if they do hire them. These new hires may well become yet another turnover statistic. In one organization we reviewed, 80 percent of their new sales representatives were being hired by the bottom 40 percent of their managers.
Is this a cost or an opportunity?
Turnover remains a major corporate problem because of the high cost of replacing employees. High turnover can also cause service disruptions for your customers. The costs from turnover and service disruptions vary widely, depending on whether top producers or marginal reps are leaving. The out-of-pocket replacement costs for a poor producer versus a top producer may appear similar, but the opportunity costs are enormously different. Losing top performers will have a significant impact on your company's bottom line. Losing poor performers usually improves the bottom line, if you're able to replace them with more talented sales representatives.
Turnover statistics vary from industry to industry. The turnover for retail sales jobs differs from the turnover for pharmaceutical reps. Clearly though, the higher the engagement levels among your sales force, the lower your turnover should be. Healthy turnover should be concentrated at the bottom of the performance quartile. And a good selection system will help you realize benefits of pruning your worst performers.
[Benson Smith and Tony Rutigliano are consultants from the Gallup Organization.]