You’ve heard it a million times – pre-hire psychometric assessments result in a more productive sales force. But salespeople are numbers people, and if you’re like me you’ve found yourself asking: How much more productive?
Let’s do the math and see how much money a valid psychometric assessment can actually make you in sales dollars.
The ROI of a psychometric assessment is called its utility (Schmidt & Hunter, 1998). Calculating utility is difficult because you need to know 5 key figures: the average validity of the assessment procedure (i.e., how well it predicts job performance), the selection ratio (i.e., the number of job applicants selected compared to the number assessed), the standard deviation of employee productivity (i.e., a measure of variation in performance), the average tenure of the employees who get hired and finally, the cost of the assessment procedure (Farrell & Hakstian, 2001).
Lucky for us, some smart researchers have already done most of the calculations for us. Farrell and Hakstian found that compared to an interview, and given a selection ratio of 0.20 (i.e., one in five applicants assessed are hired), selection methods such as psychometric assessments result in an increase in sales productivity of 20.7%.
With that figure, the equations for calculating the net gains of psychometric assessment are:
- Average net annual dollar gain per sales rep ($) = Average sales productivity of a rep ($) x 20.7%
- Average net dollar gain per sales rep over their tenure ($) = Average sales productivity of a rep ($) x 20.7% x Average length of tenure
- Total average net dollar gain across your sales team ($) = Average sales productivity of a sales rep ($) x 20.7% x Average length of tenure x Total number of sales reps
- ROI ($) = Net gain – Cost of assessments
Ok ok, formulas aside, show me the money in sales dollars. For the most accurate results you should use your firm’s data – I’ll be using averages from public data. The U.S. Bureau of Labor Statistics found the average tenure of a sales rep to be 3.4 years. For average sales productivity, The HBR published a recent survey of over 100 VPs of Sales which found an average of $1,105,500 (i.e., the averaged annual quota for a sales rep multiplied by the average percentage of salespeople that achieved 100% quota).
Plugging in the numbers reveals (drum roll please): A valid pre-hire psychometric assessment makes you an additional $778,050 in sales per sales rep over their company tenure.
With this knowledge, it becomes clear why those who use psychometric assessments in sales hiring swear by them: they’re getting rich! Looks like the value of using a valid assessment to identify top salespeople checks out, even in real sales dollars.
Have you seen this success at your firm? Or have a horror story to share? I’m always interested to see theory vs. the real world!
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