Journal of Business & Industrial Marketing

A new model for measuring salesperson lifetime value

Pablo Farías Eduardo Torres Roberto Mora Cortez
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 A New Model for Measuring Salesperson Lifetime Value

Abstract

A better understanding of the value of the salesperson should lead to changes in the way these

salespeople are managed. A model for predicting salesperson lifetime value (SLV) can aid

managers in acquiring, developing, allocating, retaining, utilizing, evaluating, and rewarding

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valuable salespeople. The objective of this paper is to propose a salesperson valuation model.

This paper presents a calculation method for estimating both the individual lifetime value of a

salesperson and the sales force equity. This article provides a starting point for salesperson

valuation, sparking more interest in this area, and brings the fields of marketing, human

resources and finance closer together. We contribute to the literature by operationalizing the

SLV concept, and introducing new important aspects in comparison with previous discussions,

including peer effect and termination costs. The proposed model is validated through a case

study.

Keywords: Salesperson valuation, Salesperson lifetime value, Intangible assets, Salesforce

equity, Valuation approaches, Financial reporting.

1
 Introduction

During recessions, firms made massive job cuts. Labour costs continue to be the single largest
operating cost in many firms, and reductions in employment continue to be a major aspect of
strategies to restructure operations and reduce these costs (Becker and Gerhart, 1996; Guichard
and Rusticelli, 2010). But do these decisions create value, or just reduce costs? Keeping or losing
the best salespeople can be critical to whether a firm can maintain a competitive advantage and
whether operations in the firm run smoothly and efficiently. Simply stated, if the best
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salespeople are not retained, a firm can be negatively affected from the operational to the
strategic level (Cardy and Lengnick-Hall, 2011; Saradhi and Palshikar, 2011).

Salespeople contribute to the profits of a firm. Looking at the value of one salesperson provides
an example. Suppose that this one person sold $800,000 worth of product at a 10% profit
margin in one year. This person produces $80,000 in profit each year to the firm. What would be
the worth of this salesperson over a 40year career if the production remained constant? That
one person suddenly is worth $3,200,000 to that organization. Determining the value of an
individual salesperson is important for determining the most valuable salespeople. At the other
extreme, the value of an individual salesperson is also important for determining the less
valuable ones. The less valuable salespeople must be identified and motivated to achieve a
higher level of value or be moved out of their organization (Heneman et al., 1981; Huselid,
1995; Pfeffer, 1995; Ulrich and Brockbank, 2006).

During the lifetime of a salesperson, different incentives and trainings are incurred at non zero-
cost (Sarin et al., 2010; Singh et al., 2015; Zoltners et al., 2012). If net value added to the
company by the sales force needs to be accounted, every activity associated with each
salesperson needs to be identified in the whole sales cycle, specifying at what cost. Therefore,
the establishment of a metric including all direct and indirect revenues and costs derived from a
salesperson’s lifetime is imperative (Kumar et al., 2014).

2
 A better understanding of the value of the salesperson should lead to changes in the way these
salespeople are managed. There is increasing urgency for managers to understand how their
actions affect the long-term profitability of their salespeople. The impact of changing
management strategies on the value of salespeople should be studied over time. To the best of
our knowledge, employee lifetime value was investigated for the first time in an article by
Cardy, Miller and Ellis (2007). They review the basics of the customer lifetime value (CLV)
framework and apply it to the HR management domain. The general construct of CLV that is
centred on the external customer translates easily to the HR management domain, if one views
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employees (e.g., salespeople) as internal customers and shifts the focus to the sales force
structure and its relationship with the firm. In general, the CLV and the salesperson lifetime
value (SLV) approach are conceptually and methodically analogous. Both concepts calculate the
value of a particular decision unit by discounting the forecasted net cash flows by the risk-
adjusted cost of capital. In addition, this study acknowledges the contribution of Kumar et al.
(2014) and Oh (2014) on SLV discussions, as the only ones that have modelled and
operationalized the concept.

The objective of this paper is to propose a new salesperson valuation model. This paper is
structured as follows: first, a comprehensive model for the estimation of both the SLV and
salesperson equity (SE) is presented. A synthesis of the SLV approach will be presented which
allows for a disaggregated and more realistic salesperson valuation. Finally, the paper provides
suggestions on how to obtain the data necessary to estimate the salesperson valuation model.

Background

There are two HR accounting methods: (a) those using a cost approach or (b) those using a value
approach (Cascio, 1987). The difference centres on whether an employee is viewed in terms of
costs-to-date or in terms of expected contributions. Cost approaches focus on historical costs
incurred to hire, train, and maintain employees, or on replacement costs that would be incurred

3
 if an employee were replaced. Value approaches consider present value of the employee's
stream of net future contributions to the firm (Lengnick-Hall and Lengnick-Hall, 1988).

Many models, developed mainly in the 1960s and 1970s, were intended to value employees
derived from historical costs (Sangeladji, 1977), net present value of expected wage payments
(Lev and Schwartz, 1971), net present value of expected incomes (Jaggi and Lau, 1974) and,
most recently, liabilities to the employees (Gröjer, 1997).
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Brummet et al. (1968) represent one of the earliest works in the area of HR measurement
(Flamholtz et al., 2002). Brummet et al. (1968) explored the deficiencies of treating employee
cost as an expense rather than an asset. The cost model of Brummet et al. (1968) suggested
capitalizing the firm’s expenditure on recruitment, selection, training and development of HR,
amortizing such costs over a period and, hence, reporting the net investment in HR in the
Balance Sheet under the heading human assets.

Flamholtz’s (1969) PhD dissertation was the first study that formulated a theory of an
individual’s value to an organization. The Flamholtz model proposes that an individual’s value to
an organization can be defined as the present value of the future services the individual is
expected to provide for the period of time the individual is expected to remain in the
organization. The stochastic rewards valuation model developed by Flamholtz (1971) for human
resource valuation, and further explained in Flamholtz (1999), is a five-step process that begins
with defining the various service states or organizational positions that an individual may
occupy in the organization. The next step is to determine the value of each state to the
organization. Then the person’s expected tenure or service life in the organization is calculated
and the person’s mobility probability or the probability that a person will occupy each possible
state at specified future times is derived from archival data. Next, the expected future cash
flows that the person generates are discounted in order to determine their present value.

4
 Similar to the Flamholtz model, another early model of human resource value (Lev and
Schwartz, 1971) measured human capital by calculating the present value of a person’s future
earnings (i.e., expected value of one’s future earnings with the firm). Morse (1973) combined
the Flamholtz model and the Lev and Schwartz model into one which specified the present
value of the organization’s human assets to equal the present value of human resources less the
present value of payments to employees. Likert and Bowers (1973) included a number of non-
monetary behavioural measures in their computation of a monetary estimate of the expected
change in the value of a human organization. The Jaggi and Lau (1974) model considers groups
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for valuation rather than individuals. The Jaggi and Lau model was based on the actuarial
concept of homogeneous group and Markovian analysis. In this model, a Markov chain
representation is used to consider the career movements of the employees within the firm and
the chances of their leaving the firm before their retirement or death. The probabilities of
career movement and of exit from the firm can be estimated on the basis of historical data and
the Markovian chain technique. Since the pattern of movements is considered to be constant,
the probabilities determined for one period are extended to future periods. Chakraborty (1976)
suggested a model for valuation of human resources known as Aggregate Payment Approach.
The value of human resources is calculated by multiplying the average salary with the average
tenure of the employee.

While authors such as Lev and Schwartz (1971) and Flamholtz (1971) have suggested
methodologies for valuing human capital to enable it, like other forms of capital, to be
incorporated into financial accounts, it is fair to say that the acceptance and adoption in
practice has been limited. Currently, there is no universally accepted model for valuation of HR.
However, most of the organizations are using the Lev and Schwartz model (Joshi and Mahei,
2012). Unfortunately, the Lev and Schwartz model ignores the variables of career movements of
the employees within the firm and the possibility of employees leaving the firm before their
retirement or death. In order to make the model operational, probabilities will have to be
determined for each individual occupying various service states, and these probabilities will
have to be determined for all employees for n periods of time on an individual basis. This way of

5
 determining probabilities is not pragmatic. It will be a tremendously expensive way to measure
the value of HR. Furthermore, it will be most difficult to predict career movements or the exit
probabilities on an individual basis. At best, these estimations of probabilities can only be made
on a highly subjective basis. Whether data based on highly subjective probabilities will have any
value for the model is a debatable question (Jaggi and Lau, 1974).

In the context of a salesperson career analysis, a contemporary research (Oh, 2014) proposed
that salesperson value emerges from the difference of the salesperson contribution (SC) and the
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organizational development investments (ODI) (e.g., sales training). Furthermore, Oh set out the
revenue generated from sales as a function of ODI contribution. This operationalization is
complex from practitioner’s standpoint because it requires the exact ODI contribution rate,
which is defined as “a rate of contribution of training and development programs to new sales
closings” (Oh, 2014). Another questionable aspect of Oh’s (2014) approach is the inclusion of a
term considering the chance of a salesperson being alive at time t, which omits any possible
analysis regarding a salesperson’s termination costs or consequences (Bendapudi and Leone,
2002).

More recently, Kumar et al. (2014) proposed a forward-looking and profit-oriented metric to
evaluate and demonstrate the effects of training type and incentive type on a salesperson's
future value. The model proposed by Kumar et al. (2014) is calculated from the CLV of the
customers of the salesperson (Kumar et al., 2014, p. 593), which is not necessarily the result of
the salesperson’s productivity. It is easy to observe that, if the vendor decides to modify the
customer assignments among the sales people, the SLV of each salesperson will change in
concordance of the CLVs of the customers received or lost by the salesperson. More
interestingly, it can be observed that Customer Equity (the sum of all CLV from customers, [CE])
will be held constant during this process, when, in fact, one would expect the CE varies in the
situation of moving clients among sales people, as a result of different customer-salesperson
relationships that can be obtained (Bendapudi and Leone, 2002). Another issue to consider
when using the CLV to calculate the SLV is that CLV is computed by definition considering all

6
 costs incurred to attract and retain a customer, including the costs of the sales force (e.g.,
interest creation, meetings, delivery, support). This approach complicates the calculation of SLV
having to properly allocate the costs of the salesperson for each customer, which will not be
easy especially in companies with a sales force structure organized by product, or even more
complex situations, in which two or more sellers interact with the same client.

The model proposed by Kumar et al. (2014) requires a large amount of data and, in some
contexts, may not be possible to apply (Kumar et al., 2014, p. 605). The model proposed in this
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article, by not including the CLV of customers, reduces the need for information and facilitates
the calculation of the SLV of each vendor. Additionally, this article presents a way to calculate
the SLV openly and robustly, and is applicable to all types of markets/countries, industries and
suppliers (vendors).

Salesperson lifetime value (SLV)

A comprehensive understanding of salesperson lifetime value (SLV) should comprise all different
aspects of a salesperson’s contributions to the company’s success. Basically, SLV is a
management tool which is designed to assist management in understanding the long-term cost
and benefit implications of their decisions so that better business decisions can be taken. If such
valuation is not done, then management runs the risk of making decisions that may improve
profits in the short run, but may also have severe repercussions in the future. For example, very
often firms hire people from the outside at very high salaries because of an immediate business
requirement. Later on, however, they find that the de-motivating impact of this move on the
existing experienced staff has caused immense long-term harm by reducing their productivity
and by creating salary distortions across the organizational structure.

In the following section, a brief summary of all relevant components of SLV will be provided and
will integrate these facets into a comprehensive valuation approach. If one views salespeople as
internal customers, the CLV and the SLV approach are conceptually and methodically analogous

7
 (Cardy et al., 2007). An examination of the basic CLV models reveals that the incorporated
variables can generally be classified into three categories: revenues, costs, and retention rate
(Reinartz and Kumar, 2000). However, the SLV approach needs a fourth category: the peer
effect. A salesperson’s productivity is influenced by the productivity of his or her nearby
salespeople. Peer effect is present in the workplace when individual behaviours are influenced
by teammates' behaviours or characteristics. For example, a machine operator in a light
manufacturing plant works harder when his/her teammates are working harder, or when
he/she is working with abler teammates, even if he/she is solely responsible for his/her own
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output. Recent studies have found evidence that peer effects can be important in several work
settings (Guryan et al., 2009). Note that the changes in productivity are not limited to that
directly attributable to the peer effect. Assuming that the firm is operating with diminishing
marginal returns, then the addition of an extra salesperson reduces the average productivity of
every other salesperson (and every other salesperson affects the marginal productivity of the
additional salesperson). In addition, we assert the peer effect can be zero in scenarios where
the salesperson operates on his/her own, separate from the organization an peers.

In principle, to calculate SLV is a straightforward exercise: projected net cash flows that a firm
expects to receive from the salesperson are adjusted to the probability of occurrence and are
then discounted. In practice, however, estimating the four components can be a challenging
task. Therefore, the questions that must be answered in order to compute the SLV are discussed
in more detail in the next section.

Retention rate
The retention rate is the probability that an individual salesperson will remain associated with
the company for the next period (the inverse of turnover rate). Because the retention
probability is always less than one, the probability that the salesperson is retained declines over
time. Retention rate automatically accounts for the fact that the chances of a salesperson
staying with the firm go down over time. To understand how the retention rate relates to SLV,
consider a simplified example. If the retention rate (r) is 90%, after 10 years, the chance of a

8
 salesperson staying with the company is only (0.90)10 = 35%, and after 20 years, this is reduced
to (0.90)20 = 12%.

The retention rate can be inferred drawing on empirically confirmed determinants of a firm’s
salesperson retention rate, such as salesperson satisfaction, switching barriers, job security,
presence of a union, compensation level, culture, demographics and attractiveness of
alternatives (Arnold and Feldman, 1982; Baysinger and Mobley, 1983). Causal analyses such as
the LISREL-approach represent adequate analytical instruments in order to quantify the
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direction and strength of these effects on salesperson retention (Bauer et al., 2003; Bauer and
Hammerschmidt, 2005). Additionally, data mining and statistical techniques can be used to build
predictive salesperson churn models (Saradhi and Palshikar, 2011). We acknowledge some
factors that can affect retention rate aren’t static (e.g., salesperson family context), which
requires a continue communication channel in order to be accounted.

Revenues
We consider revenues as the gross revenues minus the costs not associated with the
salesperson. It is important to emphasize that the revenues are not the contribution of the
marginal salesperson by itself. Suppose that a salesperson produces 10. A second salesperson
may very well produce nine or 10 or 11 and still the total output increases only to 18 because
the first salesperson reduces his output to nine, or eight or seven in the presence of the second
salesperson. In this example, output increases from 10 to 18 when one adds the second
salesperson, not because the second salesperson adds only eight, but rather because his
presence makes the situation such that the total output of both salespeople is 18. Notice that
the contribution per salesperson is reduced; the average product is actually nine. Thus, the
marginal product of the second salesperson is eight. But his actual contribution may be very
different than this. Another example is the employment of labour in the use of trucks to
transport goods. Assuming the number of available trucks (capital) is fixed, then the amount of
the variable input labour could be varied and the resultant efficiency determined. At least one
labourer (the driver) is necessary. Additional workers per vehicle could be productive in loading,

9
 unloading, navigation, or around-the-clock continuous driving. But, at some point, the returns to
investment in labour will start to diminish and efficiency will decrease. The most efficient
distribution of labour per piece of equipment will likely be one driver plus an additional worker
for other tasks (two workers per truck would be more efficient than five per truck).

The falling marginal product of labour is due to the law of diminishing marginal returns. The law
states, as units of one input are added (with all other inputs held constant) a point will be
reached where the resulting additions to output will begin to decrease; that is, marginal product
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will decline. The law of diminishing marginal returns applies regardless of whether the
production function exhibits increasing, decreasing or constant returns to scale. The key factor
is that the variable input is being changed while all other factors of production are being held
constant. Under such circumstances, diminishing marginal returns are inevitable at some level
of production (Varian, 1992). Consequently, revenues are not the contribution of the marginal
salesperson by itself. Revenues are the change in total revenue earned by a firm that results
from employing one more unit of labour (i.e., the increase in output resulting from an
incremental increase in the amount of labour employed). As these activities lead ultimately to
monetary revenues, they can be denoted as direct-monetary transaction values.

Costs
The first cost category is made up of recruitment costs, i.e., the costs incurred to recruit
salespeople. Only if the remaining net value (the value exclusive of recruitment costs) exceeds
the recruitment costs, the present value is positive and the salesperson is profitable. For
decisions concerning prospects, the net value can be considered as the maximum costs
management should incur to recruit them. The calculation and assignment of recruitment costs
depends on the recruitment practices used (e.g., enrollment costs, selection costs, placement
costs, learning costs). Enrollment costs are those incurred to identify sources of human
resources, including those within and outside an organization. These costs are also incurred to
attract prospective salespeople of an organization. Selection costs are those incurred for
determining who should be devoted to employment. They include all costs incurred in the

10
 selection of persons to be members of an organization. Placement costs are incurred to bring an
individual to an organization and put him/her in service. Learning costs refer to the sacrifice that
must be incurred to train a person and bring him/her to the level of performance normally
expected of an individual in a given position (Flamholtz, 1999).

The second category includes both the production (product-related) costs and all costs of
serving the salesperson, including the salary, the costs of materials, supplies, and training
(Avolio et al., 2010; and Oh, J., 2014) and benefits. Benefits are an important part of a
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salesperson's total compensation package. They are not cash rewards, but they do have
monetary value (e.g., spiralling health care costs make health benefits particularly essential to
today's families). Many of these benefits are non-taxable to the salesperson and deductible by
the employer. Many benefits are not required by law, but are nonetheless common in total
compensation packages. These include health insurance, accidental death and dismemberment
insurance, some form of retirement plan (including profit-sharing, stock option programs, 401k
and salesperson stock ownership plans), vacation and holiday pay, and sick leave. Companies
may also offer various services, such as day care, to salespeople, either free or at a reduced
cost. It is also common to provide salespeople with discounted services or products offered by
the company itself. In addition, there are also certain benefits that are required by either state
or federal law.

Termination costs are the third category. Termination costs of a business relationship, likewise,
must be taken into account as the final costs. The cost of conducting an exit interview, the
administrative costs of stopping payroll, benefit deductions, and the cost of the various forms
needed to process a resigning salesperson are typical examples.

The termination costs have to be spread over the relationship’s projection period and be based
on the calculation of the defection probability (i.e., 1-r). This has to be done in a way that
accounts for the probability of occurrence of these costs in the future periods. Following this
modus operandi, the probabilities of occurrence of all periods necessarily add up to 1 in the long

11
 run; this means that all salespeople with a retention rate r<1 migrate from an initial base over
time and produce termination costs in full height. The migration probability for a distinct point
of time can be described as the probability that the salesperson remains loyal until “t-1” and will
migrate in “t”. To give an example, period t2 can be calculated as r*(1-r), period t3 as r*r*(1-r),
and period t4 as r*r*r*(1-r).

Peer effect
The peer effect can be denoted as an indirect-monetary interaction value because it results
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from salesperson-to-salesperson interactions which may lead to an increase/decrease in

salespeople’ productivity (Guryan et al., 2009). The monetary value is made up of the effect that
the peers have on the salesperson and the effect that the salesperson has on peers. The
monetary effect that the salesperson has on the peers is given by the sum of margins (revenues
minus costs) of all peers weighted by the degree to which the salesperson has a
positive/negative influence over the peers’ productivity. The monetary effect that the peers
have on the salesperson is given by the margin of the salesperson weighted by the degree to
which the peers have a negative/positive influence over the salesperson productivity. The net
monetary value of peers effect of salesperson is increased (decreased) when the effect that the
salesperson has on peers is positive (negative) and the effect that the peers have on the
salesperson is negative (positive). The aggregated peer effect across all salespeople describes a
situation in which the salesperson's gain or loss is exactly balanced by the losses or gains of the
other salespeople (i.e., zero-sum).

Discount rate
To estimate the discount rate that accounts for the financing mix of a company as well as its
risk, standard financial methods (e.g., Capital Asset Pricing Model, CAPM) can be used. Finance
texts generally suggest a range of 8-16 per cent for this annual discount rate (Brealey and
Myers, 2000).

12
 Equation 1 summarizes all essential SLV components, including aspects of revenues, costs, peer
effect, and retention rate.

where
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“SLVi” is the SLV of salesperson “i”,

“RCi” is the recruitment cost of salesperson “i”,
“Ri,t” are the revenues of salesperson “i” in period “t”,
“Ci,t” are the costs of salesperson “i” in period “t”,
“Pi,t” is the net monetary value of peers effect of salesperson “i” in period “t”,
“ri,t” is the retention rate of salesperson “i” in period “t”,
“Ti,t” are the termination costs for the relationship with salesperson “i” in period “t”,
“d” is the discount rate,
“n” is the length (in periods) of the projection period.

Conceptually, the salesforce equity (SE) is the sum of the lifetime value of “z” salespeople. In
general, the salesforce equity can be estimated as:

  




Estimating SLV

With simplifying assumptions of constant revenues, constant costs, and constant retention rate
(Gupta and Lehmann, 2003), we can now write the lifetime value of a salesperson as:

13
 Note that SLV is equal to cash flow (Ri-Ci+Pi-Ti*(1-ri)) multiplied by a factor ri/(1+d-ri). We call
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this factor the cash flow multiple. The cash flow multiple is low when the discount rate is high
and salesperson retention is low. Conversely, this cash flow multiple is high for low risk
companies with high salesperson retention rate. For example, for a firm with 12% discount rate
and 90% salesperson retention rate, the cash flow multiple is 4.1.

It is easy to modify this formulation to account for changes in our assumptions. For example, if
cash flows are expected to grow at a constant rate, g, per period, then the ELV changes to

Application

This section describes the operationalization of the lifetime value of the salesperson. The case
study was with a company that had not previously calculated the value of their salespeople;
thus, managers were receiving new information. The firm has nine salespeople. In order to
safeguard the identity of the salespeople, their real names were not presented in this study. The
company under analysis was created in 2003 in Bogota, Colombia, and its core business is to
provide security products and services such as alarms, closed circuit television, remote
monitoring, and access control systems to small and medium size enterprises in the Colombian
market.

14
 The data that include aspects of revenues and costs cover a year’s period from the beginning of
2014 to the end of 2014. The rate of exchange used is 2,378.56 COL$ for 1 US$ (observed on
12/30/2014). We obtained estimates for peer effect and retention rates from the firm’s
manager. For example, if the firm’s manager suggests that the retention rate (based on
behaviour and historical comparison) for Salesperson C is in the range of 80% to 90%, then we
use the average of 85% as our best estimate for Salesperson C’s retention rate. The peer effect
is obtained from data analysis developed by the HR unit. The firm provides no information
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about its discount rate, so we choose an annual discount rate (d) of 10% in line with theory (e.g.,
Brealey and Myers, 2000). All this information enables us to calculate the SLV using the
proposed model (See Table 1).

Table 1. Data (USD)

Salesperson Revenues Costs Peer Termination Retention

effect costs rate
A 33,434 25,969 -1,584 2,082 100%

B 37,976 29,148 2,317 2,532 95%

C 28,657 22,125 -589 2,014 85%

D 19,403 16,147 1,432 1,871 85%

E 18,332 15,897 1,348 1,237 80%

F 20,934 17,219 -1,049 1,263 85%

G 19,575 16,268 -468 1,249 90%

H 18,496 15,582 -543 1,238 80%

I 15,688 13,347 -864 1,215 85%

Total 212,495 171,702 0 14,701 -

Average 23,611 19,078 0 1,633 87%

15
 In order for the SLV approach to be successful, salespeople with low SLV must be identified and
moved to a higher level of value or moved out of an organization. It is possible to segment
salespeople into categories representing their level of value to an organization, which is closely
tied to performance. Some insights can be obtained from examining firm’s SLV distribution. For
example, the $0–$22,543 category includes more than 77.7% (7/9) of firm’s salespeople, and
the $22,543-plus category includes only 22.2% (2/9) of salespeople, indicating that the bulk of a
firm’s salespeople have low SLV. Table 2 shows a startling picture of the percentage of a firm’s
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salesperson equity that is contributed by each SLV category. The $0–$22,543 category, though
by far the largest (more than 77.7% of a firm’s salespeople), produces approximately 36.6% of
the firm’s salesperson equity. In contrast, the $22,543-plus SLV category, though only 22.2% of a
firm’s salespeople, produces approximately 63.4% of the firm’s salesperson equity.

Table 2. Results (US dollars)

Salesperson Revenues Rank SLV Rank

A 33,434 2 58,810 2

B 37,976 1 69,783 1

C 28,657 3 19,179 3

D 19,403 6 14,985 4

E 18,332 8 9,428 6

F 20,934 4 8,420 7

G 19,575 5 12,213 5

H 18,496 7 5,662 8

I 15,688 9 4,402 9

Average 23,611 - 22,543

16
 Salesperson 202,884
Equity

Beyond recognizing the importance of salespeople as assets, a model for predicting the value of
salespeople is needed to aid in effectively acquiring, developing, allocating, retaining, utilizing,
evaluating, and rewarding these assets. For example, a salesperson who makes a number of
highly valued contributions to a firm may have a lower SLV if his/her tenure with the firm is very
short (e.g., Salespeople E and H), relative to a salesperson who makes more modest
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contributions but maintains a longer tenure with the firm (e.g., Salesperson G). This situation
demands the existence of an incentive, development and training plan. If the “intervention”
costs are higher than the expected return, in consideration of the termination costs, it possible
that the salesperson needs to be terminated.

Empirical evidence suggests that human resources practices have both direct and indirect
effects on firm performance (Ketkara and Setta, 2010). This model also enables the financial
impact of improvement efforts to be analyzed for any of the usual investment decisions. It is
clearly important for firms to have accurate measures of the rate of return on investment (ROI),
for this is what guides their investment decisions. If the expected ROI is underestimated,
employers will underinvest, whereas if it is overestimated, employers will overinvest (Bartel,
2000). For example, the firm could spend $9,000 ($1,000 per salesperson) in salesperson
training. Is such an investment justified? If we assume that the revenues increase by 2.5%, the
SLV model indicates that salesperson equity will improve by 12.9% (from $202,884 to $229,111),
resulting in an improvement in salesperson equity of $26,227, or an ROI of 191.4%, which
indicates that the program has the potential to be a large success (See Table 3). We assert the
training impact can be variable across the salespeople, thus we suggest that practitioners should
control the output of every training (e.g., final test) and evaluate the individual’s pace of
implementation.

Table 3. Projected ROI in salesperson training (USD)

Salesperson Current Projected Dollar Projected

17
 SLV SLV improvement ROI
A 58,810 67,168 8,358 736%

B 69,783 75,796 6,013 501%

C 19,179 21,615 2,436 144%

D 14,985 16,634 1,649 65%

E 9,428 10,650 1,222 22%

F 8,420 10,200 1,779 78%

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G 12,213 14,416 2,202 120%

H 5,662 6,895 1,233 23%

I 4,402 5,736 1,333 33%

Salesperson 202,884 229,111 26,227 191%

Equity

Conclusion

Salespeople are a critical resource in organizations, and it follows that the effective utilization of
this resource should be a central management focus. However, beyond recognizing the
importance of salespeople as assets, a model for predicting the value of salespeople is needed
to aid in effectively managing and retaining these assets. It is important to note that a model for
predicting SLV will not eliminate the traditional functions of management. Salespeople still need
to be hired, trained, and appraised, and so on. Measuring SLV encourages managers to focus on
the long-term rather than the short-term. Building SLV allows an organization to develop its
sales force as a distinctive competency that is extremely difficult for others to imitate and can,
therefore, create a significant strategic advantage.

18
 Measuring, managing, and maximizing salesperson profitability is not an easy task. It requires
that, in resource allocation decisions, both the benefits and the costs are considered. We
acknowledge several limitations of the proposed model that are the subject for future research.
The major problems of the SLV calculation lie in the creation of salesperson-oriented database
and information systems, the adequate assignment of costs to the individual salesperson as well
as problems of data procurement. Additionally, advances in modelling the SLV components are
necessary to provide quantitative techniques to calculate the input variables.
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The model proposed in this article is more comprehensive than the approach used in the study
by Kumar et al. (2014) due to the fact that our focus incorporates the recruitment/hiring costs,
termination costs, and peer effects, which are extremely relevant in order to understand the SLV
concept and manage the sales force and, consequently, quantify its net value added to the
company. These novel variables, except hiring costs, are important contributions also to Oh’s
(2014) model, besides other operational considerations (e.g., not using the ODI contribution
rate). Hence, this manuscript theoretically contributes to personnel value management in the
organization and sales force financial control.

All models have limitations, such as difficulties in estimating changes in the environment, new
costs, market conditions, marketing efforts, seasonality, legal changes, and so forth. There could
also be problems in accounting for peer effect over the years. However, these difficulties are
small in comparison to the great benefits that can be obtained from applying these models
(Hidalgo et al., 2008; Farías, 2014; Valenzuela et al., 2014). Armstrong (2001) describes several
procedures for selecting forecasting methods. By using those procedures in a systematic way, it
is likely that the manager will consider a wide set of SLV models and will select the best SLV
model for a given situation.

In times of abundance, firms easily justify expenditures on training, staffing, reward, and
salesperson involvement systems, but when faced with financial difficulties, such systems fall
prey to the earliest cutbacks (Lado and Wilson, 1994; Amir and Lev, 1996). Therefore, a critical

19
 research focus for future work on this model consists of exploring the link between salesperson
equity and firm performance. For example, its high retention rate (96% in 1999) is believed to
save the SAS Institute $75 million a year (Fishman, 2000). Another area for research to explore is
the identification of methods to cost effectively push workers to higher levels of value. Further,
it will be important to develop decision frameworks for determining when it is no longer
appropriate to invest (e.g., technical learning, sales training, behavioural inductions) in low-
value salespeople and move them out of an organization.
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In summary, this article provides a new starting point for salesperson valuation. We hope that
this article sparks more interest in this area and brings the fields of marketing, human resources
and finance closer together. In practice, the application of the SLV concept is closely connected
to management. At a purely conceptual level, the calculation of SLV is a straightforward
proposition: It is simply the present value of the future cash flows associated with a salesperson.

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