ATD Blog
Executive Coaching: An ROI Sample Calculation
Wed Oct 17 2018
Calculating the ROI associated with executive coaching can be difficult. As a high-level example, consider the following situation: A top-performing account executive at a large technology firm had recently been promoted to vice president of sales for the North American division. The executive had consistently exceeded his sales quota by 200 percent and had landed key marquee Fortune 500 customers. However, the new VP was underperforming in his new position. His direct reports were struggling to hit their individual quotas. The overall team morale had declined sharply. Engagement levels were plummeting.
Recognizing the VP’s underperformance, the CEO was considering replacing the new VP. As a last attempt to rectify the situation, the CEO urged the VP to partake in executive coaching. The VP grudgingly agreed. After a mere four months of twice-weekly intensive coaching sessions (at a total cost of $30,000), the VP’s performance had increased markedly. Team members felt a much clearer sense of purpose. The VP had learned to become less prescriptive in his directions, affording team members a greater sense of authority and ability to foster more genuine and authentic relationships with customers. Upon review of recent 360-degree assessments and performance metrics, the CEO was instilled with newfound confidence that a replacement would no longer be needed.
We can calculate the ROI associated with executive coaching using the following formula:
% ROI = (Benefits Achieved – Executive Coaching Costs) \* 100 / Executive Coaching Costs
The benefits achieved can be calculated by determining the costs incurred as a result of failing to hire an executive coach. Table 2 delineates the primary costs associated with failure to hire on executive coach. Considering only these costs, the organization has achieved an ROI of 938 percent. This analysis only scratches the surface as it does not include other tangible and intangible benefits associated with coaching, including productivity loss among direct reports, increased rates of turnover, and strained customer relations.
Table: Costs Incurred as a Result of Failing to Hire an Executive Coach
Cost | Purpose | Calculation |
$44,250 | External executive search agency cost | 25% of annual compensation rate of $177,000 |
$3,000 | Costs assumed by internal recruiting team (including time spent scheduling interviews, drafting evaluations, conducting reference checks, reviewing candidate credentials, scheduling debrief meetings, and so on) | 50 hours in aggregate among five team members at an hourly annual rate of $60/hour |
$8,000 | Opportunity costs assumed by internal C-suite stakeholders as a result of participating in candidate debrief meetings | 40 hours in aggregate among 8 team members at an hourly annual rate of $200/hour |
$88,500 | Lost two-year productivity as a result of external (vs. internal) hire* | 25 percent productivity loss at annual compensation rate of $177,000 over two years |
$25,000 | Lost productivity during four-month search process as a result of underperforming VP | 0.33 (4/12 months) at annual compensation rate of $150,000 * 50 percent productivity loss |
$54,000 | Additional salary (two-year) required to hire external candidate* | 150,000 (current annual compensation rate of VP) * 0.18 over two years |
$311,250 | Total | |
**** | **** | **** |
\* conducted by Matthew Bidwell of the University of Pennsylvania found that external hires are initially paid around 18 percent more than internal hires and also have lower levels of performance throughout the first two years. |
Executive coaching can be a costly investment. All evidence points to the fact that organizations that opt to incur the investment get their money's back and more. In reflecting on executive coaching, John Russell, managing director at Harley-Davidson Europe Ltd., remarks, “I never cease to be amazed at the power of the coaching process to draw out the skills or talent that was previously hidden within an individual, and which invariably finds a way to solve a problem previously thought unsolvable." Building a compelling business case for executive coaching is a prerequisite for maximizing ROI. With strong organizational buy-in, you’ll be able to leverage executive coaching as a propellent for future growth.
Want to learn more? Check out my new book, The Art of Executive Coaching.