The Hidden Tax on Your Business

Read Time: 2 minutes.

Quick ask: Even if this newsletter doesn’t hit for you, please answer our 5-second question about your preferred LLM in the poll at the bottom.

The Question No One Asks

You track revenue per employee. Cost per acquisition. Gross margin.

But do you know what one bad manager costs your business?

Most leaders don't.

They see underperformance as a "people problem" or a "culture issue."

But bad management is killing your bottom-line.

And the numbers are brutal.

The Manager Performance Gap

I didn’t want this to be a hand-wavy exercise. So I started with studies from credible sources and eliminated dozens that could have been added to these three.

• Gallup

• Harvard Business Review

• Human Resources Society (SHRM)

Here's what happens when you compare bottom-quartile managers to top-quartile managers across three key drivers:

Sources: Gallup State of the American Manager (27M+ employees), SHRM, Harvard Business Review

What This Means in Real Money

Percentages are hard to attach to. They don’t make the pain of this difference real enough. So, let's make this concrete with the numbers of a typical SMB:

$5M revenue company generating $1M in EBITDA.

And let’s take two managers—Manager A (Bottom 25%) and Manager B (Top 25%)—and give each one a 10-person team with $700K in annual team payroll.

• Same title.

• Same budget.

• Same team size.

Here's what the performance gap costs:

Driver 1: Turnover

• Manager A: 30% turnover = 3 people leave annually

• Manager B: 8% turnover = less than 1 person leaves annually

• Replacement cost: $70K average salary × 100% replacement cost = $70K per departure

• The gap: 2.2 extra departures × $70K = $154K annual cost

Driver 2: Productivity

• Manager A: Team operates at 82% of potential

• Manager B: Team operates at 110% of potential

• Team payroll: $700K

• The gap: 28 percentage points × $700K = $196K in lost output

Driver 3: Profitability

• Manager A: Baseline profitability on their portion of revenue

• Manager B: 48% higher profitability

• Revenue responsibility: Each manager influences ~$500K in revenue (10% of company)

• Company EBITDA margin: 20% ($1M profit on $5M revenue)

• Baseline profit from their area: $500K × 20% = $100K

• The gap: 48% higher profitability = $48K additional profit

The Total Annual Impact

Manager A costs the company $398K more annually than Manager B.

For a company with $1M in EBITDA, one bad manager is destroying 40% of your profit.

And this is conservative. We’re not even considering:

• Engagement costs

• Customer satisfaction

• Innovation losses

• Friction they impose on other teams

The 40% Rule of Thumb

Want to estimate what your worst manager is costing your company?

Here are two simple ways:

1. If You Know The Revenue/Profit They Produce

Take the number being produced by your worst manager’s team, and multiple it by 1.4.

That difference is the money you’re leaving on the table.

All of a sudden training or coaching look like bargains.

2. If The Team’s Direct Contribution is Fuzzy

Add up the total compensation for the whole team and multiply that by 1.4.

The difference is again the value you’re missing out on.

Why does this work?

Because if you have a team isn’t at least paying for themselves (i.e. at least delivering enough value to cover their own costs) you won’t be in business for long.

Again, I’m being conversative. This is likely understating just how much money you’re losing from not addressing this issue.

Here’s one more to drive it home:

Divide that number by 200 (those are work days in a year) and write it on a post-it.

That way you can be reminded about how much money you’re lighting on fire every day you tolerate a bad manager.

Why This Matters

Most organizations treat management development as an HR checkbox.

"Promote our best people. Hope they figure it out."

But the ROI on management development is 10:1 or greater.

The math:

• Invest $10K-$20K developing a manager

• Prevent $200K-$400K in losses

• Unlock additional value through higher performance

There may be no higher-ROI investment in your business.

Your Next Move

This week, answer three questions:

1. Who are your bottom-quartile managers? (You know who they are)

2. What value should their team create? (Estimate the gap at 40%)

3. What's your plan? (Develop them, move them, or exit them)

Because bad managers aren't just underperformers.

They cost you real money.

And every day you wait costs you more than you think.

Lead on,
Dave

PS - We need your input. We’re building something new to help more people become AI-Accelerated Leaders. But we can only build it on LLM.

Which should we choose?