- An important metric. Compensation cost of sales (CCOS) is a useful measure that helps steer a broader conversation about salesforce investment beyond target pay levels.
- Influencing factors. Several factors influence CCOS, including base pay levels, Target Total Compensation (TTC) levels and sales crediting rules.
- Interpreting your CCOS. Benchmarking your CCOS can reveal potential issues with your sales compensation program.
Now that it’s January, your 2024 sales compensation program has been rolled out and everything is in place for a successful sales year. As the year progresses, however, someone will eventually ask, “Is our compensation program competitive? Are we paying too much or not enough?” Often, there’s a rush to look at target pay levels when the problem lies in other areas. This is why leaders should measure and benchmark their compensation cost of sales (CCOS).
CCOS is an important metric on your sales dashboard — both a leading and lagging indicator that, when properly understood and interpreted, can point toward useful action. It is also a useful measure that helps steer a broader conversation about salesforce investment beyond target pay levels.
CCOS is best interpreted in conjunction with productivity and other metrics. In most cases, whether it’s high or low relative to the benchmark, there isn’t a single reason why but rather a combination of culprits, and thus a few areas that should be addressed together.
Determining CCOS
Cash compensation for the salesforce is the single largest component of overall cost of sales for most companies, representing roughly 40% of total sales costs. To calculate CCOS, take the cost of base salaries and variable pay (bonuses, commissions, SPIFFs — essentially all cash compensation) for all your sales roles and divide it by your sales revenue (or bookings). This derives a percentage — for example, 7.9%. What this number means is that for every dollar of revenue (or bookings) generated, you spend 7.9 cents to compensate your salesforce.
Sales leaders should care about CCOS because it’s an efficiency measure. It helps you determine whether you are getting the best “bang for your buck” in terms of investment in sales. Thus, you want this number to be as low as possible while still achieving your sales target and keeping the salesforce intact.
Seven primary factors influence CCOS:
- Base pay levels
- Target Total Compensation (TTC) levels
- Quota setting and allocation practices
- Quota attainment levels
- Shape of the pay curve in the sales compensation plan
- Sales crediting rules
- Salesforce sizing and deployment (reps and overlay positions)
Benchmarking CCOS
If you guessed that the benchmark for CCOS is 7.9%, you’re right. According to the Alexander Group benchmark database, the cross-industry CCOS for B2B companies is 7.9% — though the benchmark does vary by industry and company size. The higher your business margins and the less commoditized your products or services, the higher your total cost of sales and your CCOS will be.
If you calculate your CCOS and find that it is above the benchmark for your industry and size, your knee-jerk reaction might be to reduce sales pay, but that may not get at the root of the problem.
To pinpoint what the issue is, first investigate sales rep productivity. If your sales reps are underperforming (i.e., if less than 50% are at or above quota for any variety of reasons), your CCOS may read high. If this is the case, target pay levels may be a contributing factor, but you should also explore:
- Pay mix (Are base salaries too high as a percentage of total pay relative to the market for these roles?)
- Shape of the pay curve (Are we paying variable compensation for run-rate business?)
- Crediting rules (Are we double crediting more than necessary?)
If these compensation plan practices are competitive within the market, then it may not be a plan design issue at all. The high CCOS may simply be due to a period of low sales productivity.
If, however, your reps are performing well and CCOS is still high, a number of factors beyond just pay levels could still be driving this number. They include:
- Quotas (Are we setting quotas too low?)
- Crediting rules (Are we doing too much double crediting?)
- Accelerators (Is the upside in our plans too rich?)
- Too many pre-sales or overlay sales roles.
A CCOS that is below benchmark puts sales leaders in a tenuous position. While you might be helping the bottom line, you may also be sacrificing future performance by not providing enough incentive to keep the sales organization motivated. This is another instance where good sales compensation benchmarks can help you make your case for ensuring adequate investment in the salesforce.
Once again, look at CCOS in conjunction with productivity. A below-market benchmark CCOS could be due to below-market pay, but it could also be attributable to:
- Quotas
- Shape of the pay curve (Accelerators are low, you’re not paying competitive upside)
- Salesforce sizing (You may have too few reps, and you’re actually leaving money on the table in under-covered territories and accounts).
Sharing the Data
Knowing what CCOS is, how to calculate it and how to interpret the results can reveal important discoveries. Armed with this information, sales leaders can move forward with confidence and take appropriate steps to address any issues that may turn up.
One more thing: The next time someone asks about the competitiveness of your sales compensation program, you’ll have an answer ready.
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