If your business can accurately and confidently answer this, then your are in the minority. Compensation cost of sales (CCOS) is not a metric that many people are aware of, but it should be. It is one of the most undervalued yet important metrics you can use to evaluate your compensation plan, and also provide comfort to the finance team. The aim of analysing your compensation plan is to see your CCOS number be as low as possible while still achieving your sales targets and keeping the sales force motivated and productive. If you are not using CCOS then you are missing a big opportunity to improve your sales ROI.
CCOS is a way to measure the efficiency of your compensation plan. It offers a quick way to see how much you compensate your salesforce for every dollar they close. The lower the spend the more efficient your compensation plan is. The main benefit of CCOS is to assist you with comparing the planned cost of compensation vs the actual cost of compensation to improve your ROI and also provide a real-time 'warning' light on the cost of your incentives to the team, we can explain how this can be utilised in more detail below.
Alexander Group describes it best: "To calculate CCOS, take the cost of base salaries and variable pay (bonuses, commissions, SPIFFs – essentially all cash compensation) for all of your sales roles and divide it by your sales revenues (or bookings). This derives a percentage, for example, 7.9%, meaning for every dollar of revenue (or bookings) generated you spend 7.9 cents to compensate your sales force."
CCOS = [Total Salaries Paid + Total Incentives]/Total Revenue
A compensation plans main objective is to incentivise profitable sales growth. Yet sales leaders are generally focused on a sales organisation's productivity only (growth) and when asked to measure what the company spends on its sales production (profit vs loss), they will not be able to easily provide an answer. CCOS is the key metric for monitoring these two critical variables. Most established companies do not want growth at the cost of profit (an exception could be launching a completely new product in a new market or if you are an early-stage business in growth phase).
If after determining your CCOS, it trends higher than the industry benchmark or your budgeted CCOS number, this can be a sign that your current plans are not optimised or your sales reps are underperforming, and therefore not providing a good ROI. If the CCOS trends lower than the industry benchmark, you may consider if the compensation plan is competitive or if there are enough reps or a lack of coverage in certain territories. CCOS will not tell you what to do, but it will determine whether your investment in sales is driving the optimal results for the business.
According to the Alexander Group, there are seven primary factors that influence CCOS. This also means that when your CCOS is too high, these are the first areas to focus on and start reviewing:
CCOS is useful in the financial modelling of proposed sales incentive plans. So if you are trying to get a plan over the line with your CFO or convince the CEO of changing from one plan to another, this is where CCOS can really assist. If you can demonstrate that under varying performance scenarios, CCOS remains fair and reasonable, your stakeholders will feel secure that the new plan will be successful. Furthermore, if you can present a plan that will reduce the CCOS rate in various scenarios, you will have a much stronger case.
The CCOS metric is also useful to analyse the effectiveness of each sales executive by looking at how much they cost the business (OTE) vs how much business they bring in (sales). This metric shouldn't be used for new sales employees still in the ramp-up period, it should only be applied to fully productive sales staff. But once you have a way to calculate the effectiveness of your sales team, the easier it is to pinpoint those that cost the business more than they bring in and then take action to remedy the situation. This could be in the form of digging deeper to understand why they are not meeting quota, additional training or support or realising they might not be the best fit for your business.
A plan vs. actual analysis (also called variance analysis) is essential to better sales management. By accurately tracking results, reviewing progress, and making regular course corrections depending on performance, you can expect to improve your sales ROI. Consider CCOS as part of a healthy, balanced sales metrics dashboard that is used for a regular health check and ongoing planning.
Comparing your actual vs planned allows you take a deeper dive to understand:
The true benefit of comparing your actual vs plan is that it can answer many questions and highlight issues that simply can’t be found within the analysis of just your actual plan alone.
Looking back at your quarter you may see examples of lower sales and spending one month or an increase in advertising and and new logos another month. It may not be clear if those results are related so using insights from each plan vs actual review will enable you to see where they do and do not connect.
Everyone in your Senior Leadership team should be aware of CCOS as a metric and understand its purpose. However, the three people that should always regularly review it and understand the CCOS number at any given time are: the CFO, the CEO and of course, the Sales Director. A plan vs actual analysis must be done regularly to really see the benefits. If done once a month, it will ensure your forecasts for the following month will be more accurate.
Compensation cost of sales helps as a high-level summary of your sales compensation's relative effectiveness. Using only sales growth, market-comparative target pay ratios and hiring and turnover statistics can mask other, systemic issues. If you would like help understanding and benchmarking your CCOS, please get in touch with the team at motiveOS.