Five Reminders to Properly Calculate Your Compensation Cost of Sales
By Kevin O'Connell
Compensation Cost of Sales (CCOS) is a simple concept. It indicates for every dollar in sales how much is spent/invested in sales compensation.
Total Cash Compensation ÷ Total Sales = CCOS
$150,000 ÷ $3,000,000 = 5%
However, it is important to recognize that CCOS is easy to calculate incorrectly. It requires attention to detail so that results are not skewed and mask actual sales compensation costs. Data collection challenges for many businesses may also increase the complexity and time to accurately calculate and analyze CCOS. Here are five reminders to correctly calculate your CCOS.
CCOS varies by industry. Benchmarking data is difficult to obtain, and cost structures do vary by industry. For example, CCOS for brokers in the financial service industry is close to 50%, while technology sales may range between 12-15%, and pharmaceutical salesforces run 4-6% of sales. Companies’ cost structures including CCOS also vary in line with their business strategy (e.g., low cost provider, premium pricing).
CCOS is sales role specific. You should not mix sales jobs (e.g., territory account managers and inside sales reps) when calculating CCOS. Different sales roles typically have different target pay opportunities and possibly pay mix (fixed/ variable pay as percent of total comp), which, when combined, can distort results. Lumping different sales jobs together also increases the potential to double count sales, further distorting actual sales compensation costs. Combining sales managers and direct reports in the field is a classic example of what not to do.
CCOS can be calculated by individual salesperson but is considered a macro-level measurement. Any potential distortion on an individual seller level tends to be eliminated when viewed in aggregate.
Senior managers may desire a single CCOS number (e.g., 5%), but in reality most sales organizations have multiple roles with different cost structures. It’s best to aggregate by sales role but disaggregate the entire sales organization so CCOS can be a more useful and meaningful management metric.
Only include employees in the sales role for the full performance period (calendar or fiscal year). Employees promoted into a new sales role during the year and new hires are excluded. Their annual or year-to-date salaries and partial year incentives as they learn will make your CCOS look lower or higher than the actual cost for a full-year experienced salesperson. CCOS for veteran sellers is the metric to manage.
Compensation is defined as salary plus annual sales incentives. Exclude benefits and allowances for cars, laptops, phones, etc. Income from programs “on top” of the core sales incentive plan (e.g., sales contest awards, President’s Club, Rep-of-the-Year) are typically excluded if unable to directly link to actual sales.
Remember, the primary objective for CCOS is to map each seller’s direct compensation costs to their actual sales. Payments for activities (e.g., number of calls, sales reports) designed to generate leads and sales over time but with indirect correlation to closed business should also be excluded from the CCOS calculation.
Use actual sales credited to determine sales incentive payouts. The goal is to isolate revenues that the salesperson closed and what has been paid by the sales incentive plan. If your plan includes split or double crediting of sales between multiple reps, the CCOS calculation should also reflect that rule.
Realize sales used to calculate CCOS might not match the revenue line from the company’s financial statement. Resist the “short cut” to use reported revenues by territory or set of accounts managed by a sales rep.
In some cases, the total of individual sales reps’ sales equals the company’s annual revenue. Often some revenue is not incented (e.g., house accounts) and as sales compensation plans become more complex and targeted, revenue tied to sales incentives may be less than the total reported revenue.
Typically the biggest challenge in calculating CCOS is collecting the necessary data. It is not unusual for the data to reside in different systems (e.g., salaries in a payroll system, sales incentives in sales comp management software or Excel, account/product sales in a financial system or sales administration program), which may have different “owners” and barriers to access. Increased use of CRM (client relationship management) systems has shown promise in helping to overcome traditional CCOS data collection hurdles.
To calculate CCOS, the following specific information is required for each individual in the sales roles a full year:
Total annual compensation
Current annual salary
Total annual sales incentive paid
Actual annual total sales credited for incentives
Date started sales role
CCOS is a useful and important metric for sales, finance, and HR executives. It can be viewed over time (should be stable or decline slightly assuming no major changes to sales roles, incentives, or industry dynamics) and helps ensure a competitive cost structure for the sales organization. CCOS also provides context and a baseline to guide executives responsible for making informed strategic decisions impacting the sales force and sales effectiveness (e.g., approach-to-market, market coverage, talent management, sales compensation design, and target compensation levels).
About the Author Kevin O’Connell is Managing Partner of Accelerate Consulting Group, LLC with over 20 years experience is in sales compensation design and sales force effectiveness consulting.
Betsy Walker VP, Global Compensation & Benefits Member Since: 4/1/1999 Comments: 1
This is a great snapshot discussion of a critical component of a sales compensation plan design. A subject of much debate and interpretation (e.g., the corp Finance representative will have a very different view from the Sales team representative), this article includes some industry specific examples which is always helpful.