Sales leaders are nearly always in a desperate fight for good sales talent. Occasionally the wind is at their backs. You may have experienced it… the products are stellar, customers are spending, everything’s clicking, and sales leaders are staying busy scrambling to hire enough reps to keep up with the remarkable growth. Other times, oh and there are the other times… growth has slowed, sales cycles slip longer and longer, and average quota attainment begins to fall. Sales reps threaten to leave or start leaving. Pressures mount, including cost pressures. Eventually someone asks: “Is our compensation program competitive? Are we spending enough on sales compensation?” And so the question of sales compensation comes up. Often there’s a rush to look at target pay levels when the problem lies in other areas. This is why sales 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. What kind of action it points you to may surprise you. It’s not as simple as adjusting target pay. How should you think about CCOS?
CCOS, what is it? 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.
Why should a sales leader care about it? CCOS is essentially an efficiency measure. It helps you determine if you are getting the best ‘bang for your buck’ of investment in sales. Thus, generally speaking you want to see this number be as low as possible while still achieving your sales target and keeping the sales force intact.
What influences CCOS? There are seven primary factors that influence CCOS as follows:
What is the benchmark? If by this point you were guessing that the benchmark is 7.9%, well, you’re right. The cross-industry CCOS for B2B companies is 7.9% (Source: Alexander Group Benchmark Database). Cash compensation for the sales force is the single largest component of overall cost of sales for most companies, representing roughly 40% of total sales costs. (The other 60% is spread across sales enablement tools, support resources, infrastructure, travel and entertainment, meeting expenses and benefits.) The benchmark varies by industry and company size. Generally speaking, the higher your business margins and the less commoditized your products/services, the higher your total cost of sales and your compensation cost of sales will be. CCOS can be used as both a leading and lagging indicator. You can look back over previous periods and measure actual CCOS to gauge sales investment efficiency, and you can also look forward, building sales plans based on a target CCOS.
How do you interpret your CCOS if it’s above benchmark? Here is where it gets a little tricky. Say your number is higher than benchmark for your industry and size. The knee-jerk answer would be to reduce sales pay. But that may not be the issue. First, investigate sales rep productivity. If your sales reps are under-performing (i.e., less than 50% are at or above quota for any variety of reasons… product issues, sales talent issues, or economic issues), your CCOS may read high. If this is the case, target pay levels may be a contributing factor, but you should also explore a) pay mix (Are base salaries too high as a percent of total pay relative to market for these roles?), b) shape of the pay curve (Are we paying variable compensation for run-rate business? Should we consider thresholds?), and c) crediting rules (Are we double crediting more than necessary?). If these compensation plan practices are market competitive, then it may not be a plan design issue at all, it may simply be due to a period of low sales productivity. If on the other hand your reps are performing well and CCOS is still high, again it could be pay levels; or it could be a) quotas (Are we setting quotas too low?); b) crediting rules (Too much double crediting?); c) accelerators (Is the upside in our plans too rich?) or finally; d) too many pre-sales or overlay sales roles.
How do you interpret your CCOS if it’s below benchmark? I’ve met plenty of CFOs (and some CEOs) who take pride in having below benchmark CCOS. As for sales leaders, a low CCOS is a tenuous position. While you might be helping the bottom line, you’re constantly paranoid of sacrificing future performance (including next quarter) by not providing enough “juice” to keep the sales engine running smoothly. This again is where good benchmarks can help you make your case for ensuring adequate investment in the sales force. As described above, look at CCOS in conjunction with productivity. Below benchmark CCOS could be due to below market pay, but it could also be a) quotas, b) shape of the pay curve (accelerators are low, you’re not paying competitive upside), or c) sales force sizing (You may have too few reps – you’re actually leaving money on the table in under-covered territories and accounts!).
Consider CCOS as part of a healthy, balanced sales metrics dashboard. CCOS is a useful measure that helps steer a broader conversation about sales force investment beyond target pay levels. As mentioned, CCOS is best interpreted in conjunction with productivity and other metrics. And in most cases, whether it’s high or low relative to benchmark, there’s usually not a “silver bullet” answer, but rather a combination of culprits, and thus a few areas that should be addressed together.
To get help understanding and benchmarking your CCOS, please contact the Alexander Group.
Original author: Paul Vinogradov