June 2010

VOL. 18   ISSUE 2

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Knowing a company’s compensation cost of sales (CCOS) and the factors that influence it are essential to creating and maintaining a competitive sales effort. Going a step further, and comparing the CCOS to those of similar or competing organizations or the industry as a whole provides perspective about how effectively and efficiently an organization is reaching its customers through various geographies, channels and/or job roles.

Simply defined, CCOS is the total compensation dollars1 (not including perquisites like Sales Promotion Incentive Funds (SPIFS),2 president’s clubs, sales contests or benefits) paid to individuals involved in a sale (including "overlay" sales roles and sales management roles), divided by the credited sales revenue that is produced for that effort or sale. Although it gets technical, understanding the company’s CCOS will be well worth the effort.

Rules of Thumb

The following rules of thumb can help an organization comprehend its CCOS:

Factors that Influence CCOS

A number of factors that influence a company’s CCOS need to be taken into account:

Additionally, the CCOS at the individual level can vary significantly based on the revenue the individual produces. In Figure 2 below, the sales representatives performing in the bottom quartile (on the left), have a 52 percent CCOS whereas the top-quartile performers (far right) have a CCOS of 17 percent. The CCOS is lower because the top-quartile performers are bringing in significantly more revenue. They are three times more effective than are those in the bottom quartile.

Different Industries and Selling Models = Different CCOS

In addition to the factors that influence CCOS, it helps to understand the CCOS for the company’s industry and for other industries with similar selling models. Note that CCOS can differ significantly by company within an industry as well as by industry. CCOS can range from a median of 1.9 percent in the semiconductor business, which has historically had a very small CCOS because of the size of the deals, to 14.7 percent in financial services, which is highly people intensive. (See Figure 3 below.)

Some industries will pay more because they have higher margin products. Others will pay less because they benefit from a large embedded base of revenue and their sales process is more retention-oriented than acquisition-based.

It also helps to understand how a company’s selling model and, ultimately, its pay philosophy compare to others. For example, the financial services and software industries are primarily acquisition driven, so they will pay more for new business (new clients or new revenue). Telecom and semiconductor companies pay less. Telecom companies have a high embedded base of revenue; semiconductor companies generally have a long sales cycle and large deals.

Conclusion

In today’s uncertain economy, knowing an organization’s CCOS can provide a much-needed competitive advantage. It is good to remember there is no one "correct" figure for an industry or a type of company. Whether it is a mature organization with multiple channels, job roles and go-to-market complexities or a less-complex organization with a simple sales process, knowing the CCOS and understanding the factors that influence it are essential to creating and maintaining a competitive sales effort.

 

About the author:

Joseph DiMisa is a senior vice president and head of the Sales Force Effectiveness Practice for Sibson Consulting. He can be reached at 770.403.8006 or jdimisa@sibson.com.


1 Total compensation dollars can be broken out as base salary or fixed compensation cost of sales and commission or bonus dollars (variable compensation cost of sales). When looking at variable pay, the amounts used need to be directly attributed to the revenue credited for particular sales.
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2 A SPIF is an immediate bonus paid directly to a salesperson for selling a specific product.
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