Compensation Cost of Sales (CCOS): A three part blog on an important and often misunderstood sales compensation metric

By Ted Briggs

After almost 25 years of consulting with leading companies on sales effectiveness and sales compensation, I’ve come to the conclusion, that other than calling every sales compensation plan “commissions”, the most mis-understood and mis-applied concept in sales compensation is CCOS, compensation cost of sales. In this series of blogs we will attempt to set the record straight on the effective uses of this benchmark, and provide guidance for those practitioners who strive to impact their company results in CCOS. We’ll cover the following topics:

Part 1. What is CCOS and why should a company look internal rather than external?
Part 2. What are the drivers and influencers of CCOS results?
Part 3. How to avoid the pitfalls of micro-managing CCOS and causing sales force anxiety?

Part 1. What is CCOS and Why Should a Company Look Internal rather than External?

Before providing a definition of Compensation Cost of Sales (CCOS), let me first tell you a familiar story. Whether it comes from an email question to our firm, or a question in an initial client meeting, we are frequently asked: “What’s the average commission rate in our industry?” as if it’s a test of our knowledge and expertise, or some attempt to defend a company’s current plans against some internal attack that their plans are too rich. My favorite answer is “2.4%”, said with much certainty and a wry smile or emoticon if electronic. I often want to reply as Marisa Tomei responded in her Oscar winning performance in “My Cousin Vinny”…”That’s a b&%%$#!+ question.”

Naturally, commission rates vary widely even in similar industries, as well as within a single company as roles vary (e.g., major or global account roles versus territory or inside sales roles). This is because compensation levels, and base salary to incentive ratios typically vary by role, as do the range of expected sales volumes. Try creating an average rate by company, more or less across companies, and you quickly realize how unimportant that comparison actually is. Try selling the comparison to your sales leaders and you’ll be pushed back farther than you may be able to may be able to recover.

The question companies really seek to ask is how much am I spending on my sales force versus other companies. This too is a challenging concept. Cost of Selling studies are rife with definitional inconsistencies as to what categories of cost to include (sales office building leases, overhead allocation, etc.) as well as whether the denominator should be actual current period revenue, or sales bookings.
Ultimately, the one comparable ratio becomes CCOS, which looks at just what current period compensation (base and variable) is as a percentage of current period revenue. This measure is really a productivity measure answering: how much of every dollar do I have to spend to get a dollar of revenue? Naturally, in some businesses, total bookings, or even total gross margins (especially in distribution) may be a better denominator, but for most product based companies, revenue is the best metric. Of critical importance is to use a real financial measure, rather than sales crediting, which can be a distinctly different currency due to modifications in deal values and multiple sales crediting.

CCOS = [Total Salaries Paid + Total Incentives]/Total Revenue

Once calculated, the question becomes how to get data to compare it to. Absent having a benevolent consultant conduct one for free, you can charter a study with comparable companies. But once you get the data, what do you do? Let’s say you find that you are in the 70th percentile of spend….what do you do?

Do you cut pay, increase quotas, or reduce accelerators? Probably not! Assume you’re in the low 30th percentile of spend…now what? Raise pay, add salespeople?

Actually, what you need to do is look internal: deeply internal, and look over time to see trends. A total company CCOS rate is like an average of averages, and an average productivity measure gives you nothing with which to analyze and improve. First, you need to look at the detail, segment by segment, as well as region by region. Here, you can identify where you are performing most effectively, and least effectively. Next, you should look at not just last year, or this year’s target; include two years ago, so that you can see a trend. Which segments or regions are improving. This data gives you a chance to look for root causes of increased or decreased effectiveness.

One other cut of CCOS we like to see, is new hires versus sellers with at least a year of experience. This can help you examine your investment in incremental headcount growth, and not apply the same treatment to all sellers. This can keep you from burdening legacy employees with extra quota to try and afford new talent.

One last thing to examine, is a look at relative performance of each of your segments and regions versus your market. By defining and reviewing the growth rate with the CCOS trends, you can identify where results and effectiveness are best aligned, and of course, where they are not. This can help you understand your relative achievement versus the competition or broad market, and how effective your spend is in reaching those performance levels. The following table shows examples and some conclusions you might make.

This can help you focus your sales management efforts on coaching, training or even talent recruitment to try to drive incremental results. You can also do root cause analysis to see if there are competitive factors hurting or helping you in those specific segments or regions. Lastly, it can help you develop segment specific sales compensation plans and targets that better suit the environment in which the sellers are actually performing, and can better drive their motivation to succeed.

In our next blog, we’ll examine the key drivers and influencers of CCOS.

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BSC’s 2011 Guide to Success – Part 10

Each week, we will highlight one of BSC’s Top Ten Tips from our acclaimed Guide to Success. To download the full guide, click on to the Articles page.

To see last week’s post click here: http://bettersalescomp.com/sales-compensation/bscs-2011-guide-to-success-part-9/

10. Design Plans with Attention to Communication Messages

Creating new plans and securing official executive approval leaves one crucial step left if you want to be successful – communicating and implementing the new plans!  In too many cases, companies either do not leave enough time or enough resources to complete this essential step.  After working hard to assess the plans, create news plans to drive results, and build consensus and support at all levels of management, seeing all that effort crumble under the weight of a shoddy rollout can be heart breaking. To ensure great performance in this final step, we offer the following insights:

  • Use the communication opportunity to its fullest value. If you’ve ever thrown a tennis ball to an eager Golden Retriever, you know one thing for certain – you have her complete attention.  Those eyes never leave the bright yellow ball ready to spring from your hand.  When salespeople prepare to hear about their compensation, guess what? You have their complete attention.  We strongly encourage companies to use this session to provide the messages you most want them to hear, particularly about this year’s sales strategy and how the members of the sales organization are essential to the company’s success
  • Focus on more than the “what” behind the new plans. We’ve seen too many rollout presentations jump right into plan measures and how they calculate pay, often in gory mechanical detail.  That’s great and certainly important, but there should be some build up. Think what else they may need to know to understand this story’s punch line, such as…
  • Focus on the “why” of the plans.  Talk about the purpose behind the plan changes. What happened last year? What’s new this year? Why are the changes being made?  What drove the outcome of your plan design effort? Salespeople may not always agree with all of the information shared, but people (yes, even salespeople) learn and embrace new things when they have a greater sense of understanding. Attempt to offer it and anticipate one key question – “why?”
  • Focus on the “how”.  In this case, help them understand the (hopefully) rigorous process you followed.  Salespeople most despise when decisions are made from the nebulous “black box”. Hopefully, you have followed a process that garnered field feedback, collected market perspectives, and carefully weighed options. If you follow Tip Three, you included respected design team members.  The plan communication effort is a great time to champion your process and build confidence in its outcome.
  • Create the right materials. The best plan communication strategies include a range of crucial documents, namely the Plan Document itself (describes the plan for a specific role), the Terms and Conditions (contains all the rules and specifics that support the plan), and Plan Calculators (helpful Excel-based worksheets with the new plan programming so salespeople can test and better understand pay results from potential results achieved).  In addition, rollout presentations should be carefully communicated, first to the frontline sales managers and then on to the salespeople themselves (in the process identified below).
  • Cascade the plan communication and repeat as necessary.  Recent psychology studies indicate that humans retain 30% (we actually think it’s even less than that) of what they hear on a good day. Repetition is often a great way to increase odds of retention.  In the case of a comp plan rollout, the messaging approach and messenger both matter.  We normally recommend that the head of sales communicates the plan details to frontline management.  Next, the head of sales should reveal the “what”, “how”, and “why” to the salespeople, and the frontline managers, having already been well-trained on the content, should follow-up with one-on-one sessions and/or question-and-answer events. Cascade the communication; repeat as necessary.  One final point – we highly recommend a sales summit or get together within the first two weeks of the new plan year.  Particularly in periods of significant strategic changes, role adjustments, and new plan deployment, the face-to-face time greatly contributes to a successful rollout and a kick start to your sales results.

BSC’s Guide to Success: In Conclusion

We hope our Top Ten Tips help you ensure a successful plan assessment and design outcome.  These pieces of advice were identified while working with clients to solve their most daunting and important sales effectiveness and sales compensation issues.  There are certainly other topics worth considering, particularly around best practices in sales compensation design, which we will tackle in upcoming white papers, books, and publications.  But we are confident that the tips provided here can help you achieve a better design process and a better overall outcome.

Here’s to a future of better design processes and better sales compensation plan designs!

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BSC’s 2011 Guide to Success – Part 9

Each week, we will highlight one of BSC’s Top Ten Tips from our acclaimed Guide to Success. To download the full guide, click on to the Articles page.

To see last week’s post click here: http://bettersalescomp.com/sales-compensation/bscs-2011-guide-to-success-part-8/

9. Secure “Can-Do” Systems Participation

Companies are less likely today to accept systems limitations or unresponsiveness of IT staff as a reason to prevent enabling the optimal sales compensation plans.  In fact, more companies have invested or are evaluating the acquisition of a Sales Performance Management solution, so they can have better tools for enabling new plan designs.  That doesn’t mean there aren’t other systems priorities or competition for limited budget dollars, but at least you can get your calls returned.  Our advice follows:

  • Include budgeting needs in last year’s budget. What, too late?   Okay, well let’s not make that mistake for next year!  Whether you need a new SPM solution, an upgrade to an existing solution, or programming changes to existing administration software, build the dollars you might require into the budgeting process to protect your team from a non-funded project.
  • Consider the functionality of supporting systems, not just plan administration tools, which impact your project.  Sales reporting processes represent a critical element to driving salesperson engagement and to activating the motivation you hope your plan is driving.   Make sure sellers know where they stand and what they need to do to achieve that next level of payout or accelerator.  Other data/systems like territory account assignment, along with quota allocation and management, are intricately involved in the success of plan administration; they require focus and updating as the company shifts selling strategies or reacts to new or lost headcount. These tools need your love too!
  • Get your IT folks involved in planning early.  Start by understanding their timeframes and availability and ask them to help you with your design and implementation scheduling.  Seek their participation to help the team understand what the company “can do” to enable certain plan objectives, and have them help you with problem solving to find the optimal way to evaluate and administer any plan changes.
  • Learn from the market.  Specifically, use your contacts developed under Tip Eight to identify leading and new practices to address similar problems or challenges you are tackling.  They may also have references for vendors that can support you in the evaluation of new tools and solutions.  Learn from their experiences and share that with your IT stakeholders.

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BSC’s 2011 Guide to Success – Part 8

Each week, we will highlight one of BSC’s Top Ten Tips from our acclaimed Guide to Success. To download the full guide, click on to the Articles page.

To see last week’s post click here: http://bettersalescomp.com/sales-compensation/bscs-2011-guide-to-success-part-7/

8. Include Outside/Market Perspectives

The old adage starts as follows:  “If your brother jumped off a cliff would you do it too?”  It makes sense to conclude from that adage that just because you notice something in a benchmark or trend study, doesn’t mean you need to follow as well.  In fact, significant trends that require a competitive reaction or consideration are usually slower to evolve or are the action of a specific market competitor that won’t show up in a formal study.  Chances are you’ll hear about it from a recruiter or one of your stronger employees.  Still, keeping an ear to the ground and an eye on the market is important to not be caught by surprise by one of your colleagues in another department.   Some recommendations:

  • Encourage your company to participate in studies.  Most require only a reasonable amount of energy and they are a sign someone thinks the topic matters.  The data can be helpful and the individuals conducting the study will be helpful to you when you are looking for input on your special topic (yes, you should participate in the survey invites we send you!).  The most common studies, of course, comprise pay data studies performed by a number of targeted survey companies.  This data is certainly helpful, particularly for target and actual total compensation.  We typically caution companies to treat these data points as only directionally correct.  The market sources cannot tell you “the perfect number” to offer your specific roles, but they do offer additional points of reference for consideration.
  • Attend topical conferences.   Whether it is a Sales Management Association event, the WorldatWork’s Spotlight on Sales Compensation conference, or an SPM (Sales Performance Management) vendor’s annual users and prospects meeting (like Varicent’s Insight Conference), it’s valuable to take the time to attend and to meet fellow practitioners. The sessions and networking can be informative, confirm your practices, or give you new ones to consider. And if you ever need a new job, well, networking can work for that purpose as well!
  • Sponsor an industry forum or network session.  Work with a third party to organize and facilitate a hot-topics session with members of your industry.  Such sessions will often lead to the most pertinent information on things you care about most.  Hot-topic surveys in advance of the sessions can help to organize key discussion sessions. Participants should come prepared for in depth conversations not just about what companies do but what works and why it works for them.
  • Ask new hires from competitive firms or other leading companies. When you hire a new sales person, it can be helpful to leverage what they know about the organization from which they came.  Indeed, this type of competitive intelligence can often provide the freshest and most accurate approach to understanding market practices, leading to the consideration of new ideas and alternatives.

Outside perspectives should be carefully considered but certainly not followed without special consideration on your specific needs.  In some cases, prevalent market practices are far from best or what we like to call “better” practices. And neither may be an exact fit for your environment, but failing to consider other viewpoints or ideas will certainly hamper the chances for an optimal outcome.

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BSC’s 2011 Guide to Success – Part 7

Each week, we will highlight one of BSC’s Top Ten Tips from our acclaimed Guide to Success. To download the full guide, click on to the Articles page.

To see last week’s post click here: http://bettersalescomp.com/sales-compensation/bscs-2011-guide-to-success-part-6/

7. Garner Qualitative Input

Motivating behavior and rewarding for actual results represent typical goals of a sales compensation plan.  While data can test for the correlation to results, it becomes more of an art than a science to discern if your plan actually creates incremental or targeted activities in pursuit of those results.  BSC strongly recommends that qualitative input be gathered and presented to sales leadership and the design team.  In addition to providing perspective on how sellers perceive and react to the plans, the effort to collect field and manager input provides the opportunity to address real issues the sales team encounters.  It also provides a basis for achieving field buy-in to any recommended changes.

There are four methods for collecting field input:

  • Monitor and catalog activity with a web-based or call-in process related to questions, issues or challenges with the current plans.  This represents a passive approach to defining input and limits “field buy-in” impact, unless some confirmation of the issues is communicated back to those responding.  This effort can identify current issues but may not provide an exhaustive or go-forward assessment of the selling environment or any recent field changes. It’s a lower energy and lower impact approach.
  • Conduct an online survey.  This provides a broad touch and valuable data for report back to the field as new plans are communicated.  Survey results are best used to create conversations about the implications of the data, rather than to be used as raw facts.  While open-ended questions and requests for comment can add understanding, they don’t provide give and take on the “context” of the commentary.
  • Conduct focus groups of similar sales roles.  Staging focus groups with individuals who perform the same sales role can provide in-depth understanding of how salespeople actually perform their job and how the sales compensation plan impacts their activities or targeted results.  Combining dissimilar sales roles (e.g., major account lead with territory manager, or direct sales rep with channel sales manager) causes more time to be spent on surface discussions of unique job situations, rather than a deep dive into core issues shared by the participants.  The sessions should be well structured and should include:  reaction to survey data if available, analyses of issues and concerns, brainstorming of possible solutions, and testing of alternative options. Focus groups can be cost prohibitive as they require sellers to come to a common location, yet they can add a great deal to the understanding of your current situation.  This cost must be weighed against the strong participative and high quality interaction benefit they provide.
  • Interview top performers.  Conducting interviews of individuals in the top half to top quartile of your sales performers can allow for detailed information gathering as well as highly targeted participation messaging to valued contributors.  These are best for providing job specific and sales deal specific information.  Have the individual talk through the sales process with specific customers and detail the impact the compensation plan has on how they sell or attempt to influence the customer’s purchase decision.  Enough interviews are needed to provide critical mass of information for each role so as to avoid over-generalization of the individual situation to the total sales team.

We would be remiss to not point out that the sensitive nature of these data gathering efforts require assurance that individual input will be held in confidence. Outside third parties can be very helpful in providing a safe process and ensure information is shared in a non-biased manner to the design team.

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