Posts Tagged ‘compensation costs’

Introduction to Compensation Cost of Sales (CCOS)

Monday, May 6th, 2013

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 misunderstood and mis-applied concept in sales compensation is CCOS, compensation cost of sales. In this blog, we will examine what is CCOS and why should a company look internally rather than externally when using this important metric.

What is CCOS and Why Should a Company Look Internally rather than Externally?

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 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 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.

Answering the “Better Question”: Acceleration Rates

Tuesday, July 24th, 2012

By Clinton Gott

As a boutique sales effectiveness and sales compensation consulting firm, we at Better Sales Comp Consultants often are asked well-intended questions through our website, in business development meetings, or during active projects from senior level people in leading companies.  Often times, these questions are asking for benchmarks or specific compensation practices that are out of context and lack a clear answer without digging more into the situation and background. To best address these questions, we often need to consider the real or what we call the “better question”, which helps ensure the answers have real meaning and offer true solutions.

Common Question: “Our sales compensation plan acceleration rate is 3x. Is that the right number?”

This question is directionally correct, although it overlooks the true underlying topic and does not have a true black-and-white answer for which many may hope. To help answer it, we need to step back and translate the question into something that better addresses the real issue:

Better Question: “Do our acceleration rates offer enough market appropriate upside to our top performers?”

Companies like benchmarks. Identifying a 3x rate would seem like a simple number to compare to those found at other companies to see how one measures up. While seemingly logical, I think most would agree that the comparison itself isn’t all that valuable. Roles may be different, metrics are often different, goal setting methodologies are not universal, and achievement results can vary highly. The question really looks at each sales job and seeks to provide appropriate upside based on our potential achievement for each sales job.

Take two extreme examples. Company A is considering Account Managers with large revenue quotas who primarily manage current accounts with recurring revenue while looking for incremental penetration opportunities. Company B is considering new Business Developers with smaller quotas based on contract value (orders) who primarily focus on acquiring new accounts. If we consider that 135% achievement is stellar performance for the rep in Company A, while 200% achievement is possible for high performers in company B, we can start to sensibly consider the question, “Is our 3x accelerator the right one?”  The Company A “star” rep would earn 205% of target incentive, approximating a moderate 1:1 upside. The Company B “star” rep would earn 400% of target incentive, representing a more significant 3:1 upside.

As mentioned, the Better Question focuses on the notion of upside and whether our star performers are able to earn enough to keep them motivated, properly rewarded, and satisfied enough to stay as a member of our sales team versus trying to find greener pastures.

There are market and best practice upside targets that companies typically try to align to. Direct sellers often can earn 2:1 upside or greater. That’s the upside payment a company would want to target when setting the accelerators, and one can use historical achievement levels to help guide the design. Upside targets and trends often vary by role, and somewhat by industry, and can be supplied by those who consult on the topic, studied uniquely through industry networking, or gleaned from market pricing data (through analysis involving the 90th percentile of actual pay).

In our simple examples, let’s assume that both companies want to target a 2:1 upside. In the Company A example, the accelerator would actually need to increase to a right around 6x. At 135% achievement, a 6x accelerator would deliver 310% of target incentive and just over the intended 2:1 upside. In the Company B example, the accelerator should actually decrease to 2x. At 200% achievement, a 2x accelerator would deliver 300% of target incentive and the intended 2:1 upside.

In a large sales team and using a more robust exercise, a company should consider looking at achievement percentages by quota size, by specific sales roles, and by country/region. We would want to look at historical achievement data for the last two to three years, while also taking an educated guess on whether those achievement levels are logical and likely in the upcoming plan year. And then for a given accelerator option, you should do a sanity check on how much a top performer would earn compared to the incremental revenue results being driven. While upside is considered “self-funding”, you’ll inevitably need to defend the affordability of the acceleration rates to your finance department! Ultimately, setting the final accelerators combines a bit of science (the upside theory, the actual achievement results, the return on spend for incremental results) with some art (strategically identifying the preferred upside amounts, consideration of future achievement results).

When faced with common questions, reframing them into better questions can help shed light on the appropriate answers. In this case and on more than one occasion, I’ve witnessed intense benchmarking debates around topics like the 3x question above. That usually comes then with splitting hairs on whether the rate should be 2.9 or maybe 3.1, or some such nuance. End of day, the focus should be on creating a simple solution that offers the right amount of upside opportunity, which motivates, retains, and attracts top salespeople while inspiring average performers to reach for the stars.