2958_SM_OverpayingIncentives_Blog (1)-1One of the most common metrics companies use when developing incentive programs is compensation cost of sales, or CCOS. Here’s how CCOS is measured, how it can vary by company and how to tailor it to your incentive program.

CCOS is measured as compensation cost (the numerator) divided by sales (the denominator). While CCOS is generally between 3 and 9%, there are some things to consider:

  • CCOS isn’t measured the same universally, by company or by industry. I’ve seen surveys where the comp costs only included the salesperson salary and variable pay, while others may include distribution and marketing costs.

  • CCOS can vary based on various factors related to the incentive plan (see table below). For example, higher-margin products tend to result in higher CCOS. More mature and stable businesses tend to have lower CCOS. Smaller companies tend to have higher CCOS because larger companies tend to have higher sales per salespeople.

Product Margin

Higher margin = higher CCOS

Volume Deal Size

Higher volume = lower CCOS

Business Maturity

More mature = lower CCOS

Revenue Crediting

Can affect the sales calculation

Pay Philosophy

Paying above market = higher CCOS

Tenure and Job Roles

New job roles = higher CCOS

Quota-Setting/Company Performance

Over performance = lower CCOS

 

When putting together an incentive plan, it helps to calculate CCOS and see how it compares to some of these benchmarks.

Additionally, incentive plans tend to be (and should be) based on some expectation of pay for performance. It’s pretty standard to relate CCOS with the size of the sales force, so to align CCOS with expectations, a company would either need to downsize the sales force (fewer people = lower CCOS, assuming sales don’t fall a proportional amount), increase the expectations on the sales force (sell more to earn the same amount), or decrease the incentives (reduce the upside leverage). As you can imagine, none of these will go over particularly well with the sales force, so you need to proceed cautiously if the company wants to decrease CCOS. Overall, by keeping these factors in mind, you can use CCOS to make your compensation plan more efficient and, ultimately, more profitable.


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Topics: sales compensation, sales comp plan, performance-based incentives