Calculating the Compensation Cost of Sales (CCOS)

Compensation Cost of Sales (often shorted to CCOS) is a major component of a company’s expense on sales. Some people like to equate it with commissions, something a few experts disagree vehemently about. If CCOS is not commission, what is it, and how is it different from commissions?

Far different from sales commissions

Let us understand what commissions are and what Compensation Cost of Sales is. Commissions are the final amount of money paid out to the sales person for having brought about the sale. Let us assume that a salesperson sells a car for $30,000. If the dealership just pays him out say, $300 for the sale, it is commission.

On the other hand, how Compensation Cost of Sales is different is that it includes other costs accruing to the sales force. To take the example above; if the salesperson were to be paid not only the $300 upfront for selling  the car, but also other items like travel, which she would have made to meet an offsite client, her accommodation, phone bills, etc., all these would amount to a higher expense from the dealership’s point of view. These are, in its perspective, the costs associated with compensating the salesperson for having brought the sale about.

So, Compensation Cost of Sales is more comprehensive and includes a far greater number of factors and expenses. Having said this; it is not always necessary for a company to have a Compensation Cost of Sales in place, let alone have one that is on the higher side. Let us consider why.

Depends on the product

In some businesses, Compensation Cost of Sales is an important factor. Generally, but not necessarily, premium, meaning expensive items require a higher CCOS. For example, if the salesperson in the above example were selling apparels at a retail outlet, the concept of Compensation Cost of Sales would be redundant. It is understood that the apparel would be sold only at this outlet. So, there is no need for the travel, the phone calls, accommodation and all such items. Also, given the inherently low unit price of the product, the salesperson is generally paid just the salary.

Company is a factor too

Apart from the nature of the product or business, company policy is also a crucial determinant of Compensation Cost of Sales. Even if a company is dealing with high quality products, its salesmen may not be eligible for Compensation Cost of Sales. In totality, it has to be understood that Compensation Cost of Sales is fluid and is dependent on a number of factors. But it certainly is a factor for businesses.

References:

http://www.sibson.com/publications/perspectives/Volume_18_Issue_2/understanding-ccos.html

http://bettersalescomp.com/sales-compensation/ccos-introduction/

 

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