There is no question about the ability of an effective Customer Success team to significantly change the course of business in a company. There is, however, a wide-ranging debate about the best structure for effective Customer Success compensation plans. To some, anything that even looks like a commission scheme for CSMs is complete anathema, an inherent conflict-of-interest issue. To others, commissions are not a problem; they’ve been tested and found to work well. In practice, there are many variances and blends in place across the worldwide Customer Success community. All rely on three basic strategic approaches to compensation for CS teams.
The following is a basic definition of strategies, and is intended as a starting point for the conversation in your company about compensation.
Base Only Plan:
This is a 100 % basic salary plan with no bonus or variable component for CSMs. There is no reward or bonus for the attainers that affect the motivation of the CSM teams to achieve more, or penalty for the under-achievers to push them towards improvement. Such an approach can lead to a “status quo” performing team.
Base + Bonus Plan:
In this approach, there is a fixed base salary with a small bonus structure for the team. Bonuses are usually in the form of Objective Plan Management, where CSMs are measured by the completion of plans and objectives. The majority of objectives are quantitative and are aligned with the KPIs Team reward system of the company. The downside to this type of compensation plan is that it does not encourage individual CSM excellence.
Base + Variable Plan:
This plan has a fixed base salary plan with a variable component based on the performance of CSMs. The essence of this approach is that it is a performance-driven accountability plan that generously rewards CSMs for over-achieving their expansion and retention targets, and that motivates CSMs to do more for the company. Note that the performance criteria should recognize how the CSM has increased ROI for the customers as a key factor. This is often done by measuring progress on individual Customer Success plans negotiated with the customers.
While it can take somewhat more time to design and implement, the Base + Variable compensation plan is generally recommended due to its effectiveness in motivating the CSMs and thereby increasing the benefit to the company. There are situations, however, in which the Variable compensation plan is not applicable. For example, in the absence of clear definition of objectives, the impact of unseen factors may have an undesirable impact on CSM compensation. Lack of support from other members of Sr. Mgmt for the specific performance can also be a serious barrier.
Setting up your effective Variable Compensation Model
When setting up a Variable CSM Compensation Plan Variable Compensation Model, there are four key elements to be considered.
1.) Determine the On-Target Earnings (OTE) Split
First, you need to determine the realistic forecast of the total potential compensation that CSMs can receive if they meet their performance targets referred to as On-Target Earnings before deciding on the base pay or commission rate. A good example of an ideal base-variable split for CSMs is 80/20, 80% base pay, and 20% variable pay.
2.) Identify the KPIs for the Variable Compensation Plan
After determining the OTE, the next step is to identify your KPIs that will form the basis of your compensation plan. To keep things simple, start by focusing on two KPIs that deliver on the main objectives of the CSMs and the company: revenue retention, and revenue expansion.
3.) Determine the Variable Split
Now that the two KPIs have been identified, you need to determine the part of the variable compensation that will be assigned to each KPI. Since retention is a key responsibility of CSMs, more weight should be allocated under it. For example, 60% goes to customer retention and 40% to expansion deals.
4.) Set Targets
The final key element is to set the targets that CSMs need to achieve. It is important to work with your CFO to set levels for retention and expansion to ensure that the combined objectives for the team are fully aligned with the objectives for the company. Once the targets are set, identify the sliding scale of those who are under-performing and over-performing, and reward those over-performing CSMs for their excellent results.
Beyond the Customer Success Team
A compensation plan is a very powerful tool no matter which department it is intended cover. Whichever strategic approach you use as a basis for your Customer Success compensation plan, be sure that it is aligned with the compensation scheme for Sales, for example. Incenting the CS team to focus on retention while Sales is pushed to close any deal they can makes for obvious trouble over time. If both Sales and Customer Success are encouraged to put retention and expansion potential at the forefront, the chances for collaboration and cooperation between the two are much better.
Change is inevitable, and your compensation plan needs periodic evaluation and alteration in order to properly adjust and respond to new developments. The re-evaluation should take place at least every other year if not yearly to keep your plan finely tuned for your business model and organizational structure.
Further Resources and Reading
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Irit Eizips, CCO, CSM Practice
Irit Eizips is a Customer Success thought leader, with over 20 years of experience helping a diverse list of clients, from startups to Fortune 100 enterprises, establish a proactive and scalable customer success practice. Irit is frequently featured in podcasts, books, and industry events as a subject matter expert on customer success operations and strategy. Irit is the CCO for CSM Practice, a Gainsight partner since 2014. CSM Practice is a boutique consulting firm specializing in building customer success programs at scale through the use of automated playbooks and client data analytics. Connect with Irit Eizips on Twitter, LinkedIn, YouTube or sign up for her weekly Customer Success Newsletter.
CSM Practice specializes in the design and implementation of best of breed scalable customer success programs using an optimal combination of strategy, playbooks, and technology. CSM Practice is the first to develop accelerated methodologies for customer success programs and is continuously producing thought leadership content for the Customer Success community. The company was founded in 2014 and is headquartered in Sunnyvale, California. Learn more at www.csmpractice.com. Additional information can be found at www.csmpractice.com or connect with CSM Practice on Twitter, LinkedIn, and Facebook.