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In today’s competitive customer success landscape, it is essential that CSMs are adequately and appropriately compensated for their work. To this end, I usually see three distinct compensation models: Base Only; Base + Bonus; or the preferred model of mine -Base+ Variable- to reward excellence in performance. Read further on why this structure can be beneficial when building out your ClientSuccess team!
Before I explain the benefits of a variable compensation plan, let me discuss the deficiencies of the first two models.
1. Base Only
CSMs should have incentives for both meeting and exceeding their performance standards. Without such motivation, a base only compensation plan can cause apathy within the team; lacking rewards or consequences, CSMs will likely not strive to push past status quo. A more comprehensive approach is needed that incorporates other means in order to properly align with organizational objectives while motivating individual employees – creating an environment of success on all fronts.
When making a switch from one compensation plan to another for your Customer Success Managers (CSMs), it’s important to make the transition as smooth and considerate as possible. While starting new employees on the desired model is straightforward, existing CSM team members are relying on their base salary, which should be taken into account when migrating them away from that structure. One option may involve adding bonus or variable pay elements onto an already established base rate, while in other cases annual raises can slowly shift toward targeted plans with minimal disruption – rather than focusing solely on lowering their current salaries right away.
2. Base + Bonus
The introduction of a Base + Bonus plan is an excellent way to incentivize Customer Success Managers and encourage better performance. This bonus model generally focuses on both quantitative objectives (retention, upsells or cross-sell measures) as well as qualitative ones (contributing to the team mentality). While this system does have its benefits, we must remember that there are still some shortcomings when it comes down to rewarding employees for contributors for their hard work.
Let me highlight one challenge by sharing an example.
At Omniture, one Strategic CSM in EMEA was a vital part of driving value for an esteemed Global Fortune 100 customer one year. Despite being left to their own devices, the tenacious and devoted team member used sheer dedication and hard work for the betterment of the account — periodically seeing assistance from sales counterparts every now and then.
After a successful multi-million dollar, multiple year renewal of one of the most strategic customers at the end of the year – largely due to the considerable efforts from the CSM – frustration mounted when it was revealed that this CSM would receive only $2,000 in bonus compensation. The sales rep on the account earned commissions which were significantly higher than what had been rewarded for all their hard work throughout the entire year. As a result, implementing an equitable Base + Variable structure for reward distribution is essential and absolutely necessary; not just to recognize and value performance accordingly but also ensure loyal customer advocates are created within each team who are empowered with rewards commensurate to success achieved! For more info on hiring and compensating CSMs, read here.
A CSM team’s success is best supported by a Base + Variable compensation plan, which provides clear responsibility for performance and encourages reward when goals are met or exceeded. This arrangement offers the ideal combination of incentives to ensure that collective objectives can be achieved.
Achieving both retention and growth is essential for long-term success. To ensure your Customer Success Manager team meets these objectives, I suggest creating a comp plan that emphasizes just 2-3 KPIs: specifically, retaining existing customers and expanding into new opportunities. Of course you’ll still want to track other initiatives (such as NPS or DELTs) but focus the incentive program on those two areas of performance.
Crafting a successful variable compensation plan for Customer Success Managers (CSMs) requires striking the right balance between simplicity and effectiveness. It’s best to keep things streamlined by focusing solely on 2 or 3 core Key Performance Indicators (KPIs). With that said, here are some of the essential elements you should consider when designing your CSM incentive program:
1. On-Target Earnings (OTE) Split
When creating compensation plans, a 70/30 to 80/20 split in favor of total on-target earnings (OTE) is recommended. Too much variable incentive could make the plan too similar to sales incentives; conversely, lower than 20% can create an insufficient bonus structure for adequate motivation.
A good compromise is a 75/25 base-to-variable split. In that case, a CSM with an OTE would have 75% ($75,000) allocated to base, and 25% ($25,000) allocated to variable compensation.
2. KPI’s for a Variable CSM Comp Plan
When strategizing your plan, carefully consider the KPIs that will serve as its foundation. Be mindful of keeping it simple by focusing on two primary objectives for a CSM: core retention and expansion (growth). To measure these goals effectively, track revenue generated from both existing customers’ renewals/retentions and up-sell and cross-sell opportunities with new ones. However, there are other measures you can use to evaluate success such as customer satisfaction metrics or quarterly projects – so keep an open mind when deciding which approach fits best with your strategy.
Nevertheless, ultimately your business is expecting your CSMs to retain and expand your customer revenue so don’t beat around the bush and just measure them against those metrics. Ensure they are aligned to core business KPIs and aren’t “squishy,” as Jason Lemkin would say.
3. Variable Split
Now that you have your 2 KPI’s identified, you need to determine how much of the variable portion will be paid against each KPI. I suggest you mirror the OTE split ratio (keep it simple) and use the same percentage split for retention vs expansion. Focus most of the variable on retention to reinforce the fact the CSM’s primary responsibility is retention.
Referring back to our example above, with a 75/25 OTE split you will then mirror that with a 75/25 retention-to-expansion split for the variable portion of the comp plan.
OTE Variable Split to Achieve OTE
OTE = $100,000
OTE Split = 75%/25% base-to-variable
Base = $75,000
Variable = $25,000
OTE Variable Comp with % Weight
Variable Split = 75%/25% retention-to-expansion
Retention = ($25,000 * 75%) = $18,750
Expansion = ($25,000 * 25%) = $6,250
4. Variable Targets, Payouts & Accelerators
Setting the right targets, payouts and accelerators for each KPI is key to creating a successful variable comp plan. To do this effectively, work with your CFO to make sure that all team goals are aligned with those of the company – misalignment can prove costly! Once you have set out an achievable target at 100% payout rate, then build in sliding scales based on under-performance or overachievement. I prefer to give CSMs accelerators to reward over-achievement and monetary upside for extraordinary results.
Here is an example of a sliding scale for each KPI.
Revenue Retention Target = 90%
Revenue Expansion Target = $50,000
Employing a small percentage compensation payout on expansion dollars can incentivize teams to over-achieve, but you need to decide if there should be an upper limit or allow for unlimited potential rewards.
Percentage of Expansion Revenue Variable Compensation Model
One model gives CSMs a just reward for their part in retention and growth. Incentivized by variable compensation, CSMs are kept distinct from the Sales team’s more leveraged package structure – 50/50 or 60/40 split. Plus, it rewards them with upside when milestones are exceeded. Collaboration between Customer Support and Sales teams is also encouraged to drive business forward on both accounts of customer experience – Retention & Growth.
With this strategy in mind, we can incentivize sales and customer success teams to work together for mutual objectives. By implementing a reverse compensation model for Sales focused primarily on new business growth with the remaining 25% directed towards retention efforts, their variable comp plans will be reflective of collaboration that leads to both advancement and sustainability.
Hopefully this helps guide you successfully configure your customer success manager compensation plans.