Compensation is always a hot topic. We’re in the business of making money for our companies, customers and ultimately for ourselves. As leaders, designing a thoughtful compensation plan for our teams can mean everything in attracting and retaining top talent.
Pair compensation with the emerging SaaS darling that is Customer Success and headlines like “CS Careers and Compensation Skyrocket in 2021”, one can quickly start to feel the pressure. But how do you start to build your first CSM compensation plan or what should you think about when you need to redevelop an existing plan?
I’m going to share what questions revenue leaders should ask themselves as they’re designing a fit for purpose plan based on monetary payouts ($$$ and not “total compensation” in the form of benefits and potential equity). I also won’t go into what’s market rate compensation for Customer Success Managers and how to determine it. There are many other sources for that like here, here, here and more here.
The three questions you should ask yourself:
- Are CSMs responsible for revenue?
- What behaviors am I trying to reward or incentivize?
- What issues am I trying to mitigate?
Going through these questions will give you a head start in designing a great compensation structure. When you answer these questions, you’ll be able to find clarity and can then fill in the details of the main components of your future structure.
So let’s get started with the first question you should ask yourself.
Are our CSMs Responsible for Revenue?
You’ll want to start with a solid understanding of the role and responsibilities of the CSM. The role of the CSM is still very highly varied across tech. The most important role distinction for compensation is whether CSMs own revenue.
This important question is a much debated topic. But I’m not here to debate you on this. That can be a topic for another day. Either way, you should have a point-of-view and an aligned organizational structure that fits that POV. Why?
Revenue ownership impacts how to structure the variable component and whether to make it MBO, bonus or commission based. If the answer is no revenue ownership, then an MBO or bonus structure would be the default choice. In choosing to pick between both of those options, I’d steer revenue leaders away from MBOs – they are less objective and can sometimes be harder to tie back to outcomes that directly impact the business. A deep understanding of what the CSMs role and responsibilities are, can help clarify whether to focus on MBO or bonus.
If the answer is yes, that CSMs do own revenue, you should steer towards a bonus or commission-based structure. You’ll also want to clarify which type of revenue they own – renewal revenue, expansion and upsell revenue or both.
This further clarification can help you make a call on how to split focus on renewals vs new revenue. And how you split renewal vs new upsell or expansion revenue really depends on the company’s maturity and focus.
Generally, CSMs without revenue responsibility have an 80 / 20 split for base vs variable. Some teams go as high as 70 / 30. But once you start to move base as a smaller percentage, you get into sales-led roles like Account Management.
Designing compensation is all about rewarding and incentivizing performance so you should be clear on the behaviors and outcomes you want to drive.
What behaviors am I trying to reward and incentivize?
The difference between a reward and an incentive is a small but important one. A reward is something that is given to an employee. In terms of compensation, it’s money given for performance achieved. Whereas an incentive is a motivating factor. The idea of a reward can be a motivating factor within itself, so the lines do blur a bit here. Either way, rewards and incentives are interesting considerations when designing compensation.
For my team, I wanted to reward CSMs on gross revenue retention. I don’t think CSMs should own the closing out of a renewal, but I do believe that the work they do, day in and day out, makes our renewals easier to achieve. They are responsible, although not fully accountable, and hence the reward is in the form of their bonus. Another reason why I chose a revenue retention goal is to tie CSM compensation to a measurable and impactful company goal. I could have based it on other metrics like our customer NPS or time to launch, but revenue retention is the ultimate business outcome.
As for behaviors that I want to incentivize, this was tied to the “upside” of the great work a CSM can do, which translates to expansion revenue.
I wanted to incentivize CSMs to look for and assist with new dollar revenue on their accounts through expansion. I don’t want to turn them into sellers, however, so this incentive is not a part of their bonus, but instead, sits on top of it, like extra frosting on top of an already delicious cake. This incentive is structured as a commission for every dollar expanded on their accounts.
Since compensation structures can drive behaviors, rewards and incentives, they can and should also be designed to mitigate certain issues.
The final question you’ll want to ask yourself is – what potential issues am I trying to mitigate?
We’d been evolving our CSM compensation plan and a few issues emerged that I wanted to design for. One issue was that since CSMs weren’t responsible for the renewal, they started to feel distanced from the actual outcome. Of course our CSMs felt bad when a customer churned. That’s months and oftentimes years of hard work and effort that essentially gets wiped away. It’s also the loss of a business and personal relationship.
So yes, CSMs “feel the churn” but they were distanced from the impact as they had little skin in the game in terms of compensation. So I designed the compensation plan to have CSMs have more in it. I wanted a better way to tie pay and performance so I tied bonus to revenue retention with a sliding scale to determine their payout. For 90% revenue retention they get paid out 100%. Below 90% and there’s a sliding scale of 0-100%. If we get 90-100% rev retention the payout is 100-120%.
Now CSMs still focus on the customer’s outcomes but they will also have to focus on our company’s financial outcome as well.
The other issue that I wanted to proactively address was the issue of big expansions on a CSM’s account. We commission our sellers on every dollar in ARR that they sell, and that includes on existing accounts. Often those large expansions happen in part to the CSM successfully showing value and building a bigger vision with our customer. In our old compensation structure if a seller expanded a $50k deal, the seller got their commission and the CSM got a pat on the back. Now we commission CSMs on every dollar expanded or upsold as well.
Bringing it all together
These three questions are important in helping you design a great compensation structure and plan.
- Are CSMs responsible for revenue?
- What behaviors am I trying to reward or incentivize?
- What issues am I trying to mitigate?
Once these questions are answered you can now start to fill in the details and build out the main components of the CSM compensation plan.
To simplify, there’s a list of the components that matter most:
- Base Structure: Options here are Base Salary only vs Base Salary + Variable
- If you choose Base + Variable, The Split: Options here are generally in the range of 70 / 40 to 90 / 10 with a median of 80 / 20
- Variable Structure: Lots of options here from MBO (management by objectives), bonus to commissions; and schedules tied to determining dollar payouts
- Additional Incentives: Lots of short term, longer term and cross team incentives to drive specific behaviors and outcomes
- Frequency: Tied to fiscal quarters or some other time frame (monthly, half year, etc)
You could just jump in head first and start to put details to each of these bullets, but that would be less strategic and comprehensive. Instead, use the 3 questions to thoughtfully craft a compensation plan that accounts for the organization you’ve designed and to encourage the behaviors and outcomes you want your CSMs to exhibit.