How to Compensate Customer Success Managers
12 ways to build a Customer Success compensation plan that motivates and inspires alignment to organisational goals
Variable compensation; get it wrong and it can demotivate. Get it right, and the whole team, nay company, can benefit.
Over many financial quarters I have created, implemented, enjoyed (and hated), iterations of good, bad and ugly variable compensation structures, and have observed what drives the best performance and what almost always doesn’t.
I’ll leave you to determine what mix of base (salary) and variable (bonus) compensation is right for your company. The prevailing standard across the Customer Success discipline though is somewhere between 70:30 and 80:20, with most leaning towards the latter. I’ve also come across large and successful Customer Success organisations that have no variable compensation, i.e. the CSM receives 100% base salary. It’s an interesting and rare scenario but I quite like the idea, in theory.
Litmus Test
Before getting into the compensation elements, here are 3 questions to review every time you start planning next quarter’s compensation structure,
Can you easily measure it?
If you can’t, then your CSM can’t track against it throughout the quarter. If you don’t have the data readily available, or it takes you days/weeks to get the number… don’t do it. Simplify until you have the data or system in place to measure it.
What are the unintended consequences?
When you’re in the planning phase, leaders naturally focus on what they expect or want the variable compensation plan to generate in terms of an outcome or result, but often forget to think about the unintended consequence. When it gets to the last couple of weeks of the quarter, and someone isn’t looking like they will make their target, what natural human response will you get? What bad behaviours will the plan develop or encourage? How easy will it be for them to game the system?
Is it working?
In 1997, Jeff Bezos famously wrote a letter to the shareholders of Amazon and explained his philosophy on reversible decisions. Compensation plans are what Bezos calls a type 2 decision. In other words, it’s reversible, it’s not set in stone. If the compensation plan isn’t working… change it, don’t prolong the pain and misery.
Variable Compensation Elements
From here on out I’m going to look at the most common elements of a CSMs variable compensation plan 🎯, give you some pro’s 👍 and con’s 👎 of each, and provide a recommendation of why to ✅, or not to ❌, consider using the element for your compensation structure.
For all you skim readers, here is a high level summary of the rest of the article…
CSM Activity
🎯 Based on any of the day to day transactional elements of the CSM role. This could be anything from the number of customer calls, to the number of Quarterly Business Reviews held, to the number of Success Plans created/
👍 Over time this creates muscle memory and gives the CSM repetitive practice at the execution of key parts of their role. If the company or organisation as a particular focus or drive to get some activities kicked off, this can be a really effective way of encouraging it.
👎 This would typically be considered a leading indicator to more important internal outcomes and would typically be found as a common metric in a Sales organisation. Using activity for compensation drives a very transactional approach to the work and the customer and the biggest danger is that quality suffers in the face of needing to hit a quantity target.
❌ You could use this approach as a one off, but it really does have a short shelf life and limited productivity and effectiveness when repeated. My advice, don’t use the measurement of activities.
CSAT / NPS
🎯 Customer Satisfaction (CSAT) surveys are typically found in highly transactional, repeatable, and homogenous experiences, like a Support team or in a service industry like a restaurant. The Net Promoter Score (NPS) asks the question whether a customer would recommend a product, product, service to a friend or family member.
👍 Knowing that a customer will grade you after your interaction, and you have money riding on it, can focus the attention and mind to giving a really great customer experience. Statistical studies have also shown that NPS is a great predictor of renewal rates and overall retention of a customer. Used well, these are great leading indicators.
👎 While CSAT is focused more on individual behaviours, the NPS metric is about so much more than one single person, and for that reason it can be really hard to compensate an individual or team on it, as most times the respondent will often be thinking about the product. To make it work effectively you also have to have a really good sample size, on a consistently regular basis. Surveys are often very emotionally driven, and people are more likely to respond in negative circumstances than positive, thus skewing the results.
❌ You absolutely should be tracking CSAT on transactional experiences, and tracking NPS score at a company level but my recommendation is not to be tempted into compensating on it.
Pipeline Generation
🎯 If a customer expresses interest to purchase more, or a CSM identifies new stakeholders who aren’t using the solution but could be, these can be passed to the Sales team to start working on.
👍 CSM’s can find themselves in meetings and activities where Sales people aren’t, so rewarding a CSM for the identification of opportunities can be really positive
👎 There are other teams and roles who are compensated on this element and adding the CSM into the mix then creates conflicting interests and the unintended consequence of turf wars. If this element is targeted it then becomes a distraction from the Customer Success job at hand.
❌ I wouldn’t build this into a regular quarterly bonus, however it does make for a really good reward element so you might consider going half way any providing a capped spiff.
Logo Retention
🎯 Logo retention is typically measured in quantity of logos retained rather than the value of logos retained, since the dollar value of retention is considered Gross or Net Renewal, explained later.
👍 Don’t underestimate the value of a logo on your website or reference page. Retaining a Starbucks, Nike, or Uber, gives you big credence when selling to other customers. If you retain the logo, it can also represent a future opportunity to grow, since its harder (and more costly) to win a net new customer than it is to grow an existing one.
👎 Logo retention numbers hide the true value impact to your company. If you have a $100,000 customer and you only retain $5,000, that’s going to hit your bottom line hard, and there’s a fair chance they will churn next time. This creates a false economy and perspective of success
✅ For me, the pro outweighs the con. When you walk into a new sales opportunity and you’re able to reference your customers, that’s huge. What’s even more valuable is if you have an advocate in that account who will be a reference for you (explained later under Advocacy)
Onboarding / Time to value
🎯 From the moment the customer becomes a customer, how quickly can you get them setup and receive value and benefit from using your solution. In today’s cloud economy where we are ‘always on’ and the customer demands simplicity, after buying a new solution a customer expects to be up and running quickly.
👍 The faster you can onboard a new customer, and demonstrate they are getting value from the solution, the longer you have to expand and grow that customer before the next commercial anniversary.
👎 Onboarding can be a very short term perspective and the danger is if we are always focusing on the short term onboarding then we overlook the ongoing and longer term need to correctly onboard and upskill new users. This element is also highly transactional and distracts the CSM with things that should be automated.
❌ It’s definitely a really important metric to measure and relentlessly focus on speeding up, and this would be one of my crucial business metrics to measure, but I wouldn’t compensate on it. An alternative to this might be to consider using a License Utilisation metric (explained later) which longer term and more consistent view.
Advocacy
🎯 There are a number of advocacy activities that could be measured, but all have the underlying premise that either a customer or someone within a customer is willing to advocate your product on your behalf. This could come from things such as case studies, testimonials, sharing of content, social media activity, reference calls with other customers, hosting or participating in events.
👍 The advocacy activities listed above are all highly valuable, and come from very strong relationships. If you can compensate for the right behaviours, that lead to these, the power of an advocate can have a significant multiplier effect.
👎 Advocacy can be hard to capture at scale, across a large Customer Success organisation, and much harder over a short space of time like a financial quarter. It can create shallow behaviours that lack authenticity and genuine appreciation, if the CSM is being encouraged to set these up purely for financial gain.
❌ There’s no doubt that an effective advocacy program is important, and probably only Marketing is better placed to identify advocacy opportunities than Customer Success. If a CSM is doing their job well and creating good relationships then advocacy is a very healthy byproduct. There are many advocacy marketing tools on the market and I much prefer basing spiffs or spot bonuses based on the gamification that most of those provide for.
MBO
🎯 Management Business Objectives (MBOs) are used to help focus individuals on achieving outcomes that are often closely tied to advancing or improving something in the business, or developing the individual in an area of their role.
👍 The MBO allows flexibility to create a target that is important or necessary for a short period of time, such as a quarter. It can be changed quarterly which means as the business or individual grows and develops, the goal can change too.
👎 The MBO has to be measurable, meaningful and achievable and because of its flexibility and tendency to be more general in nature, it can distract from the core responsibilities and outputs of the CSM role. Creating new MBO’s for each team member, often with a new MBO each quarter, is very time intensive and requires a lot of planning prior to the quarter begins.
✅ MBO’s are good, but I would tend to recommend limiting them to just 1 or 2 quarters. Only use them if there are meaningful projects or improvements to be made in an individual (such as onboarding or personal development) or the organisation (transformation, implementation, developing new practices).
Feature Adoption or Usage Metric
🎯 Understanding how a customer is using your solution will give you insight into the effective use and value being gained. If they aren’t using all of the solution, especially the bits that you know make them, their process or use case really ‘sticky’, it means switching to other solutions could be more likely. Measurement and monitoring could be done by key features of the solution. More advanced than that, are metrics which are based on customer behaviour or engagement in the product. The Financial Times has a usage metric for their subscribers based on recency, relevance and frequency. In the past I’ve used breadth, depth, and frequency to score a customer’s use of our solution.
👍 This is a really strong metric for understanding the health of a customer and their intention to continue using your product in the future. Backed by data, it can be clear where improvements are being made and is easy to calculate a conclusive point.
👎 The struggle often comes in knowing how a usage metric can be affected by the CSM. Because there are external factors and behaviours involved it can be difficult to see a connection between CSM action and usage. Setting the threshold or boundary at which a CSM would be paid out is sometimes hard if you don’t know what a good adoption rate is, or by how much you are able to improve it over a quarter
✅ Despite the down sides of this, I’m a big fan of focusing on adoption and usage as a compensation element. Its easier in a more mature CS organisation where the data is well understood. This should definitely form a fundamental metric in your business, although it might not be a compensation metric from the outset.
License Utilisation
🎯 If a customer purchases 100 licenses, how many of the licenses are being used. If 40 are occupied and 60 are unoccupied, that represents a license utilisation of 40%. In other words, how many ‘bums in seats’ do you have. The un-utilised seats represents a risk of churn.
👍 This is a fundamental leading indicator for future renewal. If a customer has un-utilised seats, there’s a high chance they won’t need them and renew them in the future. This element is one of the clearest risk indicators to give visibility of future need.
👎 Increasing utilisation rate does not tell the whole story on its own. You can get all of the licenses assigned, but if they aren’t being used it’s as good as not assigning them at all. It is also highly susceptible to being gamed if all you’re needing to do is show a license as used.
✅ I like license utilisation as a compensation element because it’s clear, easy to calculate, and has a strong connection to future renewal. However, if used, it should only be a portion of total compensation and it’s a good idea to also use a more comprehensive adoption metric to complement it. License utilisation is also a much stronger, and consistent metric over the long term, than the onboarding metric discussed earlier.
Net or Gross Renewal Rate
🎯 This is a key business metric that everyone all the way up to the CEO will care about. Gross renewal is the % of $’s that were renewed, out of the proportion of those that were up for renewal. The maximum gross renewal rate would be 100%. The net renewal takes into account growth/upsell that occurred as well. In the subscription economy, a company relies on attaining a world class gross renewal rate >90% and net renewal rate >120% to be successful over the long term.
👍 If the CEO cares about these numbers, you should care about these numbers. This compensation gives really good alignment across the company and involves everyone pulling in the same direction. This is the number 1 metric that all subscription companies are measured on. This could be tracked and compensated at a company or team level because if we all succeed, then we all get paid. Alternatively, if a CSM is responsible for the commercial transaction, then tracking this at the individual level is a really good idea.
👎 When changing from an individual metric to a company or team based number, be careful about the cultural impact. Some team members may struggle with being paid on something that isn’t directly influenced by their actions alone. Because the renewal rate is a point in time metric, it doesn’t always take into account the year that preceded it. If the renewal rate is compensated on an individual basis, you’re going to want to spend a lot of time ensuring everyone’s book of business is balanced for risk, complexity, value, and $’s across the year.
✅ If the CSM owns the renewal transaction, then compensate on gross renewal at the individual level. If the CSM does not own the renewal transaction, then a team based gross renewal compensation is better. Company level is good, but just be mindful that there can be a lot of variation in regions and segments, which gives a feeling of being out of touch with the overall metric.
Expansion Revenue
🎯 Somewhat similar to Net Renewal Rate, a CSM could be directly compensated for the revenue which they grow the account by.
👍 The more people focused on bringing in revenue, the better, right? If a business unit is directly contributing to the revenue of the business then its really easy to calculate their impact and justify their existence, something which the CS org sometimes struggles with.
👎 Revenue targets will always trump all other targets and will always garner the focus and priority over anything else. Focusing on revenue, rather than customer usage and outcomes, takes a CSM to far away from the core of what the role should be
❌ Don’t do it. Expansion revenue targets and compensation should sit with the Sales team.
Customer Outcomes, Objectives, Goals
🎯 Having defined, with the customer, the business reason why they bought your solution, set outcomes based and compensate for that. For example, if your solution is used to reduce cost, improve time to market, increase quality of an output, then define a measurable goal with the customer and compensate the CSM based on that.
👍 There is no faster way to achieve alignment with a customer than when you are using their objectives and business language. It will drive greater focus and empathy if their success is your success.
👎 It can be really hard to define measurable goals and outcomes that are directly related to the influence of a CSM. Many times even the customer won’t know how to measure what they want to achieve and so compensating on that, when there is ambiguity, can be a really scary place to be.
✅ I’m only saying this should be a compensation element if you are in a really mature organisation, working with a really mature customer, or operating in an industry where outcomes are clearly understood and identifiable. For the majority of CS organisations, getting to outcome based compensation is a future desire.
CALL TO ACTION
👉 If you are a CS leader, ask the 3 questions about your CSM compensation plan; are you able to easily measure the metric in the compensation plan? Are you seeing any unintended, negative, consequences of compensating on that element? Is it working, are you seeing the behaviour or outcome you wanted?
👉 If you are a CSM, ask yourself the same 3 questions from an introspective point of view; Am I easily able to measure my progress? Am I exhibiting any negative behaviours? Am I giving it my best effort to make it work? how you can constructively and positively improve and lean into your current compensation plan, and have you sought to understand the reasoning behind why your compensation plan was designed the way it is.
