Variable Compensation Models for CSMs

If you, as a Customer Success leader, struggle to measure or communicate the contribution your CS organization makes to overall company goals, you’re not alone. It’s one of the most common challenges CS leaders express.

As you and your leadership team consider measuring sticks, it’s likely revenue will come up, and for good reason. For starters, it’s probably your company’s end-goal, into which all other goals flow; on top of that, it’s already being measured somewhere. You and your leadership might agree to measure your impact with a revenue retention goal.

With that goal in place, one tried-and-true way to deliver a good result is to tie the goal to a variable compensation component. Let’s now consider some of the choices CS leaders have when choosing a variable compensation plan for their contributors.

COMMISSION

People should only be measured on results they more or less control – this is a cornerstone of good leadership. Commission plans may sound scary, but not if you mold them to fit the scope of your team’s control.

You may have a team, or segment, where your CSMs are responsible for net revenue retention (NRR). (A fast definition of NRR: NRR = [renewal revenue + expansion revenue – churned revenue] / revenue baseline). In that case, a CSM might earn commission on every dollar that’s billed each month, no matter from where. You can calculate the commission rate on your expectation – should period-end NRR be 100% of the baseline? If your company is struggling, maybe 90%, or if you’re growing aggressively, maybe 120%.

Maybe your team or segment has a CSM+AM approach where the CSM is responsible for gross revenue retention (GRR; GRR = [renewal revenue – churned revenue] / revenue baseline) and the AM is responsible for the expansion revenue. In that case, your CSM commission plan has the same structure as the NRR plan, but with lower goals, since they don’t get credit for the expansions. The AM would have an expansion commission plan similar to a sales plan. In this way, both CSM and AM are measured on their own part.

“But wait!”, you say. “My CSMs and AMs aren’t in control of their results! Customers cancel and expansion deals are lost because of Support hold times, Product not delivering the roadmap”, and so on. If you truly can’t control those things, then you must track the reasons for those churns and losses. Tracking them allows you to do two things:

1. It gives you the option to “throw out” those churns and losses from a CSM’s results. You may have to get creative with how you recalculate your goals midstream if you use this path. You must make 100% certain that no one is abusing these reason codes to get a free pass on issues they could have controlled. Be honest, and your credibility will stay intact.

2. It allows you to give absolutely invaluable feedback to your executive and departmental leaders. You steer how your company prioritizes improvements by giving a voice, and supporting data, to where you’re coming up short in the market. You’re no longer where the churn finger is pointed; you’re the one orchestrating the fix. NRR is not a Customer Success Metric; it’s a company metric that comes from Customer Success.

One final word about commission: commission doesn’t have to mean quota. In fact, by foregoing quota, your plans are both company- and CSM-friendly. Consider:

• Even without quota, you can set goals or expectations around what good performance means.

• Calculate your commission rates based on how much weight you want them to carry. Working alongside your Finance team, make sure commission rates still leave the deals profitable for your company so that deals are always looked on as positive things.

• Think about leaving commissions uncapped (or possibly even accelerated after certain milestones are hit) to reward achievement.

• Don’t move the goalposts! If a CSM meets a milestone and earns an accelerator, let them earn accelerators – after all, you designed the plan so deals are profitable even with accelerated payouts.

• Change commission rates as little as possible, especially if goals increase year over year. If someone’s goal doubles in the new year, and their variable compensation amount also doubles because their commission rate stays the same, they will be positively motivated to achieve the goal.

ACTIVITY BONUS

In an early-stage company, it’s possible nobody knows exactly how to deliver good revenue results. You’re still experimenting with the cause-and-effect relationship between revenue results and the activities that may (or may not) support them.

If this is your situation, it may make more sense to create a bonus plan to incentivize CSM activities. For example, let’s say you manage a Strategic customer segment, and you think your Strategic customers will renew and expand more if you deliver quarterly EBRs. You could create a bonus plan centered around how many EBRs a CSM delivers, or what percentage of customers always receive one.

The key here is, this type of bonus needs to be short-term. If your guess about EBRs was right, pivot to a commission plan and incorporate EBRs as a necessary play in your playbook. If not, pivot to trying something else until you find what works. But, remember necessity is the mother of invention – you might find the answer faster with a commission plan than by experimenting activities one at a time.

It’s also possible you lack the ability to measure revenue accurately even if you wanted to. You’ll demotivate and lose people if you tie their performance to unreliable metrics. If this is your case, it’s okay to use an activity bonus as a stopgap until your reporting improves.

SPIFS

Lastly, you may need to supplement your variable comp plans with SPIFs (Sales Performance Incentive Funds) from time to time. You typically see SPIFs used for small and unforeseeable, but urgent, projects that come up midstream. A normal comp plan might make a reference to SPIFs being a possibility, but wouldn’t contain detail since they’re unknown at the time of writing. Examples of SPIF-compensated things would be things like a short-term push to create viable opportunities, a scramble to get all customers to install an urgent version update, and so on.

Some companies have a set SPIF budget at the beginning of each year – often, these companies physically buy tens of thousands of dollars worth of gift cards, lock them in a safe, and bring them out throughout the year as needed for projects and contests! SPIF alternatives that might resonate better with people are perks like time off and team events.

Variable compensation is, and will probably always be, a topic of great debate in Customer Success. When used well, variable plans can give CSMs and CS leaders feelings of purpose, accomplishment, and connection to their company.