Understanding Customer Success Management Compensation Models

Understanding Customer Success Management Compensation ModelsWhat’s the best Comp Model for Customer Success Managers (CSM)? How can I create a compensation model that drives the type of behavior we need? What percentage of CSM comp should be variable, and what impact should individual vs. org-level performance have on the variable piece of compensation?

The more this comes up, the more I realize – especially when you’re first operationalizing Customer Success Management in your company, but very likely eventually – that when it comes to Customer Success, variable compensation is a red herring.

You’re going to spend a lot of time on it even when you don’t need to. You – and your CSMs – have better things to do than worry about this… like actually making your customers successful.

Let’s dig into this…

This post assumes you have a clear understanding of Customer Success. If you have time, I’d suggest reading The 8 Elements of Customer Success Management or, if you’re very busy, read Customer Success Management: An Executive Overview.

Okay, so…

First, Ask the Right Question

This question of “What’s the best Customer Success Management Compensation Model” seems to miss the fact that there isn’t a one-size-fits-all Customer Success Manager.

As Customer Success Management has evolved, so too have organizations, and it’s not uncommon to see a mix of Customer Success Analysts or Quants, Customer Success Managers, Customer Success Executives, Customer Success Operations, as well as Onboarders, Marketers, etc., spread across different customer segments and lifecycle stages.

You first need to go through the process of determining the Customer Success Practitioner Coverage Ratios. This actually starts with Logically Segmenting your Customers by understanding the Appropriate Experience for each segment.

Then you can start thinking about the compensation model, which starts with understanding…

Variable Compensation Models in Customer Success Management

Unfortunately, like so many other things in Customer Success Management, the idea of variable comp is a carry-over from traditional Account Management, where customers were treated literally as just an account… a number.

And to ensure those numbers were going up, the Account Managers were – and still are – paid a commission that incentivized them to increase prices on renewal, renewing contracts for longer and longer periods of time, and pushing for upsells and cross-sells that the customer often didn’t need, etc.

As we’ll explore below, the blame can’t be entirely placed on the Account Manager; the leadership is at fault for creating an environment where these types of customer-negative actions were routinely taken.

But the reality is, in an environment that lacks a Customer Success focus, if you want to expand within or from your existing customer base, these types of aggressive, often nefarious, actions are required. Why? Because the customers are not successful – or, if they are, it was in spite of the efforts (or lack thereof) of the vendor – and are therefore not organically predisposed to expansion. They have to be talked into it, convinced, or otherwise encouraged (strong-armed?) into expanding.

In an organization with Customer Success as the Operating Philosophy and Customer Success Management as the Operating Model, these types of heavy-handed tactics are simply not required to get the customer to expand their relationship with us.

Yes, Logical Account Expansion strategies and tactics are still required to ensure expansion happens on a predictably consistent basis, but even then, it’s only done in conjunction with the customer’s success.

And of course, Account Management has its roots in – or is an extension of – New Business Sales, and as we know…

New Business Sales Requires Incentives

Incentives are necessary to get salespeople to chase the newly made-up business sales goals that executives put in place.

I know it’s crazy to think of it this way, but when the company leadership says, “this is our sales goal for Q3,” that’s just a number they want to hit.

It’s based on hope, faith, some market and past performance numbers, and pressure from the board. None of that is bad; it’s just reality.

Based on that goal and the number of Account Executives (AE) you have, you come up with a number that each AE has to close; that number becomes their quota.

If they “hit quota,” you’ll hit your number for the quarter. If they don’t, you won’t hit your number. Simple.

Let’s say you need to close 100 deals in Q3, and you have 10 AEs. Generally, the company will provide some type of assistance in getting enough leads for each AE to close those 10 deals through Prospecting (SDRs) or Marketing (MQLs).

By determining the close rate of the average AE – let’s say that is 20% – they need to get 50 leads into the AE’s hands to ensure – based on averages – that these AEs hit their quota.

While the math behind this Predictable Revenue model is easy, the reality is it takes a special kind of person to do what is required to find and close new business.

And these people need incentives to drive them because new business is, frankly, not easy to land.

But with your existing customers, this type of incentive-driven upside potential simply isn’t required.

So…

What Actually Drives Behavior?

I used to say that “incentives drive behavior” and that incentivizing the wrong behavior would lead people to do the wrong things. An extreme case of this came to light a couple of years ago when Comcast made headlines for a recording of a “retention” rep trying to “save” a customer by any means necessary so they could meet their quota and actually get paid that month.

Based on my experience – and backed-up by Dan Ariely’s book Payoff: The Hidden Logic That Shapes Our Motivations – I’ve come to realize that incentives really don’t drive behavior.

So while it’s true that incentives can be used to influence behavior – at least in the short-term – something else is true, and that is: leaders drive behavior.

Leaders may use incentives where necessary, but real leaders recognize when to use incentives and when they aren’t needed.

And the opposite is true; poor leaders (maybe they aren’t leaders at all) will tend to jump to incentives as a shortcut to achieving their goals… and then end up wondering why it’s always so much work to reach those goals!

True leaders understand that for some people, incentives are not needed.

Real leaders recognize that some people will behave the way they behave, regardless of whether there is an incentive.

Leaders will often use bonuses or rewards for a job well-done – and to ensure that the person they’re rewarding continues to do a great job for them instead of going to another company – but everyone understands that the great job in question was going to happen even without the reward.

Increasingly, leaders building world-class Customer Success Management organizations realize that those rewards – whatever they are – are given on top of the market salary their team members receive, not part of a variable comp model.

But the reality is, in the….

Early Days; You Don’t Know what You Don’t Know

My suggestion is to avoid variable compensation models for your CSPs for the first year… or at least the first 6 months of your Customer Success organization.

The vast majority of the Customer Success executives and leaders that I’ve worked with and talked to about this tell me that if they had known that they could simply avoid dealing with variable comp in the early days, they would have. It was a distraction that would have best been avoided.

So even though they’re doing quite well today, they wasted resources, money, and ultimately time dealing with something they didn’t need to.

There are so many other things going on that you need to focus on, so don’t waste your time on this overly-complex-yet-generally-unnecessary part of building your organization.

You also need to ensure your team is focused on making the customer successful and learning from that process. Don’t distract them from this valuable process by forcing them to do certain things to “make their nut” when you aren’t even sure that that’s what they should be doing.

Frankly, you don’t know what you don’t know, and it’s not fair to have some portion of your employees’ On Target Earnings (OTE) tied to what you don’t know. How would you like that?

New Business Sales, even in a brand-new startup, is a well-known process. As long as you have product or market fit and know why what you’re selling matters to your customer, the process of getting in front of and closing that customer is relatively well established and understood.

But what is required to onboard customers and move them from one Success Milestone to the next – and how that differs across your logical customer segments – is not known at all. Sure, there are frameworks you can apply and playbooks you can adopt, but how it’s actually going to play out for your customers is not known. It can’t be; you’ve not done it yet.

As you take that first 6 months or year to learn, you may find that variable compensation has no place in your Customer Success org, ever. Or you may find that variable comp is going to be a lever you can pull to get more out of your team. I don’t know, and neither do you.

As you’re getting started, it’s in everyone’s best interest not to worry about that. You have much bigger things to worry about right now.

Variable Comp Considerations for Customer Success Management

If you’re going to go down the route of variable comp for your Customer Success Management organization, you’ll need to figure out what that looks like for each team member (or team member type).

Some CSPs will have a greater impact on the customer’s success than others. Some will work with customers who have much more exposure to a highly cross-functional representation of your team than others. Some customer segments will be very straightforward and more inclined to success than others.

When you hear that a CSM’s base salary should be 70% to 80% of his or her OTE, and the rest variable, that seems like you’re saying there’s only one type of CSP – a CSM – and that the one-size-fits-all CSM is real.

But it’s not. And there are many types of CSPs.

And all of that has to play into your model. Which is why I say it’s often a red herring.

It’s going to distract you more than help you.

I’d suggest figuring out the right type of talent you need to provide the appropriate experience for each customer segment, paying them market salaries, and having objectives (Management by Objectives, MBOs) that you measure them against to ensure they’re doing what needs to be done.

And keep in mind – and communicate this to your team – that all of that will evolve over time.

So if you’re trying to forecast spend over the next year, keep it simple, and don’t worry about variable comp. Figure in something for bonuses if CSPs exceed their MBO by a mile, otherwise, keep it simple.

Above all else…

Be Clear and Be Fair

You can provide bonuses or career path advancement as rewards for meeting those evolving objectives, but just keep it simple, pay as close to market as you can, and motivate your team through high-quality leadership while you learn.

Remember that some CSPs have more control over the success of the customers they work with than others, and when you’re managing them – regardless of compensation model – org-level vs. individual contributions should be weighted accordingly.

Eventually, you’ll start to understand what type of effort will go into renewals and expansion and whether you need dedicated resources.

Even then, based on Success Vector, you should be able to know which customers should renew or take an upsell, and you manage towards that as the expected outcome if they are successful rather than incentivizing to hit that as a quota; different take, same (if not better) outcome.

But if you need to create a variable comp incentive model for expansion and renewals, fine… just do it when you have a better understanding of what’s involved.

About Lincoln Murphy

I am a Customer Success Consultant focused on Customer Success-driven Growth. I wrote the Customer Success book which you can buy at Amazon. If you need help applying Customer Success-driven Growth principles in your company or would like me to speak at your event, please contact me. Also, connect with me on LinkedIn or follow me on Twitter or Facebook.

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