The debate over what types of financial incentives companies should offer customer-facing employees has been unfolding for years. Department stores have gone back and forth on whether salespeople should be paid commission, and cable companies have started paying their support reps retention bonuses. How do you determine which compensation plan aligns with the customer’s (and by extension, the company’s) best interests? This question is especially fitting for Customer Success teams operating at the intersection where company and customer goals meet.
Compensation Plans for Customer Success Managers
Compensation plans for CSMs fall under 3 categories: 1) Base Salary; 2) Base Salary + Performance Bonus; 3) Base Salary + Quota. Industry surveys have shown a majority of CSMs are on a plan that includes some form of payment in addition to their base salary. Let’s take a more in-depth look at how the 3 most common compensation plans are structured, and the pros and cons associated with each.
- Structure: Base salary with no bonus structure or variable compensation
- Pros: Divorcing compensation from revenue reduces the temptation for CSMs to push upsells or expansion not in the customer’s best interest
- Cons: Assumes CSMs will work tirelessly towards goals without a clear financial incentive to do so
Base Salary + Performance Bonus
- Structure: Base salary with a bonus structure tied to goal achievement
- Pros: Ability to incentivize and reward desired behaviors. Goals set on the individual or team level connect to company KPIs
- Cons: CSMs only receive modest payouts tied to performance
Base Salary + Quota
- Structure: Base salary with compensation based on quota attainment. CSM’s on target earnings (OTE) are split between base salary and quota
- The base to quota distribution is rarely more than 70/30 and is usually closer to 80/20
- Quotas in sync with company KPIs, usually in the form of retention and/or expansion revenue. Commonly tied to net revenue since it encapsulates both retention and expansion in a single metric
- Pros: Holds CSMs accountable for goals while also giving them a share of additional revenue
- Cons: CSMs might become focused on growing revenue instead of providing value to customers
Don’t get overly fixated on revenue
One downside of having CSMs carry a quota is the risk that they become overly fixated on generating new revenue. While this might initially sound like another pro rather than a con, it’s important to remember that Customer Success only works when CSMs are focused on the success of their customers. Delivering value to customers is a CSM’s raison d’etre. Success often leads to increased revenue, but not always.
When CSMs have quotas that make up more than 30% of their OTE, you risk turning your Customer Success team into a secondary sales team. It becomes challenging for CSMs to have their customer’s best interests in mind when they have a huge quota looming over their heads. Selfishly pushing an expansion that won’t materially benefit the customer ultimately puts long term revenue at risk.
I’ve noticed a trend where certain companies try to offset high churn rates with strong upsell and expansion numbers, but this isn’t a sustainable way to run a business. In 2017 the average SaaS company saw a median gross dollar churn rate of 13.2% but still managed to see a 1.7% increase in net revenue year over year. Churn obviously slows growth, but the cost of churn isn’t limited to lost revenue. High churn rates also signal issues with product market fit and hurt your reputation among customers who have canceled.
Choosing a compensation plan
My biggest piece of advice: don’t choose a quota-based compensation plan for CSMs before your company has reached a level of maturity where you can reasonably expect accounts to renew and grow, and you have a team in place that can capture these expansion opportunities.
First, make sure you have an account list and pricing model that lend themselves to upsells and expansions. If you segment your customer base, consider having quotas coincide with the type of customers each CSM manages. CSMs servicing the SMB market need to build Customer Success processes and frameworks that scale across a large number of customers. Their time is not necessarily better spent growing individual accounts to hit an expansion goal, especially considering SMB products have a high churn rate.
However, having Fortune 100 customers doesn’t guarantee revenue expansion — value-based pricing is a prerequisite for this type of growth. Pricing along a value metric that aligns with usage ensures customers get more from the service as they expand — and that the company captures further revenue alongside this increased value.
Arm CSMs with resources
The traits of a stellar CSM usually differ from those of a rockstar Sales rep. If you want your CSMs to take on a quota in addition to their existing responsibilities, make sure they have the resources and tools they need to expand and retain customers. At a minimum, this means giving them access to Sales Engineering, Sales Ops, Sales Enablement, and Product Marketing teams.
A lot of companies choose to assign a post-sales contact to work alongside the CSM on key accounts, usually in the form of an Account Manager. 1/3 of Customer Success teams report that upselling is an average-to-low priority. Having a dedicated person concentrated on driving revenue expansion ensures it doesn’t get lost in a CSM’s long to-do list.
While there’s no one-size-fits-all solution for Customer Success compensation plans, the ideas presented in this article should act as a good jumping off point.
Originally posted on the Natero blog.