Tried and Proven - what is the best way to compensate your CSMs

NatashaA

Looking for advice on the best way to incentivise and reward your customer success managers and team leads. Ideally something that is simple and transparent for the CS function to follow.

What works and what should be avoided?

William Buckingham

Hi @NatashaA

It would help to know the CS Model you are working with. Do your CSMs close expansion opportunities or is there a sales role doing that?

I'll start high level, and then get a bit more detailed. Often CSM variable comp is 20-30% of their Salary. For example, if a CSM makes a Salary of $100K, at 20% variable comp they could earn a total of $120K (salary + variable pay). Often these will have floors and ceilings - Below a certain result there's no payout on a metric, and above a certain attainment the payout is capped. These also can have kickers, but that can complicate things for those not in a closing role. This can apply to essentially any metrics you choose.

What metrics should this be based off? Depends on the company. Typically companies which are earlier in their CS maturity will base this off a few leading indicators(adoption milestones, EBRs, etc.), and then move to comping on lagging indicators(retention, expansion, NRR, etc.) once their leading indicator activities have been proven.

The following are examples of metrics you can use, not an exhaustive list:

Leading:

1. QBRs and/or EBRs (attained vs scheduled)
2. Product adoption milestones (product dependent)

Lagging:

1. Net Revenue Retention(NRR) - this is likely most common
2. Retention
3. Expansion
4. Advocacy (hard to make this scale across large teams and mixed portfolios - this is better as a SPIFF or annual metric to Bonus on)

From there you can determine the weight of each metric on the bonus. I'll give an example using a bonus that is achieved by a renewal retention goal and an NRR goal.

Criteria for 100% Bonus Attainment:

• 90% Renewal Retention (50% weight)
• 125% Net Revenue Retention (50% weight)

This keeps it pretty simple with two priorities. Retain and Expand Revenue. The Retention goal being assessed separately ensures CSMs don't have significant churn masked by massive upsells. In this example, if a CSM had 85% Retention and 115% NRR, they'd end up at 93.22% to goal for their overall commission/variable comp.

I think at the end of the day the main thing is keep it simple, and limit the number of metrics, and make sure you stick to numbers you have and trust the data for. Additionally, make its something the CSM can somewhat reasonably track. Ideally, you make it reportable for the CSMs, they should be able to go in and see how they stand toward attainment relatively easily - harder than it sounds. The simpler you make it the less it will cost you in confusion, exceptions, and time explaining(and reexplaining).

Things to avoid: Announcing the compensation structure after (or at least not, much after) the start of the period it is impacting has begun. This will frustrate CSMs(rightfully so) and give more reasons to complain about the new structure. Basing it off data that is not trusted or not easily attained.

This is just one example. There are loads of ways to compensate CSMs, this is just a brief example of one option which I have found effective and simple. Hope it helps.

Mike Altomare

From my experience, compensating based on lagging metrics can be difficult depending on contract term lengths and frequency of CS carving/redistribution. For example, in a company with longer contract lengths and annual changes in CSM/account alignment, you may be penalizing a CSM for issues that started a year ago with no ability for the current CSM to course correct. This leads to a lot of field unrest and pressure for things like an exception process.

William Buckingham

@Mike Altomare Great points for sure. These are all great things to consider, and/or remediate(to some degree) when making variable comp decisions. There's definitely a fine balance between aligning CSM comp with actual revenue outcomes of the business and reducing demand for exceptions. Looks a little different at each company. Great callouts to consider.

LouiseC

Hey!

Not quite tried and tested yet, but we've just rolled out a bonus programme for our CSM's. They are responsible for account expansions which include upgrades, additional product bolt-on subscriptions and one time purchases (i.e. bespoke training courses, in-depth consultancy to re-model business processes). We view these as subscriptions and services that encourage retention, but the sales element could often be left behind if the team were busy, hence why we are incentivising these.

We're going with a model that gives 8% bonus on the first year of new subscriptions sold for the bolt-on products/upgrades and 5% bonus on any services sold. This is paid out quarterly for anything sold and delivered in the previous quarter.

As Will has said though, it's really different per company depending on what you're trying to achieve. We view this as our first draft and plan to review it yearly and the target/bonus may change to something else depending on what is most vital to the company at that time.. i.e. purely on renewals to longer-term contracts. There can be a fine line between incentivising to expand or incentivising them to do the job they should just be doing...