A Compensation Overview

There are a lot of different approaches to Customer Success compensation, and although there may not be one perfect plan, my experience is that a variable plan with a bonus will provide the best results. However, before I dive into why I think this is the case, let’s take a quick look at compensation plans in general.

Any compensation conversation needs to be in the context of business objectives, which usually fall into four categories. Either we want to: 1. Entice talent to join a company, 2. Retain them, 3. Motivate them, and/or 4. Focus their efforts.

Enticing Talent to Join the Team

I don’t want to oversimplify this aspect of compensation, but I’ll keep this brief since this applies to any sought-after individuals, and as such applies to all roles in your company. Compensation doesn’t get people to join your company; it enables them to join your company. There is a lot of research that shows people take jobs once the compensation reaches a certain threshold of fairness. My guess is that most people wouldn’t debate this and realize you can’t compete for talented employees on compensation alone. The company, the role, the team, the culture, along with perks and pay, all influence attracting talent! (Ok… maybe not for professional athletes.)

Employee Retention: Does Money Make for More Satisfied Employees?

There are a lot of people who believe that the amount someone gets paid correlates with increased job satisfaction. However, one of the most comprehensive research studies on this topic was done in The Relationship Between Pay and Job Satisfaction: by Timothy A. Judge Et al. in 2010. They looked at 120 years of research and concluded that; “Pay level was correlated .15 with job satisfaction and only .23 with pay satisfaction. As such: Despite popular theorizing, their results suggest that pay level is only marginally related to satisfaction.” Since satisfaction is correlated with retention (and attrition), money is not the best way to retain your talent.

This brings me to the last two business objectives: “Motivation” and “Recognizing Specific Accomplishments”. Both of these are often associated with variable pay, but before we can dive in, we need to focus a little deeper on Customer Success business objectives.

Customer Success Business Objectives

I’ve often said, “Ask 10 CEOs what Customer Success is, and you’ll get 12 different answers.” This, of course, is in large part because the profession is really quite nascent. Regardless, what follows is heavily influenced by my definition of Customer Success and that organization’s business objectives. With that said, a statement of those underlying assumptions will be helpful. There are a lot of different perspectives on what Customer Success is and why it exists, but to me, it’s pretty straightforward. Customer Success exists to optimize Customer Lifetime Value (CLTV). Since CLTV is a prediction of the net profit attributed to the entire future relationship with a customer, then Customer Success is all about revenue, and the cost to maintain or acquire new ones from your customer base.

Since I think Customer Success is all about revenue, why not compensate CS teams like a Sales team? Good question… Let me start by saying it is NOT because I think CSMs shouldn’t close business. On the contrary, I believe if your CSMs are uncomfortable talking about the cost of your products and services, about asking for a renewal, an upsell or a cross-sell, you’ve hired the wrong CSMs.

Although I’m a “revenue-focused” CS leader, I think compensating CSMs like a sales organizations is a mistake, but before we jump into the why, let’s touch upon sales compensation. For the record, I’m NOT one of those people who thinks we shouldn’t pay sales commissions. There are three compelling reasons for paying sales commissions and let me start there before moving on to CS pay.

Why Do We Have Commissions for Salespeople?

First, commissions are the norm for the sales profession. Most great salespeople are used to being paid for performance via a commission. In the words of Candace Walters from HR Works, “In the competitive marketplace, you must ask how employees at this level are compensated? If similar employees at rival companies typically have… a variable plan, failure to provide such a plan leaves your organization at a disadvantage”. Secondly, salespeople don’t necessarily love to sell, but the good ones love to compete. Sales is about winning and losing. Salespeople either win deals or lose them. It is a competition both internally, and with your team. We “ring the bell” to fire others up as much as to recognize the winner. Finally, commissions work really well for sales where your individual performance makes the difference and your focus is near term, deals this month, or quarter. The June 2013 issue of the American Marketing Association’s Journal of Marketing Research sums it up nicely. “If you want to boost current sales, pick commissions. If you want people to attend to activities with possible payoffs beyond current sales, bonuses work better.”

Which is a nice transition to why I think CS compensation plans should include bonuses rather than commissions. To organize my thoughts, I’m going to use a framework I found in an article on why commissions aren’t good for sales. Although I don’t necessarily agree with Aaron Skonnard relative to sales, I think his 6 reasons commissions don’t work (in the long run) provide a solid framework for looking at commissions and why they are suboptimal for Customer Success. It also fits in nicely with a discussion of our “next compensation objective” which is to motivate.

Motivating the Troops

Aaron’s Six Reasons for Sales… Adopted for Customer Success:

  • “Commissions Don’t Motivate from Within: Here are some insights from the available research on the topic that has influenced my perspective and aligns well with my experience. In the Harvard Business Review article: “Does Money Really Affect Motivation?” the most comprehensive studies on the topic are evaluated. Their conclusion: “There is little evidence to show that money motivates us, and a great deal of evidence to suggest that it actually demotivates us”. You may find this hard to believe, but ask yourself: If you paid your team 10% more, would you get 10% more work out of them? In addition the findings about them actually demotivating are not from a single study. Yoon Jik Cho and James Perry analyzed data from over 200,000 U.S. public sector employees. The results showed that employee engagement levels were three times more strongly related to intrinsic than extrinsic motives, but that both motives tend to cancel each other out. This means that employees who are intrinsically motivated are three times more engaged than employees who are extrinsically motivated (such as by money) and that adding money to reinforce intrinsic motivation has the opposite effect. Is this contrary to what we said about salespeople above? It may not be, in that salespeople may respond to commissions as a signifier of their success in competing; however, this may be heavily dependent on the fact that they are often individual contributors. Although you may argue that all salespeople are not individual contributors, I would argue CSMs should never be.
  • Commissions Sub-optimize, Rather than Optimize: Sup-optimization of the whole can occur when parts of the organization optimize for their own objectives. Depending on the role this can be OK. A salesperson can sell as an individual contributor. It isn’t their job to make the customer successful. It is their job to take MQLs, move them to SQL, and close the deal. Customer success, on the other hand (although an organization), is also everyone’s job. To the extent that commissions drive sub-optimization of the whole; they are not ideal for Customer Success.
  • Commissions Point Fingers at People, Not Systems: I think this is key. Customer Success is more dependent on processes, it includes things like the interconnectedness of the product or engineering team to the customer needs or issues. This is Deming stuff, “measure systems not people”. Once again I think this “systems approach” will help your company better serve more customers. Remember we measure business outcomes (churn), predictive metrics (health) and those things that make health happen (process/plays). This is system-level thinking and performance.
  • Commissions are NOT Future Focused: Customer Success exists because in a subscription economy your valuation is tied to optimizing and improving CLTV = Years of revenue at an optimal Cost. Short-term nature of commissions don’t drive entire companies to collaborate, they reinforce individual competition. To improve CLTV, you need to fix problems and build repeatable processes that nurture long-term value. These are best done by teams of people collaborating. This is not the strength of commissions, but it can be for bonuses.
  • Commissions Don’t Support Learning: The primary job of CS is to help the company improve how they contribute to the customers’ business objective. Individual contributor heroism doesn’t scale. You need to create a learning organization because CLTV is about profit, and profit requires optimization of costs. This is inherently cooperative not competitive. As such, a bonus that can be a team goal or focused on building out company assets is much better aligned with Customer Success objectives.
  • Commissions are NOT Best for the Customer: Farmers need to plant a seed, tend to the crop, and trim back from time to time to optimize the harvest. If you are helping your customer to grow, a commission can call for too much fertilizer (BS) and early harvests that kill farms and customers.

Focus Their Efforts: Where Bonuses Come In!

If variable compensation doesn’t necessarily help you attract customer success talent, motivate, or retain them, why have a variable compensation plan? The answer is that bonuses help you focus your team. Bonuses enable you to reward employees for making focused contributions. This is incredibly important with Customer Success where the demands of customers often create huge focus challenges. In a world where; “the customer is #1” and “always right”, doing those things that lead to their long-term success can be challenging to get to. Here is where a compensation plan with a bonus component can be most valuable.

So What Do You “Focus” On? First of all, I like to focus on more than one thing. This allows you to have both “team” focused components to drive collaboration, as well as individual ones. Let’s assume for a moment that your compensation plan is 80/20 (80% base and 20% variable). Although I like more than one component, don’t have more than three, and never have a component less than 5% of their compensation. There is often a desire to fit one more thing in the plan, but it doesn’t work in the long term. Our goal is to focus. As for what to include, consider the following:

10%: I like the lagging indicators as a team goal. With that said I’m hesitant to default automatically to “net churn”. Don’t get me wrong, you need to measure net churn, but for bonuses, you want to try and decompose it into its sub-elements and focus where the opportunity is. Consider Logo churn (accounts) or Gross churn… Figure out what component of Net Churn deserves the focus and then assign it to the team. I like this as a team metric because it creates an “everyone is in this boat” reality that the team lives or dies by.

5%: Use leading indicators for individuals or specialized groups within your team. This is huge… figure out how to measure leading indicators. It’s really tough, but if you can’t, you’ll fail. This is what separates the winners from the losers in Customer Success. You can’t do a thing about churn by simply staring at churn, you need to get ahead of the game. As for breaking them out by sub-team, consider what you believe are key to impacting customers’ success. Is it adoption during onboarding? Then use this for onboarding teams. Is it ROI discussed during QBRs, then figure out how to measure this. In time this will be your best lever to drive success and may move up in % of the variable component of pay. Note: If you think team goals are suboptimal… Read this!

5%: Consider MBOs. I realize they are out of fashion and that OKRs are all the rage, but as Candace Walters pointed out, “Good variable-pay plans involve attainable goals. While pushing employees to reach for the sky may be admirable, deliberately setting goals that prove to be impossible is likely to sabotage most variable-pay plans.” The reason I like MBOs is that I think Customer Success has a strong operational foundation and MBOs are focused on getting stuff done… like ops. Basically, MBOs are designed to be SMART (not stretch) which is perfect when you need to get stuff done. This also allows you to manage individual performance where they can have an impact. Do you need a new “loss of champion play for your playbook? Make it an individual MBO. Need an advocacy practice? Ditto.

Finally, there are a lot of people who think the team should live or die by Net Churn. I agree, but making this the single lever in a compensation plan won’t drive the desired results. In part, I believe we often pick Net Churn because it’s being measured (and easy to measure) and because we equate revenue to sales and so what works for sales should work for Customer Success.

Here is why I think you should consider focusing elsewhere for your team:

  • Churn is our metric, not the customers.The customer doesn’t care what your churn number is (with the exception that it may tell them something about your viability or may be an indicator of challenges you face). It sets an internal focus for an externally focused organization.
  • Ideally, I’d pick something like ROI. Which is the customer’s ultimate metric, but we pick churn, in part, because it is easy to measure. ROI isn’t.
  • I don’t know a CS team that doesn’t talk about being “proactive” and churn is about as reactive as you can get. It is a lagging metric, the proverbial driving by looking in the rearview mirror.
  • I don’t think measuring churn alone, gets your team to focus. There are too many factors impacting churn. There are always 10 things you need to do today. Good leaders focus their teams on two or three of them.

Executive Compensation

Finally, as a CS executive, I think my variable compensation should be based 100% on churn. If you look at CLTV, the head of CS needs to drive net churn and optimize costs. The budget is the budget (and a topic of another blog post), so Churn is the only other variable I need to worry about. So why do I feel differently about my team? It’s because my job is to take a team and focus them on those things that will improve CLTV and in my experience (and research on the topic), suggests structuring my team’s pay as a renewal commission like they are a sales organization is sub-optimal, which is not my personal objective.

Tom Lipscomb is a Bay Area Executive who has spent his career helping companies around the world deliver products and services that contributes to their Customers’ Success. He has always lead organizations with the understanding that, as Peter Drucker says, “Value in a service or product isn’t what you put into it, It is what the client or customer gets out of it.”

Tom Lipscomb

VP of Customer Success, Datanyze