In our last article, we discussed whether customer success should own renewals and/or expansion opportunities. In our follow-up article, we’re going to cover how to structure compensation for customer success whether they’re responsible for opportunities or not.
Before you jump to conclusions and label this article BOR-ING, we ask you to remember that the effectiveness of a compensation plan correlates to how well the designer understands human behavior. If you don’t think impacting human behavior is interesting, we view it as a good sign for your character and a terrible sign for your ability to design a compelling compensation plan.
Compensation plans are a great way to motivate people to stay aligned with key business objectives. If implemented incorrectly, they can also be morale killers or lead to unforeseen negative selling behavior. I’ve watched multiple sales leaders encourage their team to refuse to sign their plans because of a particularly ill-worded clause (not my design!).
When it comes to incentivizing people, there are a lot of levers that can be pulled, but not all of them should be in every scenario. The degree to which the person’s pay is impacted should be proportionate to the amount of control they have over hitting the objective.
If a position is responsible for maintaining a renewal rate and a certain amount of upsell business, it makes sense to design a commission plan for the position. Their performance will be tied to how well they perform against their personal goal. If the position is not personally responsible for sales but is rewarded if the company does well, a variable bonus structure may make sense. They don’t have direct control over sales, but they may be more motivated to keep customers happy and pass along leads to the sales team in the hopes the company does well.
If you make hitting a goal a requisite for earning a competitive salary, make sure the employee has substantial influence on whether or not the goal is met.
A book of business is best used for representatives who are responsible for maintaining a renewal rate and are responsible for increasing spend in their assigned accounts. The base salary may be 70 to 80 percent of the total earnings, with goal attainment driving the rest. Some plans even go so far as to allow for accelerators if upgrades exceed expectation, increasing the potential earnings well above fair market salary.
Unfortunately, I’ve never seen this work as well as the theory because of:
1. Mid-quarter account reassignments
2. Perceived unequal opportunity
3. Attrition
If you’ve made book of business compensation work, my hat goes off to you. I’ve struggled with forcing people to adhere to original account assignment, and for good reason. We had a very successful support representative rub one customer the wrong way and had to make a change to keep the customer. It wasn’t really the rep’s fault--the customer was particularly demanding in this case.
The other complicating factors tend to be perceived fairness (it’s a common struggle, particularly across regions, industries, or niche verticals) and attrition. Whenever a representative leaves and a company isn’t lucky enough to have someone immediately replace them, it’s a scramble to have existing representatives absorb a book of business to maintain customer coverage.
Shantanu Shekar, Senior Director of Revenue Operations at Nitro, reported success thanks to a mature reporting infrastructure, managers who were bought into the model, and the following rules:
(1) “Temporary coverage” rules to allow accounts to be managed by other reps in case of attrition. Basically you would not give quota credit on a renewal/other transaction but minimal commissions for a reps managing an account under temp cover
(2) 5% change threshold- no change to comp plan for <5% change up or down in quotas. Will be documented and managed in the “monthly” updated quota file though — challenge is you are going off system for this (not recommended!)
(3) Quota credit always has to closely follow baseline attribution. No baseline, no quota and hence no credit.
If you have the technology and bandwidth to constantly adjust your book of business calculations and management agrees to adhere to the rules, it’s possible to have a strong plan. Without one of these factors, we don’t recommend people attempt a book of business model.
Customer success organizations may structure payment plans so that 70-80% is base salary or non-variable compensation and the remaining percentage is dependent on hitting a goal.
Variable compensation plans that are goal dependent work well for management teams or teams that are held to a non-individual goal. For example, a manager may be paid a considerable amount if their team as a whole exceeds the team goal. Conversely, they may not hit their target salary if their team’s churn rate is higher than expected.
Other examples of a non-commission forms of variable compensation include individual payments for the company hitting a revenue target, churn rate, or some other broad metric not under control of the individual being compensated. Spiffs, which will be covered later, can also offer incremental compensation.
Commission sales award the person selling a percentage of the sale. Commission plans for account executives focused exclusively on selling may set the variable compensation piece at half the rate of a fair market value salary. Depending on how talented the salesperson is and how generous the compensation plan is, their potential earnings could be well beyond 1.5X the target salary measure.
For customer success, it may make sense to focus on a variable compensation piece to encourage high customer retention rates. Representatives would be paid their variable compensation according to the rate they retain their customers against goal. If they’re responsible for the renewal, their priority will be retaining the customer over hitting a dollar amount.
Customer success can also be paid based on a commission rate for each renewal sale. Some companies do both and reward the representative if they hit a target renewal rate and pay them a commission for each sale. This allows some room for negotiating with disgruntled companies threatening to churn while maintaining a revenue number.
If customer success is also responsible for upselling accounts, consider adding in an accelerator in addition to a flat commission rate per product or sale. If the representative outperforms their baseline goals, an accelerator (or two or three) can add extra incentive to keep selling instead of calling it good once they hit the target.
My fellow nerds will understand what I mean when I say commission plans can run the alignment system from lawful good to chaotic evil--the rest of you will recognize popular memes using this rating system:
For commissions, on the one axis is the skill level of the plan designer (lawfulness) and the other is the intent of the company (goodness). The best case scenario (lawful good) is that over half the people on the compensation plan are at or over quota and “at quota” means they’re making a bit more than the fair market value salary. The worst case scenario is that the person designing the plan didn’t understand how changing the selling mix (types of products sold) would impact quota attainment and set the bar too high and the company is pushing the team to put their primary focus on upselling a product that doesn’t have the features necessary to be competitive.
Make sure managers are well versed on their team’s plans and that they sit down with each representative to review the plan prior to going live. While no one likes to feel manipulated, everyone likes to feel smarter than the compensation plan designer and discover “loopholes” that earn them more than the person who just skimmed over their plan. Give people a clear pathway to exceeding their quota, and let the managers take credit for discovering the “loophole” and passing it along to their employee.
Bonuses are a form of variable compensation. In this case we intend for a bonus to represent an amount beyond an employee’s salary or standard compensation. When looking at company-wide goals, a bonus structure can be a good way to incentivize a team to be personally invested in the company’s success.
Spiffs are the simplest “lever” to use to motivate a team. Offering a set dollar amount for each lead passed to sales is a great way to ensure an expansion opportunity is passed along before the customer success representative moves on to something else and forgets about it. Spiffs can be tied to raw lead volume, qualified lead volume, and/or final sale.
We recommend you use a qualification gate for initial payment and consider paying customer success a modest percentage of the final sale to encourage them to lend their help to sales during the process. Odds are good customer success has the better relationship with the customer.
Employee perks should be left out of the incentive structure but be awarded to people who do their work well. Working remotely, a paid vacation, gift cards, and “clubs” that reward a group of elite contributors are all great motivators.
In each of the following scenarios, we outline an option for how to pay the customer success representative that is in alignment with how much influence they have over obtaining a selling goal.
Your customer success representatives handle all renewals and expansion deals. In fact, they’re so aligned with sales that customer success reports up to the sales executive. The company has a moderate growth plan that includes expansion sales. The company wishes to retain 85% of their customers.
Recommendation: Individual Contributors
Customer success representatives have a 70% to 30% base salary to variable compensation ratio. Each individual representative has a retention goal (hitting a goal of 85% retained gets them 10% of the salary) and is paid a commission on renewal and expansion opportunities. Expansion opportunity commissions are more heavily weighted and have bigger accelerators, giving representatives an opportunity to negotiate down pricing for renewals while being incentivized for adding on additional services.
Recommendation: Customer Success Managers
Managers have an 65% base salary to 35% variable compensation with a sizable bonus opportunity. If the company hits the retention goal, the manager is paid a bonus. The remaining 20% is dependent on whether their team meets a team goal and they are proportionately rewarded if the team exceeds the goal.
Your customer success representatives handle all renewals. Expansion opportunities tend to have a long sales cycle and the customer success representative pulls in a sales executive if they detect an opportunity. The company has an aggressive growth rate, primarily weighted on new logo acquisition.
Recommendation: Individual Contributors
Customer success representatives have an 80% base salary pay with 20% variable pay. 10% is based on a goal of 90% customer retention and the other 10% is made up from commissions on renewals. Customer success is also rewarded a $150 spiff for every upsell lead that qualifies and 1% of the final sale.
Recommendation: Customer Success Managers
Managers have an 70% base salary to 30% variable compensation with a modest bonus opportunity. If the company hits the revenue goal, the manager is paid a bonus. The remaining 30% is dependent on whether their team meets their retention goal and they are rewarded if the team exceeds their goal.
Your customer success representatives are exclusively focused on supporting customers with a highly technical product. They don’t have time to sell, and barely have time to pass along leads. The company has an aggressive customer retention goal and is focused on expansion sales.
Recommendation: Individual Contributors
Customer success representatives have a competitive salary because they are very technically savvy. They are also paid a bonus if the company hits it’s retention goal. A $150 spiff is used for any qualified lead to sales along with 1% of the final sale because the customer success representative will likely be on several group calls during the sale.
Recommendation: Customer Success Managers
Managers have an 80% base salary to 20% variable compensation with a modest bonus opportunity. If the company hits the expansion goal, the manager is paid a bonus. The remaining 20% is dependent on whether their team meets their retention goal and they are rewarded if the team exceeds their goal.
Have you seen a particular model work well? Did we forget any compensation options? Let us know!
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