There are several different models of compensation plans, but not all can be guaranteed to produce the same results for your organization. We’ve found that, when looking to build a strong team of Customer Success Managers (CSMs), an incentive compensation plan, otherwise called a variable compensation plan, produces the best results.
Not only does it motivate employees, but it helps them learn how their work affects the company’s performance, understand how they impact profits, and usually increases productivity, employee engagement, and employee retention.
What Is a Variable Compensation Plan?
A variable compensation plan is a form of compensation in which an employee — often a salesperson — has a portion of their earnings directly tied to their performance. This can be measured by how much they sell, the success of their team, or the success of the organization as a whole. These are also called incentive compensation plans.
A Base + Variable model works best for customer success compensation plans. In this model, an employee’s salary is made up of a base salary plus a variable component, which is meant to reward performance and provide motivation for over-achievement.
Compared to other compensation plans, such as a Base Only or a Base + Bonus model, the Base + Variable model tends to provide the best opportunity for alignment with the core objectives of a CSM team. Whereas a Base model places no extra emphasis on CSM objectives, and a Base + Bonus model only produces limited incentives, a Base + Variable compensation plan provides clear accountability for performance as well as generous rewards for meeting targets.
How Do I Design a Variable Customer Success Compensation Plan?
Successful incentive compensation plans tend to be grounded in a few fundamental principles that should be thought of and planned out beforehand:
- Organizational principles: these are the guidelines that determine your company’s goals and measures of performance.
- Motivational principles: it’s important to consider that not all of your employees might be motivated in the same way, or by the same rewards. You can plan to look ahead to regularly review new reward opportunities for various levels of performance.
- Behavioral principles: these relate to the degree to which individual employees will deliver, the degree to which team performance will be rewarded, and the degree to which your customer success compensation plan is simple, transparent, and understandable by your CSMs.
Clearly, by taking these principles into account, you can create a compensation plan that relates to these behaviors you want to incentivize. Consider carefully what matters to your business, what actions you want to influence, and how those actions can affect success.
Once you’ve planned out some of your guiding principles, there are a few steps you can take to ensure a thorough and measurable variable compensation plan.
1. Build Out Your Variables
First and foremost, you have to choose the main KPIs against which you want to measure your employees and their performance. It’s best practice to pick two to start with, three maximum. This helps ensure that your variables stay reasonable, understandable, and simple.
You can also pick 2 base KPIs that are a regular measure of performance, and have a third that shifts every quarter according to your company’s current goals.
When it comes to Customer Success (CS), variables in your incentive compensation plan should focus on retention and growth. These should be measured based on revenue. Using KPIs such as retention and growth help underscore the purpose and objective of your CSMs: to maintain a customer base and find opportunities for expansion.
2. Determine Your Compensation Split
Now that you have your variables that will determine the variable component of your employees’ salaries, it’s time to nail down exactly how you want that compensation to be split between your chosen KPIs.
Start with your on-target earnings, or the prediction of the total potential compensation for a specific position, which includes both the base salary and the variable pay. Then, determine how much of the on-target earnings will be from the base salary, and how much from the variable compensation.
A good split is generally 70/30 or 80/20 base to variable pay. When the percentage of variable pay starts ticking over 30%, your incentive compensation plan starts to look like one best suited for a sales position. But when the variable compensation starts falling below 20%, it looks more like a bonus than variable incentives.
It’s possible, however, that since complexity and stability can vary for CSMs across industries, the best split for your business might look different. Take some time to think what sort of split will highly motivate your employees while also providing them some security in light of possible risks of unpredictability.
When it comes to splitting your variable compensation between your determined KPIs, it’s usually a good idea to focus a majority of that split on measured retention. This helps emphasize for your CSMs that their attention and energy should be focused on the satisfaction and renewal of current customers.
How Can I Transition to an Incentive Compensation Plan?
While a Base + Variable compensation model usually produces the best results for a CS team, not every business has structured their compensation plans that way. It might be necessary to make the switch. The name of the game for this sort of transition is slow and steady.
Consider at first adding bonus or variable pay on top of employees’ current base salary. This, however, might not necessarily be in your company’s budget.
Another method is to use annual pay increases to make this switch. Instead of increasing base salaries, push all compensation increases into your newly determined variables.
Some Final Tips for Your Customer Success Compensation Plan
To make sure that your incentive compensation plan for your CS team is best suited for your employees and your company’s goals, it might take some adjustments or tweaking. If you’re noticing that performance might be dropping off, here are some tips for optimizing your plan:
- Review metrics and choose metrics that matter: go back and ensure that your variable compensation plan is aligned with your business goals. Make sure your team knows not only what numbers matter to your compensation plan, but make sure they know why these numbers matter.
- Compensate for behaviors you want to encourage: concentrate incentives on your team’s responsibilities and areas of influence. Sometimes, that also means rewarding improvement efforts, not just hitting target numbers. This encourages productive behaviors while also increasing overall team efficiency and efficacy.
- Create finite goals: employees need to be able to see and understand the finish line. Give them objectives that have rewards on a regular basis, such as every month or every quarter.
- Avoid broad metrics: just like keeping your goals achievable, your metrics should be tight and understandable. Loose or broad measurements risk encouraging low-quality behaviors just to reach goals.
- Push employees, but stay realistic: incentive compensation plans should encourage your employees to go above and beyond their average performance, but it still has to feel within reach. Make sure the goals and measures you set are still realistically achievable.
Build a Strong Customer Success Team From The Ground Up
A Customer Success team is crucial for the success of your business and the satisfaction of your customers, and a compensation plan is one big piece of finding the right people to fill those roles. If you’re interested in diving into more details about Customer Success teams as a whole, check out our Customer Success Career Guide, with guidance on job titles, descriptions, and salaries.
You can also learn more about Customer Success Strategy and team compensation plans by downloading our Ultimate Guide to Customer Success in SaaS.
Customer Success Around the Web
- Alternative Approaches to Customer Satisfaction Metrics– Learn other ways you can measure customer satisfaction outside of just NPS.
- 25 Testimonial Questions to Ask You Customers– Discover how to draw the success story out of your customers.
- Reach, Effect, ROI: Measuring the Impact of Your Digital-led Customer Success Program – Find out how your digital-led metrics differ from your usual suspects.
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