Johan: [00:00:00] Hey everyone. Welcome back. It's time for Impact Weekly. Fresh question in our inbox, Lincoln. Here it goes. What's the best approach for a variable comp plan for a Customer Success Manager?
Lincoln: Okay. Interesting.
Johan: Interesting. Yes. I think Anyone out there who's been trying to set this up know it is and can be a challenge. And there's many ins and outs to this one. So I think it's a really hot topic to talk about. And I think let's get into it and give everyone our view and also help them maybe avoid a few of the The pitfalls or the potentially like bad ways of setting up a comp plan or a bonus.
Lincoln: Yeah. And there are a lot of potential pitfalls and a lot of bad ways to do this. Definitely we can help [00:01:00] here for
Johan: Yes.
Lincoln: This is an, it is an interesting topic. And it does come up frequently. I think it comes up as a topic more frequently than it's actually. Implemented. Think it's something that a lot of heads of CS go back to, like they want to try to do this but they're still not.
Lincoln: So it comes up a lot in that way versus so much that it's actually being done. That does, that's not to say that it isn't being done. But I think as a topic, it's something that heads of CS are often looking at as something they want to try. And we'll get into some of the reasons why that might be and why the Variable Comp model may not be exactly what you should be focused on right now.
Johan: Yeah. No, and I think myself included have, many of us have probably tried a few different ways of doing this. And basically yeah, [00:02:00] after a while, just been able, had to throw it away and give up and change and re, revise it and so on. So I think that there is a lot of times attempt here to do things.
Johan: Maybe it's even coming from your leadership team. Maybe you have a CFO or a CEO that wants everybody to be on a variable comp plan. Maybe you have this in sales, you want this for your customer success department as well. So there's many inputs to this question, basically.
Lincoln: Yeah,
Johan: Yeah.
Lincoln: it's, yeah there's a lot of different reasons for this. And I think if you just look at what Variable Comp, so let's talk about that for, what do we mean by Variable Comp?
Johan: That's good.
Lincoln: Generally what that means is that you pay your. Your employee, so it doesn't matter what type of role they're in at this point.
Lincoln: So we just say we're going to pay the employee some percentage of what we would call their on target earnings, OTE. Which would basically [00:03:00] say OTE is what their salary would be. Okay. So just for round numbers if their salary would be a hundred thousand dollars a year, They're on target earnings would be 100, 000 a year, but versus a regular salary, variable comp would be, we're going to pay you.
Lincoln: 30, 000 a year, just you'll, you're guaranteed to get that. And then if you do the things that are necessary, like maybe in sales hitting certain quotas you will make that other 70, 000 or the other 70 percent of your on target earnings. If you, in sales, generally, if you go above the quota, then you will make more.
Lincoln: Then you're on target earnings. Okay. So you might make 125, 000 a year if you really if you really crush it. In Customer Success Management, you will, where this is done, you will often see It's something closer to the base salary being [00:04:00] 70 percent of their on target earnings and then the CSM having to perform their regular job of making customers successful to, to earn the other 30 percent or the other, in this case, if we're talking 100, 000 on target earnings, we would pay them 70, 000 salary, And the variable aspect of it would be the other 30, 000 to make up the full 100, 000.
Lincoln: So variable in this case means some sort of base plus some sort of earned additional income that, that altogether equals an on target earnings. And in, customer success, that on target earning is probably just going to be market rate salary.
Johan: And the problem there of course is that whereas in sales there is a big upside, perhaps in customer success, it becomes more of like a punishment or of if you [00:05:00] don't meet meet your goal, then you are basically losing some of your ot, right?
Lincoln: Exactly. Just to be absolutely clear. Yes. In sales, Variable Comp is used to motivate action. We're going to pay you a small salary to like, cover your basics. And then from there, you can pretty much earn whatever you want. If you simply hit the quota that we've put in place for you, Because that would mean that as a company across all our salespeople, we are going to hit our sales forecast. If you simply close, 10 deals or whatever or close, X amount of revenue, then you will hit your commission that equates to your on target earnings. If you go above and beyond that. Fantastic. I don't care if you hit 200 percent of your OTE. That just means that you're crushing it and the company as a whole is going to be getting even more customers, hopefully good fit [00:06:00] ones, but whatever.
Lincoln: The CSM side of things, it's not usually like that. It's, I'm going to pay you 70 percent of your salary. And you better do your job or you're not going to get the other 30%. And I say it like that, it sounds a little harsh, but that's what I've actually seen when it comes to variable comp in CS.
Lincoln: It's not, want you to go above and beyond, and you can earn whatever you want, essentially. It's, I'm basically, there's a there was a show a long time ago called Third Rock from the Sun and they were aliens. They came to earth, it was John Lithgow, was like the main guy, and he found out about tipping at a restaurant.
Lincoln: And so it was basically these aliens trying to learn how to be human. And he went to a restaurant. And so in the United States, restaurant workers they get paid very little and they make up most of their their on target earnings with tips. So from the patrons, it's not the way it is in all of the world [00:07:00] but in the United States, that's how it is.
Lincoln: And so he sits down at the restaurant and he puts a stack of money on the table. And he shows the wait person, the stack of money and he says, every time you don't do something I like, I'm going to take some of this money away. That was So the incentive for the wait person Was not to go above and beyond and hopefully get a big tip.
Lincoln: It was don't mess up, don't do things wrong, or this person is going to just sit there and take money. And of course, that's what he did. The whole episode was him just taking money off of the stack. And it sounds harsh. It was funny the way it was presented. And of course he learned the lesson, like that's not how you get the best from the person that you're working with.
Lincoln: But that's what we do in customer success management. I say, we. I don't do this, but is you're basically saying here's your on target earnings. Here's the stack of money. And every time you don't do something right, every time a [00:08:00] customer churns, which you had, not full control over, every time a customer contracts, which, it's because they were sold too much initially or the onboarding person didn't work with them right or whatever.
Lincoln: So it's outside of your control, but every time something like that happens, we're going to take money off of your, the stack of money that you should be getting. That's how variable comp is generally positioned. In customer success, it is a threat.
Lincoln: It is, it's, it only has downside potential. It is meant to motivate CSMs to simply do the job that the CSM would do no matter what.
Lincoln: And it ends up adding a lot of stress and overhead to CSMs who already carry a lot of stress and overhead simply trying to make customers successful when it seems like the rest of the company doesn't want the customers to actually be successful. I'm just
Johan: big point.
Lincoln: yeah
Johan: think that this is important. I think this is where you get wrong sometimes,
Johan: And we'll get to it soon also, what you can do about it and what we believe is a good way [00:09:00] to work with a bonus and some incentives, right? I've also seen, I'm also going to share another way where I've seen you go wrong with variable comp is to just apply the new business sales comp plan to your customer success team. Incentivizing expansion only if you bring in these new deals or upgrades or you get a commission or something like that on those. very much. And that I've seen that happening. And and then you will, of course, incentivize your Customer Success Managers to only work and maybe even push upgrades on customers that don't, are not ready.
Johan: And they will for sure forget about all these customers that need their attention, that are on the wrong track, that we need to maybe spend actually even more time with and that are even more important for us.
Lincoln: Or another thing that I see happening in that same scenario is CSMs will be like, cause they're not going to, they're not going to [00:10:00] chase deals simply to chase deals. They're not going to try to sell something to a customer that doesn't need it when they don't need it because they know that's going to hurt trust.
Lincoln: And they also know that these other customers need their help. So you end up with CSMs that are doing their job, but are being punished because. They didn't do these other things that, that the incentive structure was trying to be built around. It's just it's, this is just, we just look at these things wrong, but I want to be really clear, that I think some people may take the wrong way.
Lincoln: And that is, I just want to be really clear. We are not talking about not growing NRR. We are not talking about reducing expansion. In fact, everything we talk about on this pod, everything we do in Customer Success, our point of view is that Customer Success is a driver of growth. Customer Success Management should be the driver of the most predictable new revenue stream.
Lincoln: Streams in, in your business. [00:11:00] So this is not about re reducing growth or reducing NRR or redu or eliminating a focus on NRR or LTV growth. This is about. Ensuring we do it in the right way. And so the things we're going to talk about today will actually end up helping you grow NRR. It'll help you maximize LTV and whatever those metrics are that are important to you in terms of growth, doing this the right way is going to have a massive impact on that.
Lincoln: And this is what we're going to talk about today is the things that could actually lead to exponential growth in account value versus These other ways of doing things could lead to incremental growth at best. And at worst, it could really hurt your relationship with your customer and it could cause your CSMs to leave.
Lincoln: Pay attention as we go along here, don't get, don't, and don't think that we're talking about reducing growth. We're talking about actually maximizing growth.
Johan: Exactly. Because, again, back to [00:12:00] the question what's the best approach? I think the question behind that one is what are we trying to achieve here?
Lincoln: Yeah,
Johan: Why do we want the variable com plan for our customer success team? Or how do we incentivize them and what do we want to do?
Johan: What are we trying to achieve here?
Lincoln: I think that's always the question that I ask when somebody asks about variable comp, I say why are you looking at variable comp? Or, what, why is this the question that you're asking? To your point. There's a bigger question behind the question. And it, and I can almost guarantee somebody asking about variable comp has, a head of CS asking about variable comp has been tasked with NRR growth or LTV maximization or, whatever, expansion, they've been tasked with some, something like that.
Lincoln: And they are looking for ways to motivate their team. They're looking for ways to get these things to happen, but they're not taking into [00:13:00] consideration that one of the great motivators of a team is the leader. It's them, but they're looking for some alternative to them
Johan: Yes.
Lincoln: as a way to motivate.
Lincoln: And that is one thing that I have seen with variable comp plans is very often they are used. As a replacement for good leadership, or I should say they are, they try, but that doesn't work. But that's, that is something that can happen. It's I don't know how to motivate my team. I don't know how to coach my team.
Lincoln: So I'm going to, I go, I went to my spreadsheet. I came up with this comp plan that, that, you know that only has downside and this should motivate them.
Johan: Exactly. And it rolls up to our overall target for the company in terms of ARR growth and
Lincoln: Oh it's magical. It's a fantastic spreadsheet. I'm super proud of this thing. It has no actual basis in reality,
Johan: No. But it's [00:14:00] great at a board meeting, right?
Lincoln: yes, it looks so good. But that's the thing is I, I've worked with some companies where The head of CS maybe got into that position.
Lincoln: In one, one very specific example, I can think of this was one of the founders of the company that was the head of CS and, they all just drew straws to figure out who was going to lead which area of the company. So this was just a founder, a very technical founder, very analytical, was over CS and they just spent all their time in the spreadsheet.
Lincoln: And. They came up with this amazing variable comp model and asked me what I thought of it. And I was like, you've wasted so much time trying to figure this out when you could have just been working with your team to understand what it's going to take for the customers to be successful and how to get your team to just simply move those customers along the trajectory towards success.
Lincoln: But you've [00:15:00] spent so much time and effort. Coming up with this variable comp plan that's not going to accomplish what you want it to anyway that, now you're going to be scrambling because of all that wasted time. So it's just, and by the way, when you have something really convoluted.
Lincoln: And difficult to communicate to your team, then that just adds more overhead because nobody's really sure okay, what all do I have to do to get paid my, just to just get paid what would essentially be a market salary. I'm confused. And so then now again, you add I talk about overhead so much with CSMs, but there's so much going on that the last thing you wanna do as a leader in a, in and a and, a coach for your team is to make things more, more complicated.
Lincoln: And to add that overhead. You wanna reduce that. You want to. Help your CSMs.
Johan: Yeah. It's very easy that these incentives you try to do actually are counterproductive. We mentioned some already, but [00:16:00] like having a commission on expansion only, as you said, like some people, that are in Customer Success might get triggered by that, but most won't. They will still be focused on the customers and they will be looking at the struggling customers and the ones that need more help and turnarounds and so on that have no commission maybe in the short term. So even so you have to be very careful what type of incentives you put in place. But are there incentives you can do and what do we what's what are thoughts there? Can you incentivize customer success teams?
Lincoln: absolutely. So the way that I suggest doing this is pay your CSMs their market rate salary. So 100 percent OTE, full salary. There you go. Amazing. Okay. Now. If they don't do their job whatever that means, they don't [00:17:00] get just some fraction of their salary. They still get their salary, but you as the leader and as their coach intervene, Hey, we didn't hit our numbers last month or last quarter.
Lincoln: Let's look at that and see what's going on. And we do a deep dive and we figure out, okay. This one CSM's portfolio is more heavily weighted to like bad fit customers. And they got a bunch of customers from a CSM who was flaking out and didn't do their job. And so this CSM is saddled with a portfolio that's underperforming.
Lincoln: It's not the CSM's fault. Okay, cool. Here's what we're going to do to try to alleviate some of that overhead, next quarter. And that's fine. We have another CSM that, that actually has a pretty good portfolio, but they themselves are, not doing what they need to do.
Lincoln: So maybe we try to work with them next month, next quarter, we get back with them. They're still not really doing what they need to do, still getting their full salary. We put them on a performance improvement plan. Next quarter, next, next month, whatever your timeframe is for that [00:18:00] improvement plan, they don't improve.
Lincoln: Now they need to go work somewhere else. But in that whole time, they just got their salary. See, that's called being a manager. That's called being a leader. You're not, you're just, that's how you, that's how you work with CSMs. That's how you work with employees. So you pay them their salary. You can bonus them on other stuff. Even if you're doing something like CSQL, so Customer Success Qualified Leads, which I don't like because we don't have leads, we're working with customers. Leads are prospects that, they're new business things. But even If you're surfacing CSQLs for sales to work fine, that's a quota.
Lincoln: You would hit, we need to hit, we need 10 of those this month from each CSM. If the CSM does that, they get a bonus. They still get their full salary, plus they get a little bit extra. Okay, cool. I would suggest not doing CSQLs, but that's a whole other [00:19:00] thing. If we're doing things right, we're not doing CSQLs we have this we have milestones.
Lincoln: That we understand our customers move through. And some of those milestones are going to have associated expansion opportunities. I would bonus my CSM on simply getting the customer to that milestone.
Johan: yeah,
Lincoln: Now, whoever takes over from there to actually close the deal, whether it's. Whether it goes back to new business sales and they close the deal, whether it's an account manager that's going to close the deal, whether I, as the CSM can push a button and add it to their account, whatever.
Lincoln: The CSM gets bonused on simply getting the customer to that progress milestone, because that's the only thing that they have. To the extent a CSM has any control over anything anyway that's what the CSM has control over, is moving the customers through these milestones. So you can bonus on that.
Lincoln: You can bonus on on orchestration. So in our Impact Academy training, we talk a lot about orchestration, which is basically where you're letting a customer know, hey, at some point in the future, this thing is going to happen. Usually it's around expansion or [00:20:00] maybe even advocacy. But you. We did this at one company where we wanted the CSMs to, like the first time we were doing this we wanted the CSMs to start orchestrating more, it's a learned behavior.
Lincoln: Like it's, it, you have to, first of all, you have to know how to do it and then you have to practice and then you have to start doing it. So we actually bonused on if they orchestrated. I can't remember the percentage. If they were doing this 50 percent of the time, bonus would start and then it would go up to a hundred percent of the time.
Lincoln: So basically in, in all of their meetings, and we were tracking that through Gong, we would just set up a tracker for some of the parts of orchestration, and that was a great way to motivate a change in behavior.
Johan: yes, that's
Lincoln: Yeah. And so and we were talking about success sprints also, right?
Johan: yeah, and the milestones part I think is really cool because milestones, progress milestones, every customer you have can make progress from wherever they are, right? So even if you inherit bad portfolio in the sense that the [00:21:00] person before you were not doing their job or you had a lot of, yeah, poor onboardings or whatever.
Johan: If you have clear progress milestones, you can you can basically move your customers up from a low base if you like. And maybe it's not even expansion, but from a company perspective, from a customer success perspective. These customers are now getting closer to achieving their goals.
Johan: They're getting more value from our platform. So we're doing the right things. And that we should incentivize.
Lincoln: Yeah, exactly. Progress milestones are really the basis for operationalized customer success management. If you're not, if you're not building your operation around the customers moving through these milestones, then I would encourage you to really take a look at what you're operationalizing around, because it's possibly something that's not super meaningful and, isn't really moving everybody in the right direction.
Lincoln: So progress milestones are important. All of these things are amazing. And you're right. Not every milestone has an associated [00:22:00] expansion opportunity with it, but every milestone is important. If we move our customers through those milestones that's something that, that we should be celebrating and maybe even bonusing the CSMs on.
Lincoln: Another way to do it is velocity. So how quickly are we moving them through these milestones? Remember it's. It's actual progress. It's a progress milestone. So if I can move customers through those faster, that doesn't mean that we're. We're skipping steps. It doesn't mean that we are doing things poorly.
Lincoln: It's actual progress. So if we're able to move them, especially as we move into progress milestones that are more customer centric the milestones in the early days in onboarding they're more what we call, there's there's technical and administrative milestones. And as you move towards customer centric milestones, you get into operational and tactical and strategic.
Lincoln: Those are so much more meaningful to the customer because they're they're customer centric. And if customers are [00:23:00] making changes on their side through the use of our product, it's impacting their business in a meaningful way. That's great. And if we can do that at a faster clip.
Lincoln: That's awesome. And so you can bonus on the velocity of those things. Advocacy, we're getting customers to, to be advocates for us that's something you could bonus on. And again, success sprints, which are just little two week projects that, may or may not even be customer facing, but they're things that CSMs who are in good standing and who want, can take these additional things on and if they complete them, they get a bonus, right?
Lincoln: So
Johan: Yeah.
Lincoln: this is really about incentivizing the behavior that we're looking for. And because it's a bonus, there's not the fear associated with not, with something not working out and you simply not getting your full salary. If the CSM is doing well, then they're going to go above their on target earnings with these bonuses.
Lincoln: And if they're not doing well. They're not going to lose, there's no downside beyond simply, getting [00:24:00] paid what they, what their salary is, but you as the manager, you as their leader are going to intervene and try to get them back on track. That's the key. So you have to do that.
Johan: And also, this is not maybe for this episode, but you should also have a clear career path for your CS team. So you can increase, of course, your base salary and your, or your your full salary as well as you advance your career and take more responsibility and do more for the company and the customer success team as well, of course.
Johan: All right, cool. So let's wrap up. What are our three takeaways? I'll go first here. So I think that one of the big points of this episode is that you need to be aware of the pitfalls with variable comp for customer success.
Lincoln: Yeah. And I think, just building off of that is, is, just pay your full salary and then bonus on things like moving [00:25:00] customers through progress milestones.
Johan: And last, but definitely not least, variable comp do not replace leadership. I think that's the big thing here as well. Alright, thanks for listening, and see you back next week.
Lincoln: Okay. Interesting.
Johan: Interesting. Yes. I think Anyone out there who's been trying to set this up know it is and can be a challenge. And there's many ins and outs to this one. So I think it's a really hot topic to talk about. And I think let's get into it and give everyone our view and also help them maybe avoid a few of the The pitfalls or the potentially like bad ways of setting up a comp plan or a bonus.
Lincoln: Yeah. And there are a lot of potential pitfalls and a lot of bad ways to do this. Definitely we can help [00:01:00] here for
Johan: Yes.
Lincoln: This is an, it is an interesting topic. And it does come up frequently. I think it comes up as a topic more frequently than it's actually. Implemented. Think it's something that a lot of heads of CS go back to, like they want to try to do this but they're still not.
Lincoln: So it comes up a lot in that way versus so much that it's actually being done. That does, that's not to say that it isn't being done. But I think as a topic, it's something that heads of CS are often looking at as something they want to try. And we'll get into some of the reasons why that might be and why the Variable Comp model may not be exactly what you should be focused on right now.
Johan: Yeah. No, and I think myself included have, many of us have probably tried a few different ways of doing this. And basically yeah, [00:02:00] after a while, just been able, had to throw it away and give up and change and re, revise it and so on. So I think that there is a lot of times attempt here to do things.
Johan: Maybe it's even coming from your leadership team. Maybe you have a CFO or a CEO that wants everybody to be on a variable comp plan. Maybe you have this in sales, you want this for your customer success department as well. So there's many inputs to this question, basically.
Lincoln: Yeah,
Johan: Yeah.
Lincoln: it's, yeah there's a lot of different reasons for this. And I think if you just look at what Variable Comp, so let's talk about that for, what do we mean by Variable Comp?
Johan: That's good.
Lincoln: Generally what that means is that you pay your. Your employee, so it doesn't matter what type of role they're in at this point.
Lincoln: So we just say we're going to pay the employee some percentage of what we would call their on target earnings, OTE. Which would basically [00:03:00] say OTE is what their salary would be. Okay. So just for round numbers if their salary would be a hundred thousand dollars a year, They're on target earnings would be 100, 000 a year, but versus a regular salary, variable comp would be, we're going to pay you.
Lincoln: 30, 000 a year, just you'll, you're guaranteed to get that. And then if you do the things that are necessary, like maybe in sales hitting certain quotas you will make that other 70, 000 or the other 70 percent of your on target earnings. If you, in sales, generally, if you go above the quota, then you will make more.
Lincoln: Then you're on target earnings. Okay. So you might make 125, 000 a year if you really if you really crush it. In Customer Success Management, you will, where this is done, you will often see It's something closer to the base salary being [00:04:00] 70 percent of their on target earnings and then the CSM having to perform their regular job of making customers successful to, to earn the other 30 percent or the other, in this case, if we're talking 100, 000 on target earnings, we would pay them 70, 000 salary, And the variable aspect of it would be the other 30, 000 to make up the full 100, 000.
Lincoln: So variable in this case means some sort of base plus some sort of earned additional income that, that altogether equals an on target earnings. And in, customer success, that on target earning is probably just going to be market rate salary.
Johan: And the problem there of course is that whereas in sales there is a big upside, perhaps in customer success, it becomes more of like a punishment or of if you [00:05:00] don't meet meet your goal, then you are basically losing some of your ot, right?
Lincoln: Exactly. Just to be absolutely clear. Yes. In sales, Variable Comp is used to motivate action. We're going to pay you a small salary to like, cover your basics. And then from there, you can pretty much earn whatever you want. If you simply hit the quota that we've put in place for you, Because that would mean that as a company across all our salespeople, we are going to hit our sales forecast. If you simply close, 10 deals or whatever or close, X amount of revenue, then you will hit your commission that equates to your on target earnings. If you go above and beyond that. Fantastic. I don't care if you hit 200 percent of your OTE. That just means that you're crushing it and the company as a whole is going to be getting even more customers, hopefully good fit [00:06:00] ones, but whatever.
Lincoln: The CSM side of things, it's not usually like that. It's, I'm going to pay you 70 percent of your salary. And you better do your job or you're not going to get the other 30%. And I say it like that, it sounds a little harsh, but that's what I've actually seen when it comes to variable comp in CS.
Lincoln: It's not, want you to go above and beyond, and you can earn whatever you want, essentially. It's, I'm basically, there's a there was a show a long time ago called Third Rock from the Sun and they were aliens. They came to earth, it was John Lithgow, was like the main guy, and he found out about tipping at a restaurant.
Lincoln: And so it was basically these aliens trying to learn how to be human. And he went to a restaurant. And so in the United States, restaurant workers they get paid very little and they make up most of their their on target earnings with tips. So from the patrons, it's not the way it is in all of the world [00:07:00] but in the United States, that's how it is.
Lincoln: And so he sits down at the restaurant and he puts a stack of money on the table. And he shows the wait person, the stack of money and he says, every time you don't do something I like, I'm going to take some of this money away. That was So the incentive for the wait person Was not to go above and beyond and hopefully get a big tip.
Lincoln: It was don't mess up, don't do things wrong, or this person is going to just sit there and take money. And of course, that's what he did. The whole episode was him just taking money off of the stack. And it sounds harsh. It was funny the way it was presented. And of course he learned the lesson, like that's not how you get the best from the person that you're working with.
Lincoln: But that's what we do in customer success management. I say, we. I don't do this, but is you're basically saying here's your on target earnings. Here's the stack of money. And every time you don't do something right, every time a [00:08:00] customer churns, which you had, not full control over, every time a customer contracts, which, it's because they were sold too much initially or the onboarding person didn't work with them right or whatever.
Lincoln: So it's outside of your control, but every time something like that happens, we're going to take money off of your, the stack of money that you should be getting. That's how variable comp is generally positioned. In customer success, it is a threat.
Lincoln: It is, it's, it only has downside potential. It is meant to motivate CSMs to simply do the job that the CSM would do no matter what.
Lincoln: And it ends up adding a lot of stress and overhead to CSMs who already carry a lot of stress and overhead simply trying to make customers successful when it seems like the rest of the company doesn't want the customers to actually be successful. I'm just
Johan: big point.
Lincoln: yeah
Johan: think that this is important. I think this is where you get wrong sometimes,
Johan: And we'll get to it soon also, what you can do about it and what we believe is a good way [00:09:00] to work with a bonus and some incentives, right? I've also seen, I'm also going to share another way where I've seen you go wrong with variable comp is to just apply the new business sales comp plan to your customer success team. Incentivizing expansion only if you bring in these new deals or upgrades or you get a commission or something like that on those. very much. And that I've seen that happening. And and then you will, of course, incentivize your Customer Success Managers to only work and maybe even push upgrades on customers that don't, are not ready.
Johan: And they will for sure forget about all these customers that need their attention, that are on the wrong track, that we need to maybe spend actually even more time with and that are even more important for us.
Lincoln: Or another thing that I see happening in that same scenario is CSMs will be like, cause they're not going to, they're not going to [00:10:00] chase deals simply to chase deals. They're not going to try to sell something to a customer that doesn't need it when they don't need it because they know that's going to hurt trust.
Lincoln: And they also know that these other customers need their help. So you end up with CSMs that are doing their job, but are being punished because. They didn't do these other things that, that the incentive structure was trying to be built around. It's just it's, this is just, we just look at these things wrong, but I want to be really clear, that I think some people may take the wrong way.
Lincoln: And that is, I just want to be really clear. We are not talking about not growing NRR. We are not talking about reducing expansion. In fact, everything we talk about on this pod, everything we do in Customer Success, our point of view is that Customer Success is a driver of growth. Customer Success Management should be the driver of the most predictable new revenue stream.
Lincoln: Streams in, in your business. [00:11:00] So this is not about re reducing growth or reducing NRR or redu or eliminating a focus on NRR or LTV growth. This is about. Ensuring we do it in the right way. And so the things we're going to talk about today will actually end up helping you grow NRR. It'll help you maximize LTV and whatever those metrics are that are important to you in terms of growth, doing this the right way is going to have a massive impact on that.
Lincoln: And this is what we're going to talk about today is the things that could actually lead to exponential growth in account value versus These other ways of doing things could lead to incremental growth at best. And at worst, it could really hurt your relationship with your customer and it could cause your CSMs to leave.
Lincoln: Pay attention as we go along here, don't get, don't, and don't think that we're talking about reducing growth. We're talking about actually maximizing growth.
Johan: Exactly. Because, again, back to [00:12:00] the question what's the best approach? I think the question behind that one is what are we trying to achieve here?
Lincoln: Yeah,
Johan: Why do we want the variable com plan for our customer success team? Or how do we incentivize them and what do we want to do?
Johan: What are we trying to achieve here?
Lincoln: I think that's always the question that I ask when somebody asks about variable comp, I say why are you looking at variable comp? Or, what, why is this the question that you're asking? To your point. There's a bigger question behind the question. And it, and I can almost guarantee somebody asking about variable comp has, a head of CS asking about variable comp has been tasked with NRR growth or LTV maximization or, whatever, expansion, they've been tasked with some, something like that.
Lincoln: And they are looking for ways to motivate their team. They're looking for ways to get these things to happen, but they're not taking into [00:13:00] consideration that one of the great motivators of a team is the leader. It's them, but they're looking for some alternative to them
Johan: Yes.
Lincoln: as a way to motivate.
Lincoln: And that is one thing that I have seen with variable comp plans is very often they are used. As a replacement for good leadership, or I should say they are, they try, but that doesn't work. But that's, that is something that can happen. It's I don't know how to motivate my team. I don't know how to coach my team.
Lincoln: So I'm going to, I go, I went to my spreadsheet. I came up with this comp plan that, that, you know that only has downside and this should motivate them.
Johan: Exactly. And it rolls up to our overall target for the company in terms of ARR growth and
Lincoln: Oh it's magical. It's a fantastic spreadsheet. I'm super proud of this thing. It has no actual basis in reality,
Johan: No. But it's [00:14:00] great at a board meeting, right?
Lincoln: yes, it looks so good. But that's the thing is I, I've worked with some companies where The head of CS maybe got into that position.
Lincoln: In one, one very specific example, I can think of this was one of the founders of the company that was the head of CS and, they all just drew straws to figure out who was going to lead which area of the company. So this was just a founder, a very technical founder, very analytical, was over CS and they just spent all their time in the spreadsheet.
Lincoln: And. They came up with this amazing variable comp model and asked me what I thought of it. And I was like, you've wasted so much time trying to figure this out when you could have just been working with your team to understand what it's going to take for the customers to be successful and how to get your team to just simply move those customers along the trajectory towards success.
Lincoln: But you've [00:15:00] spent so much time and effort. Coming up with this variable comp plan that's not going to accomplish what you want it to anyway that, now you're going to be scrambling because of all that wasted time. So it's just, and by the way, when you have something really convoluted.
Lincoln: And difficult to communicate to your team, then that just adds more overhead because nobody's really sure okay, what all do I have to do to get paid my, just to just get paid what would essentially be a market salary. I'm confused. And so then now again, you add I talk about overhead so much with CSMs, but there's so much going on that the last thing you wanna do as a leader in a, in and a and, a coach for your team is to make things more, more complicated.
Lincoln: And to add that overhead. You wanna reduce that. You want to. Help your CSMs.
Johan: Yeah. It's very easy that these incentives you try to do actually are counterproductive. We mentioned some already, but [00:16:00] like having a commission on expansion only, as you said, like some people, that are in Customer Success might get triggered by that, but most won't. They will still be focused on the customers and they will be looking at the struggling customers and the ones that need more help and turnarounds and so on that have no commission maybe in the short term. So even so you have to be very careful what type of incentives you put in place. But are there incentives you can do and what do we what's what are thoughts there? Can you incentivize customer success teams?
Lincoln: absolutely. So the way that I suggest doing this is pay your CSMs their market rate salary. So 100 percent OTE, full salary. There you go. Amazing. Okay. Now. If they don't do their job whatever that means, they don't [00:17:00] get just some fraction of their salary. They still get their salary, but you as the leader and as their coach intervene, Hey, we didn't hit our numbers last month or last quarter.
Lincoln: Let's look at that and see what's going on. And we do a deep dive and we figure out, okay. This one CSM's portfolio is more heavily weighted to like bad fit customers. And they got a bunch of customers from a CSM who was flaking out and didn't do their job. And so this CSM is saddled with a portfolio that's underperforming.
Lincoln: It's not the CSM's fault. Okay, cool. Here's what we're going to do to try to alleviate some of that overhead, next quarter. And that's fine. We have another CSM that, that actually has a pretty good portfolio, but they themselves are, not doing what they need to do.
Lincoln: So maybe we try to work with them next month, next quarter, we get back with them. They're still not really doing what they need to do, still getting their full salary. We put them on a performance improvement plan. Next quarter, next, next month, whatever your timeframe is for that [00:18:00] improvement plan, they don't improve.
Lincoln: Now they need to go work somewhere else. But in that whole time, they just got their salary. See, that's called being a manager. That's called being a leader. You're not, you're just, that's how you, that's how you work with CSMs. That's how you work with employees. So you pay them their salary. You can bonus them on other stuff. Even if you're doing something like CSQL, so Customer Success Qualified Leads, which I don't like because we don't have leads, we're working with customers. Leads are prospects that, they're new business things. But even If you're surfacing CSQLs for sales to work fine, that's a quota.
Lincoln: You would hit, we need to hit, we need 10 of those this month from each CSM. If the CSM does that, they get a bonus. They still get their full salary, plus they get a little bit extra. Okay, cool. I would suggest not doing CSQLs, but that's a whole other [00:19:00] thing. If we're doing things right, we're not doing CSQLs we have this we have milestones.
Lincoln: That we understand our customers move through. And some of those milestones are going to have associated expansion opportunities. I would bonus my CSM on simply getting the customer to that milestone.
Johan: yeah,
Lincoln: Now, whoever takes over from there to actually close the deal, whether it's. Whether it goes back to new business sales and they close the deal, whether it's an account manager that's going to close the deal, whether I, as the CSM can push a button and add it to their account, whatever.
Lincoln: The CSM gets bonused on simply getting the customer to that progress milestone, because that's the only thing that they have. To the extent a CSM has any control over anything anyway that's what the CSM has control over, is moving the customers through these milestones. So you can bonus on that.
Lincoln: You can bonus on on orchestration. So in our Impact Academy training, we talk a lot about orchestration, which is basically where you're letting a customer know, hey, at some point in the future, this thing is going to happen. Usually it's around expansion or [00:20:00] maybe even advocacy. But you. We did this at one company where we wanted the CSMs to, like the first time we were doing this we wanted the CSMs to start orchestrating more, it's a learned behavior.
Lincoln: Like it's, it, you have to, first of all, you have to know how to do it and then you have to practice and then you have to start doing it. So we actually bonused on if they orchestrated. I can't remember the percentage. If they were doing this 50 percent of the time, bonus would start and then it would go up to a hundred percent of the time.
Lincoln: So basically in, in all of their meetings, and we were tracking that through Gong, we would just set up a tracker for some of the parts of orchestration, and that was a great way to motivate a change in behavior.
Johan: yes, that's
Lincoln: Yeah. And so and we were talking about success sprints also, right?
Johan: yeah, and the milestones part I think is really cool because milestones, progress milestones, every customer you have can make progress from wherever they are, right? So even if you inherit bad portfolio in the sense that the [00:21:00] person before you were not doing their job or you had a lot of, yeah, poor onboardings or whatever.
Johan: If you have clear progress milestones, you can you can basically move your customers up from a low base if you like. And maybe it's not even expansion, but from a company perspective, from a customer success perspective. These customers are now getting closer to achieving their goals.
Johan: They're getting more value from our platform. So we're doing the right things. And that we should incentivize.
Lincoln: Yeah, exactly. Progress milestones are really the basis for operationalized customer success management. If you're not, if you're not building your operation around the customers moving through these milestones, then I would encourage you to really take a look at what you're operationalizing around, because it's possibly something that's not super meaningful and, isn't really moving everybody in the right direction.
Lincoln: So progress milestones are important. All of these things are amazing. And you're right. Not every milestone has an associated [00:22:00] expansion opportunity with it, but every milestone is important. If we move our customers through those milestones that's something that, that we should be celebrating and maybe even bonusing the CSMs on.
Lincoln: Another way to do it is velocity. So how quickly are we moving them through these milestones? Remember it's. It's actual progress. It's a progress milestone. So if I can move customers through those faster, that doesn't mean that we're. We're skipping steps. It doesn't mean that we are doing things poorly.
Lincoln: It's actual progress. So if we're able to move them, especially as we move into progress milestones that are more customer centric the milestones in the early days in onboarding they're more what we call, there's there's technical and administrative milestones. And as you move towards customer centric milestones, you get into operational and tactical and strategic.
Lincoln: Those are so much more meaningful to the customer because they're they're customer centric. And if customers are [00:23:00] making changes on their side through the use of our product, it's impacting their business in a meaningful way. That's great. And if we can do that at a faster clip.
Lincoln: That's awesome. And so you can bonus on the velocity of those things. Advocacy, we're getting customers to, to be advocates for us that's something you could bonus on. And again, success sprints, which are just little two week projects that, may or may not even be customer facing, but they're things that CSMs who are in good standing and who want, can take these additional things on and if they complete them, they get a bonus, right?
Lincoln: So
Johan: Yeah.
Lincoln: this is really about incentivizing the behavior that we're looking for. And because it's a bonus, there's not the fear associated with not, with something not working out and you simply not getting your full salary. If the CSM is doing well, then they're going to go above their on target earnings with these bonuses.
Lincoln: And if they're not doing well. They're not going to lose, there's no downside beyond simply, getting [00:24:00] paid what they, what their salary is, but you as the manager, you as their leader are going to intervene and try to get them back on track. That's the key. So you have to do that.
Johan: And also, this is not maybe for this episode, but you should also have a clear career path for your CS team. So you can increase, of course, your base salary and your, or your your full salary as well as you advance your career and take more responsibility and do more for the company and the customer success team as well, of course.
Johan: All right, cool. So let's wrap up. What are our three takeaways? I'll go first here. So I think that one of the big points of this episode is that you need to be aware of the pitfalls with variable comp for customer success.
Lincoln: Yeah. And I think, just building off of that is, is, just pay your full salary and then bonus on things like moving [00:25:00] customers through progress milestones.
Johan: And last, but definitely not least, variable comp do not replace leadership. I think that's the big thing here as well. Alright, thanks for listening, and see you back next week.
