Incentives and compensation models for customer success teams often vary significantly across companies and industries. On one end of the spectrum, customer success managers, or CSMs, are purely in a partner role with customers, helping them get the most value out of the products and services they have purchased. On the other end, customer success managers often work closely with sales teams, have a significant focus on upselling customers, and may even have a large percentage of their total earnings come from variable compensation, although not as large of a percentage as sales teams have. In determining how to map out compensation for customer success teams, it’s essential to design a structure that accounts for the specifics of each business and will maximize outcomes in line with your specific business objectives. This guide will break down the fundamentals of CSM compensation and explore the trade-offs and use cases for each model.
At the most basic level, there are three basic models for compensating customer success teams:
1. Compensate CSMs with a Base Salary
This is the starting point for any CSM compensation package. By itself, this is the simplest way to compensate CSMs. This structure can make a lot of sense for certain types of businesses.
For example, new CSM teams without any historical performance data or benchmarks around upsell potential. The responsibilities and focus areas for CSM teams can be broad, and without an understanding of where they will be most effective, providing solely a base salary in the early years can be helpful while establishing where to focus the efforts of the customer success team. Similarly, this can also be helpful for teams where there is a huge backlog of work which may not be directly related to driving revenue, or where product adoption is suffering to the point where CSMs have to do damage control before focusing on revenue growth.
The benefits of this structure:
When CSMs are needed to be a neutral, strategic advisor, a base salary helps ensure their neutrality. This can be helpful for earlier stage companies still looking for product market fit; churn events can be a natural course of action as a company tries to figure out who its best customers are, and having CSMs proactively churn customers which just don’t make sense is an important tool. Thus, incentivizing CSMs to not churn customers would be counter to the company’s best interests in this scenario.
The downside to this structure:
CSMs can often become focused on lower impact or even reactionary work, and have less incentive to be laser focused on revenue growth or specific product adoption metrics. Some customers will always use CSM resources as much as they can get away with; with this compensation model, it can be more difficult for CSMs to extricate themselves from requests which aren’t always mission critical.
For companies with newer customer success teams who pursue this approach, it can be helpful to think about if or when it might make sense to move towards a compensation structure incorporating some level of variable compensation, and setting expectations with the team as new hires are onboarded in order to ensure a smoother transition.
2. Compensate CSMs with a Base Salary + Bonus.
This next compensation model for customer success teams begins to add in some financial incentive towards revenue goals. In this scenario, the majority of the CSMs earnings will still come from their base salary, but quantitative achievements such as renewals or upsells become more of a focus. This helps customer success teams stay more focused on revenue metrics throughout the year.
With this approach, the bonus is often tied to team goals. Collaboration is important to help customer success teams be effective, as they can share learnings with issues faced from different types of customers and resolve issues more quickly.
For customer success teams that have not historically had any form of variable compensation and want to begin implementing it but are apprehensive about the cultural impact, this approach can help share the burden across the team and serve as a smoother transition versus moving directly to a bonus tied to individual goals.
However, the downside to this approach is that it may not adequately reward CSMs who go above and beyond in order to retain or upsell large or difficult customers. This can create resentment, especially in situations where a CSM is working with a sales rep to upsell an existing account, and the CSM might do an outsized proportion of the work for a relatively small bonus while the sales rep might benefit significantly more from variable comp once the customer upgrades.
3. Compensate CSMs with a Base Salary + Variable Compensation
This tends to be the best compensation model for customer success teams that want to drive revenue growth. With this structure, the CSM still earns a base salary, but a higher percentage of their earnings comes from variable compensation tied to revenue goals such as renewals, upsells, and cross-sells, or related metrics such as product adoption or product usage.
What’s the right OTE split for CSMs?
Generally speaking, customer success OTEs range between a 70/30 split and an 80/20 split between base salary and variable comp. For example, if the CSMs on-target earnings, or OTE, is $100K, then $70K would be their base salary and $30K would be their full variable comp earning potential.
When over 30% of comp is variable, the position starts to become closer to a sales compensation structure, and incentivizes revenue growth above ensuring the customer is adequately supported and set up for success in the long run. Meanwhile, when the variable comp is under 20%, the incentive to grow revenue tends to be too small to motivate the most effective set of behaviors from CSMs.
Variable on retention vs. growth: the next question that arises is how to split CSM variable compensation between retention goals and growth goals. This will depend on each company’s churn rate, NRR, and past success upselling or cross-selling customers.