Customer success is a business activity that touches every part of a SaaS provider’s operations. A customer success manager (CSM) ensures customer satisfaction, encourages optimal use of a SaaS product, optimizes product adoption rate, and helps customers identify goals and track value derived from product use. Through these and other efforts, CSMs help a SaaS company retain and expand customer revenue. Because of the close connection between CSM efforts and revenue, the compensation structure for the position is crucial.
While there are many ways to compensate any employee, CSM compensation usually falls into three main categories: base salary, base salary plus bonus, and base with a variable compensation component other than a bonus. Each compensation method provides a company with the ability to reward employees for performance.
It’s possible to pay a CSM a base salary alone, and some SaaS companies use this method, especially if their goals are to provide a consistent income level to their CSMs. In this method, CSMs do their jobs with no immediate reflection of their performance. However, raises can be tied to performance metrics during annual reviews or other milestones. While this is a simple system, it has several drawbacks, including:
- Lack of incentivization
- Little connection between performance and pay
- No use of KPIs to track accomplishments
Base salary plus bonus
To provide incentives for achieving positive results, companies often use a combination of base salary plus a bonus for CSM compensation. This system mirrors a sales employee compensation structure; however, CSMs usually earn a higher base salary, reflecting their operational and administrative duties. While the figures can vary widely, common compensation base to bonus ratios for CSMs is at 70/30.
In this compensation model, bonuses are paid per newly closed deal, with the understanding that ongoing revenue will be tied to onboarding, lowering churn rates, ensuring product adoption, and other customer success initiatives. Bonuses encourage CSMs to be effective at their jobs. Still, they can ultimately provide less-than-fair compensation as the amounts are often tied to revenue at the beginning of a customer lifecycle, instead of encompassing the entire journey.
Base salary plus CSM goal achievement ongoing revenue sharing
While CSMs play an essential role in sales, their primary function is to ensure ongoing customer success. A fairer compensation structure for the CSM role is one that rewards an employee for reaching customer success goals. A bonus based on new accounts captures an incomplete picture of the value that a CSM brings to a company. A SaaS company can base the variable compensation component on KPIs related to customer success. By doing so, companies can engage in management by objective instead of a relatively arbitrary system — from the perspective of a CSM.
This system rewards a CSM for their role in a SaaS company’s success, as greater customer success leads to lower churn and more revenue through expanded product use or new customer referrals from successful users.
Determining KPIs for compensation
Which KPIs should direct bonus amounts? A company can look at several indicators, including churn rate, adoption rate, use, and even such factors as net promoter score. However, while these metrics help determine the effectiveness of overall customer success management activities, they do not directly relate to the revenue-focused goals of retaining and expanding customer revenue.
Focusing on core revenue retention and growth can provide a fairer and more accurate basis for determining CSM compensation. With this method, a percentage of renewed revenue can be earmarked for payout to the CSM. For example, if a target earning for a particular CSM is $100,000, and a 70/30 split is used, the $30,000 of annual salary would be earned if a target revenue renewal rate is met. If a 5 percent revenue loss was acceptable, then renewing 95% of revenue would receive the full $30,000. Should the revenue renewal improve, the customer success manager would earn a higher bonus, which in turn further incentivizes going beyond set goals?
Unlock insights into performance with KPIs
Central to this fairer system that truly rewards performance is the use of KPIs. To tap into this data, SaaS companies need a view into their customer success initiatives. SmartKarrot’s intuitive dashboards that provide actionable insights into the customer journey, and accurately reflect customer success. With SmartKarrot, SaaS providers can quickly determine a customer success manager effectiveness, and fuel compensation determinations with this information.
SmartKarrot enables companies to operationalize customer success and, as a result, track the performance of CSMs and build compensation structures that incentivize customer success.