#39: Build The Ultimate CSM Incentive Program

How can you incentivise CSMs to focus on impactful work in 2024?

Many of us are in the midst of the '24 budget season.

And with that, it's time to do two things:

1. Set targets and goals for next year 
2. Re-evaluate the incentives we have in place for CSMs to drive these results 

If you are using NRR, here is a great refresh on how to set good NRR targets.

In this edition of the newsletter, I will be sharing ideas on how you can build a killer incentive programme for your CSMs.

🤑 Why Have Paid Incentives For CSMs?

Incentives drive behaviour.

That's both the power and the danger of incentive programmes.

Impactful incentives help CSMs prioritise effectively, direct their energy into the right work and move the needle on all your key metrics.

That's why I am team incentives! 

Wins for the customers + Wins for the business + Wins for the CSM

But when incentives are not designed carefully, they can be gamified or take energy away from important work and end up having a negative effect on the overall business performance.

So what should you be incentivising?

While there is no doubt that NRR will continue to be a key metric of success in 2024, more and more CS leaders are focusing on leading indicators of performance.

🚀 The Case For Blended Incentive Programmes 

Most CS leaders I talk to already use a Base + Variable compensation structure. 

The variable piece is often made up of either personal performance for high-touch CSMs or team performance for scale CSMs.

And, payouts are based on the attainment of a lagging indicator target such as NRR or GRR.

But there are a few issues with results-only incentives:

1. They can leave CSMs feeling demotivated if they are having a particularly difficult month or quarter. For example: If I know I don't have a chance of hitting in this period, why would I do anything to close the gap? I know I won't make it anyway.
2. They can lead to sandbagging behaviour: For Example: If I know I won't get close to hitting my numbers in this bonus period, I might push upsell and cross-sell deals into the next period to set myself up for future success
3. CSMs can feel like they are not in control and resent others. For example: The product team is late with an important feature and some customers churn, my compensation is impacted.

You can see how those things can drive the opposite effect that you'd want on an incentive. 

The other popular incentive programme in CS is an activity-based one.

Where you only use leading indicators like number of engagements, book of business coverage, product usage etc, those metrics can easily be gamified.

It becomes a volume vs. quality game. 

So how do you make the incentive more holistic?

You blend both leading and lagging metrics of success into one incentive. 

🛠️ The Process For Designing Your Own

I'd argue that the right structure for an incentive programme is 60% Results and 40% Effort. 

If you read last week's newsletter you will remember these 2 categories from the framework I use to manage CSM performance.

Why 60:40?

• Either piece is meaningful enough on its own for CSMs to care about both
• Results matter more than effort because that's the simple reality of running a financially feasible business and because you have skin in the game for the quality of your inputs

For example: If you have a bonus pool of $1000 per CSM. They should make up to $600 based on their results and up to $400 based on their efforts.

What Result Metric should you use?

You should use your North Star metric.

I am a big fan of NRR (read here why I think this should be a CSM individual metric), but if you don't use it today it's okay.

You can have it based on GRR, Churn Rate or Transaction Revenue Growth. 

What's really important to make this effective is that it's not binary (ie. you either hit or you don't). That often causes the problems we discussed above.

Create a sliding scale to incentivise CSMs to push as hard as they can.

For example: Out of the $600 allocated to Results, a CSM can make:

• $400 if they reach 90-99% of their target
• $500 if they reach 100-109% of their target
• $600 if they reach 110-120% of their target

Some brave companies might not have a cap on this scale and every X extra points in NRR gets the CSM significantly more variable compensation. While this might be harder to budget for, it will certainly drive your ambitious CSMs to give it all!

Getting targets right will be key, so you might want to refresh on how to set good NRR targets.

What Effort Metric should you use?

In order for this incentive to work as intended, you need to find the key metrics that correlate with value for customers.

I can't tell you what those metrics are for your business, but I can tell you that any activity metric you implement and incentivise should be deeply connected to your customer's outcomes.

If you haven't yet defined customer outcomes, start here.

Some examples of effort metrics I've seen are:

• High-Value Engagements (ie. % of total customers with EBRs with key stakeholders)
• Activation (ie. % of total customers activated within X days)
• Usage (ie. Avg. Customer Health Score) 

For this metric, you can also use a sliding scale for attainment, perhaps setting the minimum bar at 100% attainment and incentivising for overperformance (after all, these things are why people are paid a base!).

The final advice I have is to create a dashboard where people can see in real-time how they are tracking. Having clear goals and seeing the work you put in every day get you closer to your financial goals is incredibly motivating.

And it will save you dozens of emails asking for individual updates and clarifications.

TL'DR:

A CSM incentive that works is one where:

1. You reward results and effort that are deeply connected to the customer's outcomes
2. CSMs feel in control (as much as possible)
3. It's not easily gamefiable by volume alone
4. Incentivises overperformance and gets the people who are just below the target to push harder to get there
5. People can see how they are doing and how close they are to their financial goals

See you next Friday!