Planning for 2025: Variable Compensation

By Kristen Hayer

Part 4 is here and I’m so excited: Compensation is one of my favorite topics! After all, what else gets into both the practicality and psychology of money? Nothing drives behavior in the same way as variable compensation. It can be great. It can also be significantly bad. Think: Wells Fargo’s commission scandal where bankers were signing up customers for fake accounts to earn bonuses.

I personally believe that variable compensation is an important part of a Customer Success program. I’ll admit, I have a background in sales. Driving performance through compensation is effective. However, it needs to be handled in an organized way that is both tactful and candid.

Here are our recommended steps:

1. Understand Total Compensation

One of the first things you need to do is understand what a person on your team should be paid, all in, based on their geography. This has gotten more complex in post-pandemic time because team members are more distributed, but they still need to be paid the right amount for the place they live. You may find that they are overpaid for a new geography, which might result in a tough conversation. Those talks need to happen before the rest of this structure works.

2. Pick Goals that are Revenue-Oriented

I hope that you set some goals for your team based on the first article in this series, but if you didn’t, you’re going to need to go back and do that now. You cannot plan variable compensation if there are no goals. Variable compensation literally only exists because variable performance exists. Pick goals that are revenue-oriented to base your variable compensation on. I would recommend choosing the 2-3 goals that are most relevant to team performance.

3. Choose an Appropriate Variable Percentage

Determine what percentage of the total compensation should be tied to personal performance. For example, if a CSM is expected to earn $100k, and you think 20% is the right variable percentage, then $80k is their base and they have the opportunity to earn $20k based on how they perform against their goals. 20-25% if typical for a customer success manager to earn as a variable. CSMs who do more support-style work earn lower variables, and CSMs who do more selling or consulting-style work earn higher variables.

4. Set the Right Variable Structure

There are essentially 2 choices – commission or bonuses. Commission rates are great for goals that directly relate to revenue and are tied to the company receiving money.

Specifically, for CSMs, commission typically is paid as a percentage of the renewal rate when a customer signs up for another contract. Bonuses are used for softer goals that are still tied to revenue but less directly. For example, a CSM might receive a bonus of X dollars for each qualified lead they pass over to a sales team member.

5. Determine the Right Timing

Annual bonuses just don’t work. I have lots of stories to tell on this front, but you just need to trust me here - nobody pays attention to something that is only expected to happen once a year, and it certainly doesn’t impact behavior. You might as well be throwing that money away. Quarterly or Monthly bonuses do work, and you should base which of those you choose on the specific goals your variable comp is based on. Monthly goals = monthly payout. Quarterly goals = quarterly payout.

You can do all this right, and sometimes things can still get in the way. Here’s how to handle common obstacles to variable compensation.

• Your company pays less than market rate

First, consider whether you should be working for this company (I’m kidding…or am I?) Then, build an aggressive variable plan. The way you can pitch this to your company is “hey look, our salary isn’t up to market but if we have people who bring in revenue, they make a percentage.” Make sure this compensation plan is heavily skewed toward commission vs. bonus.

• Your executive team doesn’t like variable compensation

Not everyone agrees with the concept of variable compensation. This is a western cultural ideal, and many European companies won’t like it. If you have a team that is strongly opposed to variable comp there are other ways to drive behavior. Use contests or team events as a motivator to help your team see the value in hitting their goals.

• You company only wants to pay out annually

If your company is committed to the annual payout approach, understand that this won’t drive the day-to-day behavior of your team. Again, look at my previous suggestions of using contests and team events to drive behavior, and you can also share articles on the downsides of annual payouts with your executive team in the hope that they will change their tune over time.

• Your team is scared about having a variable plan

The first time I sacrificed some of my salary to be a part of a variable plan it was very scary. I was afraid I wasn’t good enough at my job to make the math work. But my boss was smarter than I was, and I did end up earning a whole bunch of money in my first sales job. Acknowledge that change is tough but encourage your team to take a risk. If you’ve planned it well, it will all be upside for them.

• Your team isn’t motivated by the plan you came up with

Consider that you may need to adjust your plan. If you’re offering a monthly variable, but it isn’t even enough to go out for a nice dinner, your percentages might be off. Before you roll out your plan to your CSM team, run it by your Sales VP or CRO. Their experience with this type of plan can help to ensure that you’re driving the right behavior at the right time.

Variable compensation is an incredible motivator if used thoughtfully. I hope you find this article helpful as you move toward 2025 and build out your team budget!

Need a boost getting your 2025 planning completed? The Success League can help! We are a boutique customer success consulting firm that offers one-on-one consulting and coaching for CS Leaders. Check out our class on Developing Compensation Plans, which can be taken à la carte or as a part of our Structuring Your CS Program training series. Visit TheSuccessLeague.io for more.

Kristen Hayer - Kristen founded The Success League in 2015 and currently serves as the company's CEO. Over the past 25 years Kristen has been a success, sales, and marketing executive, primarily working with scaling tech companies, and leading several award-winning customer success teams. She has written over 100 articles on customer success, and is the host of 3 podcasts about the field. Kristen has served as a judge for the Customer Success Excellence awards, and is on the board of several early-stage tech companies. She received her MBA from the University of Washington in Seattle, and now lives in San Francisco.