In today’s highly competitive B2B SaaS landscape, achieving and sustaining rapid growth is the ultimate goal for any company. However, the path to scaling successfully involves more than just acquiring new customers; it’s about retaining and expanding your existing customer base. To navigate this complex terrain, SaaS companies turn to platforms like RevSetter to manage, retain, and grow their customer relationships. One critical aspect of this journey is the design of compensation models that align different teams working with customers, such as Customer Success Managers (CSMs), Account Managers, and Account Executives (AEs).
In this comprehensive guide, we will delve deeply into the intricacies of structuring salary and compensation models for scaling SaaS companies. We’ll explore the various components that can be integrated into these models, including Net Revenue Retention (NRR), Gross Revenue Retention (GRR), and Objectives and Key Results (OKRs). By examining real-world examples and comparing different compensation models, we aim to provide actionable insights that will help SaaS executives make informed decisions about their compensation strategies. We will also dedicate significant space to how these models align CSMs and Account Managers for maximum synergy, discuss how to pay the comp (commissions vs. bonuses vs. mix), and the optimal balance between base salary and variable compensation. Additionally, we’ll discuss potential pitfalls to avoid when creating compensation models.
The Importance of Aligning Compensation Models
Before we dive into the specifics of compensation models, it’s crucial to understand why alignment matters. In a scaling SaaS company, various teams collaborate to drive customer success and revenue growth. These teams, primarily CSMs and AMs, often have different objectives and responsibilities. Properly structured compensation models can align their efforts and create a shared focus on customer satisfaction, retention, and expansion.
Before you start
One important consideration before deciding on what type of compensation model and the different variables you want to include therein is to consider your business goals and objectives. Be specific in this thinking, “what does the CEO and/board expect from the business this year?”, “What business critical unit economics and KPIs are prioritized this year?”, and “Are we struggling in any particular areas, like retention, or have opportunities in others, like expansion?” are examples of questions to ask. The answers to these questions and others similar to them will help guide what variables you prioritize in the compensation models.
Example 1: Mix-Model Compensation
How It Aligns CSMs and AEs/AMs:
- This compensation model combines elements of both revenue-centric and retention-focused models.
- CSMs receive a base salary and a percentage commission on all bookings (renewals & expansion deals) and bonuses tied to key KPIs and/or OKRs like NPS or usage.
- If you have AEs, they earn commissions on new deals and bonuses tied to renewals and NRR/GRR performance.
- If you have AMs, they earn commissions on expansion deals and bonuses tied to renewals and NRR/GRR performance.
Example: CSMs receive a base salary representing 60% of their total compensation, with the remaining 40% being variable. AM/AEs receive a 50/50 split between base salary and variable compensation. This mix-model ensures that both teams are motivated to drive revenue while also focusing on customer retention and satisfaction.
Example 2: Retention-Focused Compensation Model
How It Aligns CSMs and AMs:
- CSMs are responsible for GRR & NRR, and the majority of their compensation directly correlates with GRR performance along with tiered NRR bonuses.
- AMs are responsible for NRR & GRR, and the majority of their compensation directly correlates with NRR performance along with tiered GRR bonuses.
- Both CSMs and AMs are motivated to close deals with a strong emphasis on customer fit and long-term potential, as churn & expansion impacts their bonuses and both GRR/NRR performance.
Example: CSMs are rewarded with a 3% commission for all renewals. AMs receive a 5% commission for all expansion deals. You can also tier the commission percentages, i.e. if GRR is <75 % = 1 % commission, 75-90 % GRR = 3 % commission, and GRR > 90 % = 5 % commission. This alignment ensures that both teams prioritize customer retention and growth.
Example 3: OKR-Driven Compensation Model
How It Aligns CSMs and AMs:
- OKRs are set collaboratively with input from both CSMs and AMs, fostering a shared sense of responsibility for customer success.
- Compensation is tied to the achievement of OKRs, ensuring that both teams work together to meet company objectives.
- OKRs can be time-bound, e.g. change each quarter or half year to adjust for evolving needs in the business.
Example: Align the compensation model with OKRs, offering bonuses based on achieving quarterly targets regarding user activation, executive business reviews, projects completed, NPS or more. This approach fosters a sense of shared responsibility and accountability among teams.
Example 4: Revenue-Centric Compensation Model
How It Aligns CSMs and AMs:
- CSMs work closely with AMs to drive growth. Their compensation is equally tied to the upsell and cross-sell opportunities they identify and close as it is to the renewals they work on.
- AMs compensated for both renewals and expansion deals, working closely with the CSs to be successful with growing the customer base.
Example: The CSM and AM teams meet regularly to discuss renewals and identify expansion opportunities within their customers. CSMs receive a 5% commission on renewals & expanion deals, while AMs, who drive the revenue execution, earn a 10% commission on renewal and expansion deals. This encourages both teams to collaborate on maximizing customer lifetime value.
How to Pay Compensation: Commissions vs. Bonuses vs. a Mix
- Commissions: Commissions are a percentage of the revenue generated by a team member’s actions. They provide direct incentives for renewals or expansion.
- Bonuses: Bonuses are lump-sum payments tied to specific achievements or milestones. They can encourage behaviors that lead to long-term success, such as hitting retention targets.
- Mix: A balanced approach, using a mix of both commissions and bonuses, can align short-term and long-term goals. Commissions drive immediate action, while bonuses motivate sustained efforts and results.
- Time-period: Consider your sales cycles, customer journey, your reporting and other factors to determine your Quota and payout periods (monthly, quarterly, annually).
- Individual vs team: Using a mix between individual performance and team performance measurements can fuel collaboration, e.g. paying a bonus for the team hitting NRR target.
Base Salary vs. Variable Compensation: Striking the Right Balance
Determining the right balance between base salary and variable compensation is critical. While there’s no one-size-fits-all answer, several factors should be considered:
- Company Stage: Early-stage startups might offer higher variable compensation to attract top talent, while more established companies may opt for a more balanced approach.
- Risk Tolerance: Higher variable compensation can be riskier for employees who prefer a stable income, so consider the preferences of your team.
- Industry Norms: Research industry standards to ensure your compensation structure is competitive.
- Performance Expectations: Align compensation with performance expectations and KPIs.
For instance, a common approach might be a 60/40 split, with 60% of total compensation in base salary and 40% in variable compensation. However, this can vary widely depending on the factors mentioned above. It’s crucial to regularly reassess and adjust this balance to suit your company’s evolving needs.
Potential Pitfalls in Compensation Models
While designing compensation models, it’s essential to be aware of potential pitfalls that can hinder their effectiveness:
- Misaligned Metrics: Using metrics that do not accurately reflect customer success and revenue growth can lead to suboptimal results. Ensure that the chosen metrics align with your company’s strategic goals.
- Overemphasis on Short-Term Gains: Revenue-centric models can sometimes prioritize short-term revenue over long-term customer satisfaction. Striking a balance is crucial.
- Complexity: Overly complex compensation models can confuse and demotivate team members. Keep them simple and transparent.
- Neglecting Team Collaboration: Failing to encourage collaboration between CSMs and AMs can result in siloed efforts. Consider team-based bonuses to foster cooperation.
Scaling any business requires a multi-faceted approach, and compensation models play a pivotal role in aligning teams, driving desired behaviors, and achieving key business objectives. Whether you opt for a revenue-centric, retention-focused, mix-model, or OKR-driven model, it’s essential to continually evaluate and adapt your compensation strategy as your company evolves.