My last blog post was about building a Customer Success culture throughout your entire company. Today’s subject was touched on in that post and is closely tied to the overall culture because the culture of a company is set and driven by the leadership. So, what incents and motivates the leaders in a company will be apparent to the entire employee base and will drive them as well. Much like sports teams, the players reflect the attitudes and goals of the coaches.
So, we tackle the question today of how the executive compensation structure should look at a company serious about Customer Success and retention. And that, of course, encompasses every single recurring revenue business. Perhaps the bigger question is not what the compensation plan should look like (that’s fairly simple), but what behaviors, or behavioral changes, that might drive throughout the company.
Obviously, executive compensation should be built around the metrics that are most critical to the business. For mature companies, that will revolve around growth and profitability. For pure growth companies, especially SaaS, the focus on profitability is less early on, and may stay that way for many years. Growing the install base, which will ultimately become the engine that sustains the company, is priority #1, #2, and #3. In a recurring revenue business, as we all know, growth is about three things:
- New business sales
- Retention/renewals
- Upsell/cross-sell to the install base
Customer Success is a Common Thread in Each Element of Growth
#1 is driven primarily by a company’s Sales and Marketing engine, with some help from Customer Success – making existing customers happy and referenceable. #2 is the primary metric for measuring Customer Success and, in some companies, is supported by a separate Renewals Sales team. #3 is also largely the result of Customer Success (happy customers buy more product), and if upsell and cross-sell are not also done by Customer Success, they are done by the Sales team responsible for install base sales.
So, Customer Success is a common thread in each element of growth. In particular, the renewals/retention number is truly the domain of Customer Success. Even if there is a separate Renewals Sales team, the ultimate results are largely driven by the Customer Success team working with customers on product adoption and ROI. Most SaaS companies don’t have to be around more than 4-5 years, even in a rapid growth phase, before Renewals bookings will approach, and even exceed, the New Business bookings on an annual basis. And, if you include install base sales on the Customer Success side of that ledger, this will happen even sooner.
If we really simplify the growth of a company down to just two elements, they are:
- New Business bookings
- Bookings from existing customers (renewals, upsell, and cross-sell)
Shared Bonus Across All Executives
So then, to get back to our subject of executive compensation, shouldn’t all executives in a company participate in a comp plan that is driven largely, if not exclusively, by those two metrics? That’s not to say that your Engineering VP should not also be compensated on shipping a quality product on schedule. But, that should be part of his individual comp plan or MBOs. I’m talking here about the shared bonus across all executives. The bottom line point here is that a visit to your Engineering VP from your VP of Customer Success, should carry equal weight to a visit from your VP of Sales. They are similarly critical to the overall success of your company.
As I mentioned previously, the compensation part of the discussion can then be pretty simple. Let’s say the overall executive bonus pool is funded at $1M if targets are met. And, for the sake of argument, let’s say the New Business bookings target is $20M and the Renewals bookings target is also $20M. If both targets are equally important, then the bonus pool is funded at $1M ONLY if both targets are met. If New Business bookings come in at $22M and Renewals bookings come in at $18M, this is a miss, and the bonus pool should not be funded at the full $1M.
The message here is that you cannot make up for the loss of customers, or ARR from existing customers, by selling new ones. Revenue loss from existing customers can never be made up. If your bucket is leaking, it’s a losing battle to simply increase the volume of water being poured in at the top. The expense of customer acquisition is simply too great to use it to cover customer churn for any extended period of time.
The Compensation Structure Should Drive Behavioral Changes Throughout the Company
Perhaps the most important aspect of a comp plan such as I suggested above, is the behavior that it drives across your company. Think about these not-so-subtle changes:
- Engineering is just as intent on developing sticky features as they are new, flashy ones that help sell the product.
- Engineering is required to balance the frequency of releases with the importance of the quality of those releases.
- Sales thinks twice about selling to those customers they know you can’t really satisfy.
- Finance pays just as much attention to the drivers, and accuracy, of the Renewal forecast as they do the New Business forecast.
- Marketing gives some time and energy to campaigns to the install base that are all about loyalty and love, not just upselling.
- HR treats the hiring and retention of great Services people with the exact same attitude as they do for great Sales people.
You can see how the executive compensation plan can direct the proper behavior across your company. If retention and renewals truly are just as important as new business sales, you should not only get yourself a bigger gong (for Customer Success), but also a compensation plan for your execs that reflects those priorities.
