Compensation conundrum | Ep. 146

[Dillon] (0:00 - 0:15)

If you built a zoo with no lines of separation between the penguins and the lions and the giraffes and you just expected like, yeah, but it's a zoo, guys. Isn't that what we want? We want to see the animals like all together.

Not quite.

[JP] (0:22 - 0:24)

Oh, look at this.

[Dillon] (0:26 - 0:53)

What's up lifers and welcome to the Daily Standup with Lifetime Value, where we're giving you fresh new customer success ideas every single day. I'm so glad you guys do not behave like churless little munchkins when we have other people on this show. It's just us today.

Rob, can you please say hi? What's going on? JP, can you please say hi?

[JP] (0:54 - 0:56)

Insubordinate and churlish.

[Dillon] (0:56 - 1:04)

And churlish. And I am your host. My name is Dillon Young.

Rob, you said you wanted to bring something to the table today. Is that right?

[Rob] (1:04 - 2:53)

Yeah. Yeah. Interesting situation.

Turkey. Turkey. No, no turkey.

But we will talk turkey. When it comes to talking turkey. One of the things I think about is comp.

And a question came up from a CEO at a startup this week. He asked me, how should I be thinking about variable comp for my head of customer success? And I was like, well, typically, I would recommend basing it on NRR.

And given your model, I think NRR is the right metric. He was like, I actually want to base it on company milestones, broad company milestones, like are we hitting our overall growth goals, our overall revenue milestones? And I was like, dude, I don't know about that.

Yeah, I was like, this isn't GE, brother. Like, yeah, exactly. He was thinking of it more as a quarterly bonus or something based on company milestones.

The reason I pushed back was I was like, I see what you're trying to do here, right? You're thinking that you'll incentivize all these extraneous behaviors that a CS person can be doing, like getting referrals, because that helps top line revenue growth and other behaviors like maybe helping product with where product is stuck, or even engineering or whatever. So I see what you're going for here.

But it's a recipe for disaster in my mind. Because you're just asking this person to number one, get stretched way outside of their core domain of responsibility. But number two, you're asking them to do things that are outside of their locus of control, and you're paying them based on things that are outside of their locus of control.

Right? And could you imagine if sales was comped on like, total company revenue goals?

[Dillon] (2:53 - 2:54)

Sprints completed.

[Rob] (2:55 - 2:55)

Yeah.

[Dillon] (2:55 - 3:00)

Well, I mean, they are responsible for total revenue goals for the most part, though.

[Rob] (3:00 - 3:11)

Well, if I'm saying anything that impacts revenue, aka retention, right? Sales would be coming up in your grill being like, why is this customer churning? And you're like, please leave me alone.

Let me cook.

[Dillon] (3:11 - 3:39)

So you look at it from the negative side, but the CEO is often saying it as it'll just make us a tighter team. We'll all just work a lot better together. If you built a zoo with no lines of separation between the penguins and the lions and the giraffes, and you just expected, yeah, but it's a zoo, guys.

Like, isn't that what we want? We want to see the animals like all together. Not quite.

Keep going, Rob. I'm sorry.

[JP] (3:39 - 3:41)

I was going to be having penguin for lunch.

[Rob] (3:43 - 4:00)

No, so that's where I'm at. I do want to play the devil's advocate and try to play the role of that CEO and say, all right, cool. Let's optimize for whatever makes the company perform best.

But before I do that, I want to hear your thoughts. JP, what you got? Go ahead, JP.

Okay.

[JP] (4:01 - 6:48)

So a few things come to my mind when the topic of variable comp comes up. I'm going to stay away, I think, from the leadership aspect since I can't speak to it. But I will say, I know we've thought about this with job descriptions and how you can figure out what kind of CS role you may have based on maybe how much variable comp you had and maybe some of the language and stuff like that.

My idea, if I could have the perfect idea of variable comp, it would be that the base comp is enough for me to be satisfied. There's a limit where it's okay, I am happy making this much. And this is for CS, by the way.

I know that sales has a very different type of thing. For me, it would be, okay, my base is maybe it's good enough that I can say this is good. Maybe this is going to sound wild, but maybe even slightly under, depending on the role of what I think should be good.

Because what I'm thinking about is, if I have a base where I'm like, this is good enough, and I'm not a necessarily hugely incentive-driven person, although I know that we want to keep our jobs and so forth, I'm thinking maybe from a company standpoint, you may want to have it be like slightly under, whatever that is, and then have this variable where it is not so wild of a swing. Please, this is an exercise. Let's say that you're getting offered 70K as a base, and then you're getting offered 30K as compensation, variable compensation, excuse me, so that you have a potential to make about 100K.

To me, that is a good range. Let's just say that's a good range where I'm saying, okay, that's not a crazy thing where we're going to give you 70K base, but you could potentially make 200K. Then I begin to get some red flags.

But I guess the other part of this is what you're saying, Rob, is what is it tied to? I think that 30K would be acceptable for variable comp. What is it tied to?

I'm not quite sure what direction that can go. I do know I don't want it to be milestones, but Dillon, have you set up or have you had input on variable comp at your previous roles?

[Dillon] (6:49 - 10:02)

Yeah. I actually just had this conversation earlier today, and it was basically like, how do you think about variable comp and the comp structure? Even though this wasn't my topic, I talked about this earlier today.

There's so many factors that go into it. Number one, and the point of any bonus is to incentivize people to do a certain activity. When you make it so many degrees removed that it is just overall company performance, it can actually disincentivize because people have no clue how to actually contribute.

My question is, I don't even really know why you would design it that way unless, in my pessimistic brain, they're trying to create as many degrees of separation so that they can withhold bonus if they feel like it versus making it very cut and dry. If you get this many CSQLs, you get this much money. If you get this level of NRR, you get this much money.

If you retain this many customers, you get this much money. Now, all of those are more of a bonus structure because they're just the way you should be performing. There's average and then there's exceeds expectations sort of stuff.

Where variable gets funny for CS is how responsible and capable are you of creating additional revenue off of your customers. When this comes into play, I no longer think it should be a bonus because that is a quota. When in fact, what you should be incentivizing is essentially uncapped income in the form of commission for your CS folks.

Then your whole split, 80-20, 70-30, that goes out the door because you do have the potential to make $200,000 in commission with a $70,000 base, which is, by the way, exactly how sales is incentivized. It's typically right below what a salesperson will be comfortable with because they got to keep them hungry. You can't pay them enough for them to sit and eat bonbons.

You've got to pay them just as little or just less enough so that they're motivated to go and continue to do activity, sales activity. With customer success, it isn't actually unlimited because you can only operate within your book of business, but you can start to do some math to understand in any given month or quarter. Based on our historicals, they have the ability to really sell this much if they knock it out of the park.

That's where you can start to figure out your OTE and create a range. I think this all goes back to what are you actually trying to incentivize? Does your CS team even have stuff to sell, or are they just retaining?

Well, then they probably don't need a commission, and their overall variable split is going to be smaller than if they've got the potential to sell a bunch of other stuff. What I said to the guy this morning was, and be ready, if you make that variable component outsized, then you better hope that they don't have to ever answer a support ticket because they never will. They're going to chase the money all day.

There's this idea of incentives and what has to be sacrificed in order for those incentives to be achieved. That's my spiel. Rob, you said you had more to offer here, so you don't have to respond to what I said if you wanted to play devil's advocate.

[Rob] (10:03 - 10:44)

No, I love what you said. I'll just add one thing. I won't play devil's advocate, but I'll just add one thing.

For anybody out there building these comp plans, please just try to keep it real simple. If somebody has to pull up a spreadsheet to figure out what their comp is going to be, that inhibits their ability to use the right behaviors when in the moment on a call. The right comp structure will be so simple that a CSM live on a call will know to do the right thing that can trigger their payment without having to pull up a spreadsheet and be like, could you hold on, Mr. Customer?

I just got to go check.

[Dillon] (10:45 - 10:53)

I figure out what's going to pay me more if I sell you this thing or that thing, or if I get a high NPS score, so I'm not going to rock the boat right now. Yeah, exactly.

[JP] (10:54 - 11:38)

That's a good point. I often think about this because I know for me, in my history, once something's been introduced, if I don't quite understand it too, then that leads to some friction. To your point, Rob, I think that once something is explained to me and I get an opportunity to just do it and see it in real time, it doesn't feel so phony baloney.

Dillon, to your point, you brought up something that was like, yikes, but when someone has this vague language around the variable comp and then we want to do so we can give it to you when we want and not when we don't, I think that is unfortunately reality for a lot of people.

[Rob] (11:38 - 11:46)

I will just say this CEO, he likes paying his people. I know it's not that, but it does make you question in other situations.

[Dillon] (11:47 - 12:44)

The other scenario, it's a little bit more of if it's laziness or doofiness, is they don't want to track a bunch of individual components. They just want to look at the top line because that's all they care about. That's all their investors care about.

It's just easier to do it that way, but it's not the way to encourage the best behavior. The last thing I'll say related to that is I will typically, if I'm introducing a comp structure, or maybe it's just like a competition for a quarter or two quarters, I will usually explain what is rewarded based on certain activities. Then I will just strip away even the rewards and I'm like, that's because we want you to do this thing.

The point is we are trying to drive this behavior. If you ever think something is getting in the way of that or you think that this isn't a reasonable ask based on the other responsibilities you have or so on and so forth, then let's talk about that because that means this isn't designed properly.

[JP] (12:46 - 12:48)

Just be very upfront about it.

[Dillon] (12:48 - 13:09)

It doesn't have to be a dance of, oh, if you do this slightly ambiguous thing, you get paid. Just tell them straight up, yo, put leads in the funnel, bro, and I will pay you. The lead has to walk and talk and look like this, but I will pay you if it looks like that.

Tell me what you need to do that. That's so well said.

[Rob] (13:10 - 13:10)

I love that.

[Dillon] (13:12 - 13:16)

All right, boys. That's our time. Love you all.

Bye-bye.

[Voiceover] (13:23 - 13:25)

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