BS in CS Issue 7
CSM compensation MUST include incentive pay
This continuing series explores common, but misleading and sometimes dangerous BS in CS. We will apply science to challenge faulty beliefs and suggest better alternatives.
Item #7: CSM compensation MUST include incentive pay.
Conventional wisdom says CSM compensation must have fixed and variable components tied to achieving goals such as GRR, NRR, or NPS. It just makes sense. If you pay people for results, they’ll be more motivated because they’ll make more money.
Except it’s BS. Yes, people want to be fairly compensated, but for many, “pay for performance” schemes are surprisingly demotivating. Customer Success isn’t Sales. It requires different tasks and different types of people, so incentivizing CSMs like they’re salespeople doesn’t make sense. And evidence shows that better hiring and leadership practices combined with non-contingent rewards are much more effective for creating high performance teams.
The Science of Motivation
There are many different models of human motivation, but the most comprehensive and rigorously tested is Richard M. Ryan and Edward L. Deci’s Self-Determination Theory. At its heart lies the distinction between intrinsic and extrinsic motivation. People are extrinsically motivated when they do something to get something. A sales commission, for example. But when people are intrinsically motivated, they do something because they want to do it. Reading a novel is enjoyable for its own sake.
Experiments show that extrinsic rewards motivate people on a short-term basis, especially when it comes to simple, mundane tasks and immediate payoffs. However, there are drawbacks. When the rewards are taken away, motivation wanes. And extrinsic rewards make people more focused on the ends than the means. They take the shortest path, not necessarily the best path.
But remarkably, rewarding people for something they enjoy doing backfires. Deci’s experiments in 1971 famously showed college students lost significant interest in solving puzzles when they were paid compared to when they weren’t. This wasn’t an isolated effect. In 1999, a meta-study of 128 experiments across multiple domains showed that extrinsic rewards of any type significantly reduce intrinsic motivation (study available for download to paid subscribers below).
If that’s not concerning enough, further studies have shown that extrinsic rewards systematically undermine a person’s:
Persistence
Curiosity
Creativity
Proactivity
Flexibility
Teamwork
Satisfaction
Integrity
Unfortunately, these are the attributes managers want from their employees. So extrinsic rewards can create unintended consequences. What explains this?
Causes
Self-Determination Theory reminds us that individuals vary. During childhood, some people can develop stronger needs than others, prompting them to focus externally to satisfy them. For example, children starving for resources and attention often develop a deep craving for security and affirmation, causing them to pursue life goals for wealth and fame. But children growing up with abundant resources and attentive parents have their basic needs met. They’re more likely to pursue intrinsically satisfying goals.
A person’s acquired beliefs include their perceived locus of causality (PLOC), the extent to which their actions affect life’s outcomes. The individual’s worldview can then conflict with reward systems. Self-Determination Theory posits that extrinsic rewards shift the focus from internal (I-PLOC) to external (E-PLOC), and while this may have a limited effect on people with a predisposition for extrinsic rewards, more intrinsically motivated people experience the carrots and sticks as controlling. This causes them to become demotivated.
Unfortunately, most of the time a person’s actual locus of casualty is low. As described in a previous post, it’s impossible for any individual to control the outcome of a complex system. That’s due to the nonlinear dynamics and random variations inherent in all systems. Consequently, business results are rarely an indicator of someone’s merit; they’re mostly a reflection of systemic averages and chance outcomes.
And that’s certainly true in Customer Success. Churn reason analysis typically shows factors outside a CSM’s control (e.g., bad-fit customers, product deficiencies, poor support, etc.) mostly determine whether accounts cancel. CSMs recognize this fact, and when they’re held accountable for GRR, they often feel powerless. Many experience burnout as a result.
Whether they know it or not, CSMs indeed make significant impact upstream during onboarding, ensuring customers achieve their desired outcomes. Effective onboarding earns trust in the brand and increases the odds of renewals and expansions. But the economic gains from onboarding are longer-term and difficult to quantify, so many CS leaders take the easier, more concrete route. Imitating their Sales counterparts, they reward short-term bookings.
Variable compensation, albeit well-intentioned, is counterproductive. CSMs who are mostly intrinsically motivated (doing the job because they enjoy it) become less proactive, creative, and persistent helping their customers overcome obstacles. And CSMs who are mostly extrinsically motivated (doing the job for the money) suddenly chase sales opportunities. As predicted by Self-Determination Theory, many firms implementing CSM quotas and commissions report seeing a modest increase in expansion revenue but a substantial decline in retention revenue. In terms of NRR, they’ve won the battle, but they’ve lost the war.
So if tinkering with incentives doesn’t work well in Customer Success, what does?
Solutions
Some people are naturally better suited for sales and others for service. During the hiring process, it’s best to screen individuals to uncover their inherent motivations using formal assessments. This ensures the applicant’s core personality drivers align with the job. For a classic sales role, a candidate’s orientation towards extrinsic rewards is a positive thing. But if a service-centric onboarding role is the focus, then an intrinsically driven CSM is a better fit.
Then managers must create a positive work environment. A comprehensive analysis of multiple studies (available for download to paid subscribers below) shows that three factors support intrinsic motivation and promote higher job performance:
Competence: to master skills and influence outcomes
Autonomy: to have agency and choice
Relatedness: to be connected to and care for others
To boost a CSM’s sense of competence, managers must first quantify which tasks influence outcomes and which don’t. This requires statistical analysis to characterize likely cause-and-effect relationships. Evidence-backed statements follow, such as “Customers who achieve this value milestone are 5.5 times more likely to renew.” Then managers must coach their people to perform the tasks leading to the outcomes. For example, CSMs can clarify and properly ground buyer expectations through effective Success Planning, producing reliable value realization and increased renewals. CSMs experience higher competence by focusing on the things they can influence rather than the things they can’t.
It’s also essential to listen to and empower staff. Deci found that when managers incorporated their subordinates’ inputs, provided non-controlling feedback, and offered them opportunities to make their own choices, employees reported greater job satisfaction. Engaging CSMs in process improvement projects and allowing flexibility in how they create and execute Success Plans are two examples of how to boost autonomy.
And a paper describing how to apply Self-Determination Theory in work environments (available below) backs it all up. The authors state:
To summarize, aspects of jobs such as complexity, challenge, importance, choice, and participation, as well as autonomy-supportive interpersonal climates and being high on the autonomous causality orientation, lead employees to be relatively autonomously motivated for their jobs.
And what about monetary rewards? Should they be abandoned altogether?
Not necessarily. Multiple studies have shown that salaries combined with unexpected and non-contingent rewards such as spot bonuses, don’t undermine intrinsic motivation. Ryan and Deci say in their book, Self-Determination Theory: Basic Psychological Needs in Motivation, Development, and Wellness, “In these cases, the reward is not likely to be perceived as controlling one’s behavior, so it is not likely to foster an E-PLOC, undermine autonomy, or diminish intrinsic motivation.”
So if the goal is to create a highly motivated CSM team, incentive pay isn’t the answer. Of course, managers must offer CSMs a fair wage. Then they must hire the right people, show the impact of their work, coach them, and consider spot bonuses to reward top talent. This brings out the best in people, not through manipulation but by helping them fulfill their innate desire for meaningful and satisfying work.
Paid subscribers can conveniently access three research papers cited in this article below.
