Pharma's Incentive Compensation Plan Landscape

As pharmaceutical companies become increasingly focused on retaining key sales people, they continually

Partha S. Anbil

consider ways to leverage variable compensation (incentive programs and rewards and recognition programs) as a strategic tool for maximizing the return on their investment in top talent.

Traditionally, pharmaceutical companies have attempted to attract and retain high-performing sales staff by offering exceptionally competitive total compensation packages. In recent years, companies have balanced this goal with budgetary constraints by devising variable pay schemes which account for a larger percentage of compensation.

Currently, the industry emphasis is shifting visibly from recruitment to retention activities. In order to combat the costly effects of voluntary attrition among sales representatives (estimated by the Hay Group to be $100,000 per individual), pharmaceutical companies must now ensure that their existing sales force remains productive, motivated, and committed by developing and refining strategic incentive and reward programs.

In addition, recent industry data regarding the labor market for sales staff indicates that hiring activity in the industry has stabilized after years of rapid expansion. If this trend continues, it will result in an overall decrease in the total number of new sales representatives hired within the next five years. In this environment, pharmaceutical firms must engage in an ongoing process of adjusting variable pay practices to ensure that retention goals are aligned with other critical business objectives.

The following structural features are visible among incentive programs in general:

Combination Plans: Some firms tend to use incentive structures that incorporate multiple performance metrics, a trend that is visible across functions and product.

Criteria Weightings: Companies that operate an incentive structure based on multiple metrics typically establish weighting systems that reflect the relative importance the firm places on certain desired behaviors. While incentive compensation schemes at profiled companies attempt to motivate sales performance, reward and recognition programs generally aim to reinforce exceptional sales force achievement.

This briefly highlights the following features of these programs:

• Visibility and Prestige- Most companies attribute an exceptional degree of prestige and visibility associated with their top-tier reward and recognition programs

• Variety of Recognition Schemes - The majority of firms offer multiple recognition schemes for different representatives

• Monetary and Non-Monetary rewards - Most firms use non-monetary rewards, usually paid vacations, as part of their reward and recognition schemes

• Behavior-Based Rewards - To varying degrees, companies may incorporate behaviors as well as sales goal attainment into reward and recognition schemes

Evaluation and revision of variable compensation at firms may be characterized as a four-step process involving the following components

• Underlying business objectives - Motivating sales staff to achieve volume and share growth is the most commonly-cited business purpose behind most types of variable compensation

• Feedback - Firms gather feedback on their variable compensation programs through questionnaires, surveys, focus groups, interviews, and informal dialogue between managers and representatives

• Evaluation - Many firms cite the difficulty of accurately gauging the efficacy of variable compensation due to the complexity of the factors that may affect individual sales performance

• Review and Revision - The majority of firms engage in an annual review of their incentive, reward, and recognition schemes and regularly make adjustments

According to recent research, incentive compensation typically represents approximately one quarter to one third of pharmaceutical sales representatives’ total

Compensation. For the most experienced representatives, the average incentive compensation was 29%-35% of base pay, according to research by the Hay Group. This average, however, incorporates compensation figures that vary greatly from company to company.

Pharmaceutical companies usually maintain between five and eight incentive plans in place at any one time, but a few firms operate as many as 40 different plans simultaneously. This trend indicates that pharmaceutical companies are attempting to tailor their plans to specific job types and changing market situations.

The vast majority of pharmaceutical sales representatives receive a base salary, plus incentive pay dependent on several variables. Incentive structures at companies demonstrate consistency with this trend. The majority of plans incorporate multiple performance criteria into a combination approach, rather than relying upon a single metric. This trend is consistent regardless of the specific sales force population.

Incentive compensation plans tend to be varied, numerous, and extraordinarily complex, particularly with regards to the number of variables considered. In fact, current state suggests that in an attempt to incorporate as many performance metrics as possible, firms may compromise the extent to which sales representatives understand the criteria on which their incentive payouts are based. 

Most firms use more than one performance metric (i.e., a combination approach) to determine the incentive payouts of their sales representatives. Many firms use different models to calculate the incentive payouts depending on the segment of the sales force population; this ensures equitable payouts that incorporate inherent differences in products and markets.

In the context of sales force variable compensation planning, a combination approach refers to a system in which more than one performance metric is used to calculate representative’s performance and incentive payout. This approach may incorporate two or more of the following metrics:

• Sales goal attainment

• Relative metric

• Market share

• Share change

• Commission

• Achievement of objectives

Some companies tailor incentive calculations to various segments of the sales force population such as:

• General practitioner representatives: Relative metric system incorporating market share and share change

• Hospital and specialist representatives: Combination system incorporating market share, share change, and subjective criteria

• National account managers: Market objective structure

Some companies use the following:

Representatives are divided by product line and selling model, not by target audience. The company may maintain 26 different plans. For many representatives, the following metrics are considered:

• Percent of planned objective (PPO)

• Market-based objectives (MBO)

• Market share change

Other companies use:

• General practitioner representatives: Incorporates market share, share change from trimester to trimester. Performance in these areas is plotted on a grid. Grid placement determines payout

• Hospital representatives: Based on sales goal attainment and qualitative assessment by managers of attainment of objectives

• Specialist representatives: Primarily based on sales goal attainment and change in performance over previous trimester

• Account managers and national account managers: Based on sales goal attainment and pre-set subjective targets that vary according to sales force

In addition, some firms may consider subjective criteria when deciding upon variable

pay targets. For example, some companies consider subjective criteria for some segments of the sales force softer skills that may be considered, including the following:

• Development of people

• Consistent sales performance

• Leadership skills

• Respect for customers and peers

• Peer leadership

• Territory management

• Resource management

• District and regional initiative

• Partnering with other sales staff

• Commitment to individual business plan

Most Common Performances for Determining

Research by the Hay Group indicates that the following are the most common performance measures:

• Sales performance against target

• Managers; subjective judgments

• Attainment of special objectives

The most common qualitative factors are teamwork and customer focus. To the extent that firms choose a combination approach, they then assign relative weightings to the metrics that comprise that combination. Through this approach, firms hope to align individual and organizational goals by communicating the relative

importance they place on various performance criteria. In many cases, one metric dominates the calculation that determines the incentive payout. Just as firms may choose to employ different metrics to assess the performance of different groups of sales representatives, firms may weigh criteria differently depending on the relevant sales force population

Our experience indicates that sales performance is the most common primary measure of performance used to calculate incentives. The most common secondary measure is subjective judgment by managers, followed closely by attainment of special objectives.

The majority of firms incorporate these special objectives into their incentive payout calculations, although they may use different objectives and assign different weightings depending on the sales force.

Our experience indicates that as a general rule, pharmaceutical companies make a concerted effort to ensure that all representatives are rewarded. The best-performing representatives earn an average bonus equal to 59% of base salary, but even the lowest-performing representatives receive incentive compensation that equals 32% of base.

According to a recent Hay Group study, 60% of pharmaceutical companies offer long-term incentives to sales and marketing staff, usually through non-qualified

stock options. Like other industries, the pharmaceutical sector as a whole has been expanding long-term incentive compensation to those at lower levels of the organization.

It is unclear whether such plans drive performance and tenure or if they merely bolster the compensation package. Sales people typically view stock options as desirable, regardless of whether or not they see a direct link between their individual efforts and company performance. In fact, they often cite a lack of stock options as a reason for leaving. Other industry observers report that companies that treat equity-based compensation as an incentive rather than a benefit tend to achieve a higher return on investment from stock payout programs

Experience suggests that the complexity of incentive plans, coupled with administration difficulties, may explain why pharmaceutical companies are distributing incentive payouts fewer times per year. The number of companies making payments three times per year (rather than quarterly), though still small, has doubled in the past few years to approximately 16%.

Among all pharmaceutical companies, quarterly payments are still the most prevalent, although the percentage of firms making payouts this frequently has been decreasing in recent years. Only one pays incentives out quarterly.

Although research indicates that the average lifecycle of a pharmaceutical compensation plan is three years, many companies consider these plans to be discrete initiatives that either change or remain stagnant from year to year. Rather, most profiled firms keep the basic structure of their programs consistent from year to year, making adjustments or adding components as necessary to meet organizational and company objectives. Most companies review their plans and make changes on an annual basis, representing a process of continual growth rather than periodic upheaval.

Partha S. Anbil is cognitive enterprise transformation leader, Healthcare & Life Sciences practice at IBM Global Business Services. He can be reached at partha.anbil@ibm.com