Sales-Rep Compensation: Adding Long-Term Incentives to Mix

Several macro trends in the pharmaceutical industry are putting pressure on companies to do more with less. Companies are grappling with reduced selling, general, and administrative expense budgets; fewer blockbusters; more “micro” launches; increased digital promotions; and continued restrictions on access to healthcare professionals. In some cases, these industry dynamics will force sales leaders to shrink their teams while at the same time attracting and retaining top reps who generate the most sales results.

But attracting and retaining these top sales reps requires pharma companies to rethink their approach to incentive compensation. One approach companies should consider is to add long-term incentives to the compensation stack. Pharma companies have long used long-term incentives (e.g., stock options, long-term cash awards, etc.) to incentivize and retain manager and c-suite-level professionals. However, companies have traditionally incentivized sales reps with short-term bonuses (e.g., annual bonuses). While short-term incentives for sales reps remain important, long-term incentives can play a key role in helping pharma companies, both big and small, to retain their top talent.

Though pharma companies are starting to introduce long-term incentives, it is not a widespread practice in the industry yet. Further, companies must be careful not to adopt long-term incentives in anad hocmanner. This approach can result in situations where the long-term incentive isn’t sizable enough to meaningfully motivate reps. It can also result in situations where the long-term incentive isn’t sufficiently different from the short-term incentive. Consider a yearly long-term incentive program. The payout for this long-term incentive may happen alongside the annual short-term incentive payout. This limits the differentiation between the two and limits the motivating power of the long-term incentive as a result. Therefore, it’s important for pharma commercial leaders to adopt a strategic approach as they construct their long-term incentive programs. First, let’s look at the different types of long-term incentives companies can implement.

Options for long-term incentives

Long-term incentives enable sales reps to earn rewards for the long-term benefits they generate for the organization alongside the rewards they receive for their short-term impact and sales results. Long-term incentives typically come with a vesting period, which provides built-in motivation for a rep to stay with the company and earn the full payout. In some cases, this vesting comes in the form of a“cliff” payout (i.e., the payout comes all at once). In other cases, the payout is delivered in installments over a set period of time.

As companies implement long-term incentives for their sales forces, they should look at the entire ecosystem of long-term incentive options. There are pros and cons with each and a hybrid approach that includes multiple long-term incentives may be ideal for many pharma companies.

The three categories of long-term incentives are as follows:

• Cash payouts are the simplest long-term incentives. They are easy to understand and administer but can pose cashflow challenges for cash-strapped companies.
• Restricted stock units are units of stock that a company provides based on predefined criteria and value. However, restricted stock units can be an expensive compensation method for a fast-growing company since it is typically giving away high-value equity.
• Stock appreciation rights (stock options) give recipients the option to purchase shares at a fixed price. Stock appreciation rights offer a great upside if the option’s strike price is lower than market value at the time of exercise. However, options have no salvage value if the market value is less than the strike price for the option. Thus, the rep may end up with nothing (unlike the other two options described above).

The optimal mix of long-term incentives will vary from company to company. But it’s important to be strategic when implementing a long-term incentive program.

Creating a cohesive incentive compensation strategy

As we noted, a pharma company should avoid an ad hocapproach to implementing long-term incentives. Instead, it should strategically integrate long-term incentives into its incentive compensation program. By adopting a strategic approach, a company will be able to define the optimal value and mechanics of its long-term incentives and ensure the incentives it puts in place help it address its unique retention challenges.

This effort begins with benchmarking and analytics around market dynamics and the company’s unique retention challenges. Commercial leaders should collect and analyze a mix of data and information (e.g., attrition rates, compensation data, competitive intelligence, etc.) to begin to construct the company’s long-term incentive program for sales reps. Alongside this collection of data and information, commercial leaders also must think through questions such as:

• What mix of long-term incentives should we implement?
• What benchmark value should we aim for?
• What vesting period is optimal?

Additionally, a pharma company needs to ensure its long-term incentive program aligns with the company’s overarching incentive compensation philosophy and strategy. A company’s incentive compensation philosophy must be consistent across short- and long-term incentives. For example, if a company has an aggressive short-term incentive program to encourage quarterly sales results, it doesn’t make sense to put in place a meager long-term incentive program. The “tone” of these programs must align. If a rep is in line for significant short-term rewards if they perform, they must see the same potential value in the long-term incentive program.

Deploying a comprehensive incentive compensation portfolio

The need to do more with less puts pressure on pharma commercial leaders to proactively find ways to retain their top sales performers. Extending the use of long-term incentives beyond the domain of management and the c-suite and offering it to sales reps will help companies attract and retain top reps.

Pharma commercial leaders should deploy a benchmarking and analytics-based approach to develop long-term incentive programs that fit strategically within a company’s incentive compensation framework. By adding long-term incentives to the incentive compensation toolkit, pharma commercial leaders will strengthen their ability to build—and keep—a sales dream team.

Rohit Gupta is the vice president of analytics, strategy, and transformation for Beghou Consulting.