In spite of pharmaceutical employers' best intentions to the contrary, sales rep compensation is being squeezed in a vise that is gradually narrowing the gaps between what top, average, and bottom performers are earning. According to the Hay Group's Pharmaceutical Sales Force Effectiveness Study, co-sponsored by Pharmaceutical Executive, reps in the 90th percentile are earning just 40 percent more than the average performer. This is not to suggest that reps aren't being paid handsomely (they are), but that the pay-for-performance model is showing signs of weakness.
On the whole, the annual survey confirmed that many of the industry's compensation practices are working well, but sounded a few notes of caution along the way. (See "About the Survey," at the end of this article.)
Another Way? When it comes to allocating resources in sales, US pharmaceutical companies are engaged in a staring contest on a grand scale. Collectively, they employ nearly 100,000 sales reps, targeting approximately 250,000 physicians, and they plan to hire still more. The thought of backing away from such a ratio may be appealing, but only if someone else does it first-and survives in the market. No company wants to be the first to blink.
Employing an army of salespeople works to achieve reach and frequency, but is that what it all hinges on? Could the whole sales process work even better? Many companies are in the process of answering that question by evaluating various sales force models. Their aim is to improve sales force effectiveness-without adding to the number of people knocking on physician doors. At that point, effectiveness will have to be measured in terms other than reach and frequency. Any new model would, of course, have to prove itself against the increasing numbers of competitive reps clamoring for face time with physicians.
Until someone punctures the status quo and adopts a different model, the challenges in using compensation to achieve a company's business goals will remain the same. Pharmaceutical employers continue to make their compensation plans ever more motivating, attractive, fair, equitable, and manageable. In fact, many companies intend to change their incentive plans next year, and several changes in effect this year are quite interesting.
Yet, the industry's sales force, which has reached roughly 100,000, continues to grow. In recent surveys, the market appeared on the verge of becoming saturated, and each year, like a magical sponge, it somehow absorbed still more reps. Between May 2002 and May 2003, 78 percent of study respondents increased their sales staffs, and nearly half did so by more than 5 percent.
A look down the product pipeline suggests that in the 2005–2008 time frame, the rate of new product introductions may slow, which theoretically should bring a corresponding slowdown in sales force growth.
Taming Turnover Last year, voluntary turnover rates had begun to drop after they had peaked at 19 percent in 2001 for primary care reps. The ongoing drop has now brought them back to a more "normal" level of 10 percent-the lowest rate since 1998. (A voluntary turnover rate of 10 percent is typical in sales organizations in other industries.) Of course, in theory, the 10 percent a company loses should be the bottom-not top-performers. It seems logical to assume that salespeople were less mobile last year because of the tepid economy and because they recognize that the pharma industry is a good place to be.
For the first time, it appears that turnover rates within large pharma companies are slightly higher than those within specialty and biotech companies. It is too early to say if the change will become a trend, but it is at least worth noting and watching. Hay's experience in the field suggests that reps who are not afraid to take risks are frequently drawn to small specialty and biotech companies because of the autonomy, greater visibility, and wider scope of responsibility.
Moving Target The pharma industry continues to pay salespeople well for their efforts. Reps earned more in total cash compensation in 2003 than the previous year, more as a result of their incentive earnings than their base salary. Some senior specialty sales reps, for example, earned 9.6 percent more in total cash than the previous year, which was primarily the result of larger incentive payouts. That trend suggests that companies are putting the onus on salespeople to earn their keep through strong performance. Even so, new salespeople can expect to do well for themselves. In 2003, an entry-level pharma sales representative can expect to earn an average of $62,500.
Most companies examine their salary structures every year and make adjustments to remain competitive, to improve internal equity, or to counteract compression. The next median salary structure increase for all employee groups covered in the study is expected to be 3.2 percent, a slight decline from the previous increase of 3.5 percent.
On the other hand, merit increases are expected to remain flat over the next year, and the criteria for determining merit raises have changed. In 2003, companies are relying far less on a demonstration of core company values and team skills than the year before. Reliance on core company values declined from 58 percent to 21.6 percent, and companies using team skills as a basis decreased from 34 percent to 5.4 percent, perhaps reflecting an industry preference for quantitative rather than qualitative measures. (See "Who Merits a Raise?")
The use of sales results and compa ratios (an employee's base salary divided by the salary midpoint for the job level) to determine merit increases remained relatively steady between 2002 and 2003, currently used by 43.2 and 48.6 percent of companies, respectively.
A growing number of companies claim that their compensation philosophy is to target base pay above the market median. In 2002, 38 percent of respondents aimed to set their reps' base salaries above the median, whereas 62 percent intended to do so in 2003. The constant escalation has the effect of perpetually pushing the median beyond reach, like the mechanical rabbit in greyhound races. The market median is the proverbial moving target.
One unintentional consequence of using compensation as a competitive weapon in the battle to attract new talent is that it compresses the spread between what a new hire and a tenured person make-unless sufficient changes are made to the salary structure for existing employees. Some new hires can be offered more in starting salary than experienced incumbents earn-the current situation with a few district managers. Naturally, that imbalance could prompt experienced district managers to look elsewhere.