After the Mad Dash
Like a shopping-spree winner on a timed run through a grocery store, the US pharmaceutical industry has been in a five-year hiring frenzy. Driven by market competition, companies raced to load their "shopping carts" with the best values-the most promising salespeople-they could find. Pharma headhunters went after talent with great urgency and all the resources at their disposal.
Between 1995 and 1999, the top 50 pharmaceutical companies more than doubled the number of US sales reps, raising the total from around 35,000 to more than 75,000. Also during that time, the average starting salary for an entry-level sales representative increased by 20 percent, and the average incentive nearly doubled. Together, the top 50 companies spent an estimated $2 billion in sales force compensation in 1995 compared with $5 billion in 2000.
But the mad dash seems to be over. The 2000 data indicate that industry employment has reached a state of relative calm. Pharmaceutical companies are hiring to counteract attrition among sales reps, although they continue to add new reps at a slower rate. With more than 80,000 reps selling to a finite audience, the market may have finally reached its saturation point. Furthermore, if the current trend continues, during the next five years, the number of representatives not only will stop growing but also will decline as companies turn to e-communication to reach physicians.
Pharma companies must now concentrate on what's in their shopping carts, ensuring that their people remain productive, motivated, and committed. The employment market is still fluid for sales and marketing people to find other options if their current situations are lacking. The average turnover rate for general physician sales reps was nearly 17 percent in 2000-up from 12 percent the previous year. Employers are now as concerned about retention as they are about recruitment. Consequently, companies are using compensation not only as a means of attracting talent but also as a strategic tool for maximizing the return on their existing investment.
The pharma industry has long paid its salespeople more handsomely than most. Recent figures indicate that the total cash paid to pharmaceutical sales reps is more than 20 percent higher than in other industries, with the widest difference among career sales reps. And the pay for first-line pharma sales managers is 35 percent greater than the pay for other types of managers.
But now, according to the 2000 study, sales compensation for industry in general is increasing faster than it is in the pharmaceutical industry. Although other sectors have a long way to go to compete with pharma companies in total cash compensation, other industry employers are beginning to close the gap. Between 1997 and 1999, the pharma industry's aggregated base salary increase for sales and marketing positions was nearly double that of industry in general: 10.1 percent, compared with 5.3 percent, respectively. But between 1998 and 2000, the industry's aggregated base salary increase was only half of what others provided: 8 percent, compared with 16 percent, respectively. If that trend continues, general industry's compensation will be attractive enough to compete for pharmaceutical sales reps in just three years.
One way the pharma industry has been able to afford paying its salespeople more than other industries is by shifting a larger percentage of the total compensation package into variable pay. Pharma companies can offer prospective sales reps a very attractive package of potential earnings, but that pay is based on results. In 1999, entry-level pharma sales reps had nearly twice as much of their base salaries at risk than did salespeople in general: 25 percent, compared with 14 percent.
Growth in incentive pay as a percentage of base pay has been rising since the early 1990s and is only now showing signs of tapering off. Companies may have found that pharma sales reps' tolerance for assuming risk has peaked. When study participants were asked about their intentions with regard to pay-at-risk ratios, the number that planned to increase the ratio dropped from nearly 70 percent in 1999 to 20 percent in 2000. It seems clear that most companies have found the ideal variable pay mix for attracting and motivating sales people.
Pharmaceutical companies are moving away from giving general, across-the-board salary increases to their sales organizations. The percentage of companies that reported doing so dropped from 48 percent in 1998 to 22 percent in 2000. The large majority of companies participating in the study awarded individual merit/performance payouts in 2000 as a percentage of base salary. That trend is in keeping with a "pay for performance" philosophy that has taken a strong hold in the industry during the past few years.
For approximately half of participating companies, some percentage of the annual merit increase was based on demonstrated competencies— desired behaviors and specific skill sets—rather than on sales results. Companies reported that they apply competency models to enhance skill levels, support superior performance, communicate valued behavior, emphasize pay for performance, and reinforce corporate values.
The degree to which companies rely on competencies when making staffing decisions, managing performance, setting base pay, and directing training and development has not changed during the past two years, suggesting that most companies interested in adopting competency models have already done so.
Pharmaceutical sales compensation plans have never been, and probably never will be, simplistic. The sales process itself is complex: the retail channel is indirect, and multiple influencers are involved in purchase decisions. And because of their organizational structure, pharma companies must track performance and administer compensation across multiple sales forces and within mirrored territories. To be accurate and fair in determining sales force rewards, employers have intentionally built many bells and whistles into their compensation plans.
No matter how hard companies work to communicate their plans, many industry sales reps still fail to understand their compensation packages. As one sales rep put it, "We need to solve algorithms to understand our incentive compensation plan." Hay Insight's sales opinions database reveals that only 64 percent of representatives know how their incentive programs work. That number falls far short of the ideal. A plan can motivate only if it is understood; even the best engineered plans fail if they are not communicated properly.
That lack of comprehension, coupled with administration difficulties, might explain why the number of companies with multiple variables in their incentive plans has dropped. In 1999, 91 percent of the organizations and 83 percent of the plans fit into a "base salary plus multivariable incentive/bonus" category. In 2000, those numbers dropped to 76 percent and 68 percent, respectively.
It is also likely that the need to keep plans simple and the desire to reduce administrative time and costs have prompted more companies to distribute such compensation only three times a year. The number of companies making three payments a year, although still small, has doubled from 8 percent in 1999 to 16 percent in 2000. Although quarterly payments were still the most prevalent payment method among companies in 2000 (49 percent), they are on the decrease, down from 58 percent in 1999.
Sales performance was the most common primary measure of performance used to calculate incentive payouts in 2000, as has been the case for the past few years. The most common secondary factor in determining incentive payout was managers' subjective judgments, followed closely by attainment of special objectives. The most frequently reported qualitative objectives used to measure performance were teamwork, territory management, and customer focus—mirroring 1999's results.
Total cash for pharma sales reps remained relatively unchanged between 1999 and 2000. Cash compensation increased only 5.3 percent, from an average of $62,100 in 1999 to $65,400 in 2000. Collectively, salespeople above the entry level met or exceeded their full target potential. But entry-level reps earned incentive compensation that represents 25 percent of their base, even though their target was close to 40 percent, the highest percentage for all the levels. Clearly, companies have asked their least experienced reps to bear the greatest percentage of compensation risk. For the most part, starting reps have been unable to achieve their targets, but the upside potential for those who can is great.
At the time of the survey, pharmaceutical employers anticipated healthy, albeit disparate, increases for various categories of reps in 2000. Participants projected that total cash for general physician reps and hospital-based reps would increase by more than 9 percent. The real winners should be specialty physician reps, with a projected 15.6 percent increase. In contrast, oncology reps-who realized a surge in total compensation in 1999-are expected to receive only a 3.4 percent increase.
In response to the increased number of US product approvals each year, manpower within product management has also increased. Between 1995 and 2000, the average number of associate product managers per company rose from four to six, the average number of senior product managers increased from 3.9 to 5.6, and the average number of group product managers rose from 3 to 4.3. It's worth noting that the number of product managers held steady at 7.5 per company.
In a classic illustration of the effect that supply and demand has on compensation, total cash for product management jobs grew dramatically between 1999 and 2000. To attract people to the position, industry increased pay packages for associate product managers an average 20.7 percent.
Furthermore, pharma companies are rethinking the amount of at-risk pay in product management compensation. For senior and group product managers, companies have been decreasing the percentage of variable compensation since 1997, when it reached its peak. Employers must have found that they had pushed the ratio of variable to base pay beyond the limit that would attract candidates. The demand for talent in those functions is so high now that companies must offer the financial security of a larger base salary to attract the best people.
The premise that companies are now using compensation as a retention tool as much as, if not more than, a recruiting tool, is supported by the fact that more than 40 percent of study participants reported offering long-term incentive plans to their sales and marketing personnel. Such programs include equity plans-incentive stock options, nonqualified stock options, restricted stocks, and performance share/performance units-and cash plans, including stock appreciation plans and others. Among those, the nonqualified stock option plan is the most prevalent, offered by 14 companies.
The pharma industry is not alone in expanding long-term incentive compensation to those at lower levels of the organization; the trend cuts across many industries. But it remains to be seen if such plans drive performance and extend tenure or if they merely bolster the total compensation package. Yet, salespeople seem to view stock options as desirable, 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. According to more than one sales rep, "Had there been a stock option opportunity, I might have stayed."
As another means of keeping existing talent and appealing to a broader array of workers, industry employers are offering their people a better work-life balance. In 1999, 26 percent of participating companies offered salespeople some form of flexibility in their job structures or work schedules. In 2000, that number rose to 40 percent.
Most of the flexibility stems from adjusted work hours rather than from job sharing or part-time positions. Only 16 percent of respondents offer part-time sales positions, and the employment arrangement for part-time reps varies from company to company. Some assign part-time reps their own territories, whereas others arrange for them to share their territories. Some reps have their own product portfolios, and others do not. However, the majority of part-time reps are compensated with the same incentive plan as full-time salespeople, with prorated incentive targets.
More than a third of the companies employ contract sales forces as a convenient way to deal with fluctuating staffing needs, such as during a new-product launch. Those that use contract sales forces appear to be satisfied with their performance, because nearly all of them plan to continue or increase such use in the future. Half of the companies report that contract sales reps have their own product portfolios but are compensated with a different incentive plan than the full-time sales force.
Pharmaceutical companies will most likely continue to adapt their compensation practices to meet retention as well as recruitment goals. The industry's sales force will continue to grow, but at a slower rate, so the hiring pressure will ease somewhat-as long as companies can hold onto the talent they have. But compensation trends bear watching, because other industries may, within a few years, be able to compete with pharmaceutical companies' compensation packages. If that happens, the pharma industry may have to up the ante again.
In the meantime, companies can now take the time to adjust the amount of at-risk pay to mutually optimal levels, simplify their compensation plans so they are easier to administer and understand, and find creative ways to encourage employee longevity beyond the use of compensation. Hay's research indicates that compensation is among the top several factors that differentiate employees who plan to leave their jobs from those who plan to stay, but it is by no means the only one.
Supply Chain Strategy: Managing risk and opportunity in a changing global landscape