Pharma employers planned to award merit increases in 2006 that averaged four percent, slightly above the 3.5 percent increase
in other industries. All the participants reported that they look at how well the company met its sales goals when deciding
on these increases. That's nothing new. But, what's changing is the mix of other factors that go into deciding reps' raises.
Most apparent is how companies are drastically reducing their reliance on reps' bonuses to determine merit increases (from
53 percent in 2005 to 20 percent in 2006). This is widely viewed as a positive development, as calculating merit increases
based on bonus results places too much emphasis on a single measure that may be flawed in its own right. Instead, companies
have turned to core-value measures and behaviors, such as demonstrating high levels of customer service (30 percent, up from
nine percent in 2005). Execs feel these metrics can more easily be used to determine how well reps do their job, rather than
other metrics that may reward or punish reps based on confounding factors like formulary placement.
For the past five years, companies have steadily cut the percentage of total comp represented by base pay. They have sought
to increase efficiency and productivity by shifting more of the field force's compensation into the bonus structure. In this
way, they could continue to offer attractive earning potential—but tie it to specific expectations. In 2001, base pay accounted
for 80 percent of a salesperson's total compensation; today it accounts for 73 percent.
This shift, while made for valid reasons, has forced the industry to pay an inordinate amount of attention to defining the
right performance measures upon which incentive compensation is based. This task is not easy in the best of circumstances,
but it is especially daunting in the life-sciences industry, where establishing a clean cause-and-effect relationship between
a rep's effort and drug sales is so elusive. After all, most often, the PCP sales effort is team-based, not to mention that
a multitude of other factors—such as promotion—influence a physician's prescribing decisions.
By using these complex incentive programs, companies have, in a sense, painted themselves into a corner. The situation now
begs the question of whether the basic split between fixed pay and variable pay is right for pharma reps. In other industries
that face confounding factors to measuring rep performance—like strong influence by buying groups, significant spend on advertising,
and pricing determined by others—variable pay tends to account for only about 10 percent of total compensation.
Incentive Compensation: High Stakes
Companies continue their quest for the perfect set of performance metrics to determine incentive compensation. In general,
the industry is getting back to basics by attempting to simplify the process by doing away with advanced algorithms to weigh
performance criteria. The percentage of companies that built their incentive plans on three or more performance metrics dropped
from 22 percent in 2005 to 14 percent in 2006. The more complicated the payout matrix, the harder it is not only to administer
but to explain. In the survey, communication on performance-measurement systems ranked third on the list of topics requiring
more attention. Sales execs know that if an incentive plan is not understood, it can hardly serve to motivate and drive behavior.
Companies are also leaning more heavily on quantitative measures in structuring their incentive-compensation plans. While
36 percent report using a mix of quantitative and qualitative factors, 64 percent use only quantitative factors. For PCP reps,
qualitative measures make up only three percent, on average, of the factors used to determine incentive compensation. On the
other hand, companies turn to qualitative measures for 22 percent of the managed care rep's performance measurement, because
it is difficult to measure their impact in quantitative terms.
However, when companies do go qualitative, they are relying more on measures such as customer satisfaction, product proficiencies,
staff development, and teamwork—and less on call average/frequency, territory management and administration, PhRMA code compliance,
formulary access, and management evaluation. This shift is consistent with the behaviors one would want to reinforce in a
consultative selling model—where reps are truly fulfilling physicians' educational needs—rather than the transactional model,
where reps are more focused on delivering samples and scripted messages.