We may finally have seen a reversal of that trend in 2007, as the ratio was down ever-so slightly to 26-to-74. That is still
a far cry from the 10 percent contributed by incentive compensation in the consumer-products industry, but it may signify
a realization within the pharma industry that the ratio had grown too lopsided.
The reality of managed care and strict formularies is that pharma reps simply don't have the same direct impact over the actual
sale, nor are their sales results 100 percent trackable, given that data is collected on a sample basis. As companies find
relief from pay inflation, they should be able to put less emphasis on incentive compensation versus base salary. (Much of
the recent increase in the proportion of variable pay has been needed to match high rates of pay inflation in the industry.)
Performance Criteria: By the Numbers
Over the years, as companies placed greater emphasis on incentive compensation, they added complexity into their incentive
plans based on the premise that measuring more dimensions of performance increases accuracy and fairness. Many companies have
thus overengineered their plans, turning them into monsters that are too difficult to administer and explain to reps.
These incentive-compensation plan designs are only manageable—not to mention understandable—with a maximum of three variables.
When plans incorporate more than that, they lack the focus needed to inspire and direct reps' behavior.
Most companies (64 percent) base incentive-plan payout on achievement of target, quota, and goal—fewer are using a ranking
or matrix-based system that pits the performance of one rep against another's (19 percent compared with 34 percent the year
before). Approximately 40 percent of all plans use ranking at some point in the process (down from 50 percent last year);
however, 22 percent of plans are based solely on ranking. Our experience tells us that the percentage of companies using ranking
methodologies will continue to decline. After all, companies have a growing recognition that pitting one rep against another
can foster the wrong kind of competition—and that they have to pay out their entire budget for incentive compensation, whether
they meet their sales objectives or not. Commission-based systems, where companies pay, say, $1 per scrip, continue to be
scarce, with the exception of launch-compensation plans. It is simply not possible to design territories with equal sales-volume
opportunity. The number of companies using this type of plan was down from 11 percent of plans in 2006 to 2 percent in 2007.
Across all companies, 82 percent of incentive plans are based primarily on individual performance. Respondents use a combination
of factors in setting territory quotas. Past territory results are used 76 percent of the time; company goals, 65 percent
of the time; and territory potential, 57 percent of the time. Some organizations consider managed care impact, but they often
treat it as a secondary factor.
Growth in Total Cash Slows Down
Companies are continuing to move away from qualitative factors to judge reps' performance, seeking more simplicity in the
numbers. The percentage of study respondents that relies exclusively on quantitative factors to measure rep performance climbed
to 68 percent, up from 64 percent in 2006. Consistent with last year's findings, prescription volume, market share, and revenue
continue to be the most prevalent primary criteria used to determine payout. Qualitative measures, especially achievement
of objectives and manager appraisals, tend to be used as secondary measures. For those companies that use a mix of quantitative
and qualitative factors, on average, 90 percent of the mix is quantitative.
The vast majority (more than 80 percent) of organizations participating in the survey set goals that reps must achieve before
the incentive plan kicks in. This is an increase from last year's 67 percent. Among respondents, 80 to 100 percent of eligible
employees receive a payout, down from 90 to 100 percent last year, as companies strive to enforce minimum-performance standards
to earn an incentive payout. Companies have thus tightened the purse strings, somewhat reflecting the fact that employers
are increasingly interested in enforcing sales force productivity standards.