Ever More Complex
A job in pharma sales compensation management is not for the faint of heart; characteristically, the industry's plans are
ultracomplex-more so than in any other industry. The most prevalent type of plan (representing 72 of the incentive plans reported)
provides a multivariable incentive bonus on top of a base salary. By taking into account a variety of performance measures,
the typical plan has a lot of moving parts that can be adjusted and re-adjusted to accommodate changing conditions and expectations.
That's the benefit, but there are two drawbacks. First, the plans are devilishly hard to understand, and consequently, they
don't always provide reps with the direction and motivation intended. Rather than providing direction toward the required
sales behavior and performance, the plan designs are viewed more as abstract algorithms that generate a cash payout that one
hopes will be satisfactory. Second, the use of so many variables tends to compress pay, as individual payouts gravitate toward
the mean. This is an example of probability theory at work: the more measurements taken, the less variation found in the results.
A related phenomenon is that many companies are now treating each quarter as a stand-alone performance period with its own
goals and payout. Nearly 70 percent of companies reported using stand-alone quarters, a practice that had not been observed
before. The concept is appealing to reps who have a bad quarter and get to start fresh with the next 90 days. It also benefits
companies that want to ratchet up standards as the year progresses.
Although a short-term focus can be an appropriate performance management tool for sales organizations in a dynamic market,
a note of caution should be sounded. To use quarterly stand-alone performance periods effectively, companies must ensure that
their plans can stretch sufficiently to differentiate pay. Otherwise, when a rep's four units of compensation are averaged
together at the end of the year, the total tends to gravitate toward the mean for all reps.
In adjusting an individual's targets upward or downward each quarter according to achievements in the previous quarter, companies
are minimizing the difference in incentive payout across reps. Also, the use of quarterly plans for the sales organization
and annual plans for other areas of the company could introduce major discrepancies across the company in the year-end perspective.
As a rule of thumb, companies should strive to have their top performers earning twice the incentive compensation of an average
performer. This goal is unrealized, however. In actuality, reps in the 90th percentile are earning only 140 percent of the
average performer's incentive compensation. And, the rep in the 10th percentile earns 60 percent of what the average performer
earns. (See "Less Than Ideal.") Combine that with the fact that everyone's base salary is essentially the same, and the differentiation
between levels of performance becomes even more blurred.
Compression of compensation levels is a serious situation because it affects the best salespeople the most, and they are the
ones most likely to pull up stakes for better pay elsewhere. The industry's pay-for-performance model is showing some signs
of strain in that respect. It is essential that companies take steps to, as one industry member put it, "Let the big dogs
All of this leads to the disappointing fact that the industry's $2 billion incentive compensation budget is not as well appreciated
as it should be. Fewer than half of sales reps feel that their incentive payout reflects their performance. Only slightly
more are favorable about the fairness of their incentive plans.
There is clear evidence that new reps are being added to incentive plans earlier and earlier in their employment. The average
number of months elapsed before they are put on a plan has decreased from seven in 1999 to three in 2003, according to participants
in Hay's semi-annual Sales Incentive Roundtable. That can be viewed as a shrinking security blanket-new reps are expected
to start producing sooner-or as a recruitment tool-new reps are promised an opportunity to start earning bonus pay sooner.
Most companies (70 percent) incorporate sales incentives for new products into their existing plans, even though in Hay's
experience, having a separate plan for the first six months of launch is more effective in boosting sales. A separate plan
for a newly launched product gives the launch goals extra visibility and helps reps focus. But establishing a separate plan
for a new product makes it difficult to maintain equity for those sales reps who do not have a similar opportunity, and that
may be why so many companies refrain from doing so.
Ranking. Fewer than 20 percent of companies in the study use ranking as a primary method of calculating incentive compensation. In
ranking, all reps are placed in order according to their performance, and the sales incentive budget is doled out accordingly.
The practice simplifies incentive calculation and has the advantage of keeping budgets predictable.
But, it pits one rep against another in less than healthy competition. The practice brings to mind the old joke about the
hunter who realizes that to survive, he need not outrun the bear that is chasing him, only his hunting companion. When they
are compensated by rank, reps focus more on how they are doing relative to their peers and less on making their best effort.
Special achievement. The number of companies using special achievement awards has increased dramatically over the past two years-from 31 percent
in 2001 to 71 percent in 2003-perhaps reflecting a need to counteract compression. Such awards are also often used to even
out the score when good performers are adversely affected by managed care policies in their territory.
Long-term incentives. These programs remain quite popular; 59 percent of reporting companies offer them. The most prevalent type is a nonqualified
stock option plan, so smaller companies that can't offer stock are at a disadvantage. The whole practice is worth watching.
If Microsoft's move to give its employees restricted stock grants rather than options, the use of incentive stock options
in pharma may be a bubble waiting to burst. Because companies can generally afford to be more generous with options, employees
tend to prefer them. Reps may view a move toward grants as a negative change.
In recent years, pharma's marketing function has been gaining ground in a sales-dominated world. Between 2002 and 2003, marketing
made major strides, at least in terms of sheer mass. In just one year, the average number of incumbents per company in product
management has nearly doubled, indicating a growing reliance on that critical function. The average head count in market research
has also increased substantially (67 percent).
The value of marketing is reflected not only in head count, but also in compensation. Compared with 2002, total cash increased
an average of 8.8 percent for incumbents in product management jobs and 12.5 percent for incumbents in market research in
2003. Considering the recent state of the economy, those are healthy increases.
For now, the pharma industry is focused on using the sales force to achieve reach and frequency. Only when companies are able
to change their orientation from those metrics will the size of sales forces self-correct.
In the meantime, employers, in their zeal to measure an ever-multiplying array of variables in monitoring performance, risk
compromising their ability to differentiate and reward top performers through their compensation and incentive practices.
Still, companies have been making many improvements in their policies, and in the final analysis, there are many saving graces:
turnover is down, total cash targets are moving closer to the median, and sales reps are still generously compensated.