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Last year's average turnover among general physician sales reps was 19 percent-up 2 percent from 2000-making retention the number one human resource issue for pharmaceutical companies today. Industry employers are discovering that despite all the resources
Last year's average turnover among general physician sales reps was 19 percent-up 2 percent from 2000-making retention the number one human resource issue for pharmaceutical companies today. Industry employers are discovering that despite all the resources-more than $8 billion a year-they devote to compensating their sales forces, money isn't buying them as much "love" or loyalty as they want. An examination of pharma companies' current compensation practices, as identified by the Hay Group's 2001 Compensation Report, reveals what money is-and isn't-buying the industry.
In 2000, there were signs that the feverish sales-force expansion of the past few years was slowing down and that, consequently, companies were beginning to think of compensation as a tool for retaining talent as well as attracting it.
There's reason to believe that the expansion has peaked. First, fewer companies plan to launch a new product in 2002: 60 percent compared with 73 percent in 2001. Second, although three-quarters of the companies plan to add staff this year, the number that anticipate an increase of more than 5 percent dropped from 71 percent in 2000 to 61 percent in 2001. Third, fewer companies than last year expect to increase their use of contract sales reps. Only 12 percent of those who use contract sales organizations plan to increase their usage, compared with the 56 percent who planned to do so in 2000.
That is not to say that hiring new reps has come to a halt. It is still going strong in some companies and market segments. In fact, the demand for sales and marketing talent is still great enough to make it an employee's market.
Some of the demand, however, comes from the need to replace reps who have "jumped ship" rather than the need to keep up with expansion. Companies are challenged to find ways to keep sales people on board, and the issue is likely to keep some managers up at night. High attrition among sales people
is not unique to the pharmaceutical industry, and if anything, the situation is much better than in other industries. Sales people everywhere are notoriously hard to keep. In a recent Hay Group survey, a staggering 38 percent of sales people were eyeing the coastline for other opportunities and planned to leave their companies within two years.
Still, pharma may feel the pain more acutely than many other industries for several reasons. First, they try so hard through their compensation practices to avoid the problem altogether. Second, because of the technical nature of the job, pharmaceutical companies invest heavily in training sales people. It is a great loss when that investment flies out the window. And third, because the industry relies so much on personal selling, there's an unusually heavy price to pay for severing relationships with customers.
Just how important is compensation in determining who gains reps and who loses them? Blaming attrition on the compensation plan is an easy answer, but it's not the whole answer. In many cases, it's not even the right answer. People leave one company for another for a variety of reasons. "Management" is the most frequently cited; "compensation" is the second. Others include "better career opportunities," "family issues," and "limited opportunities for advancement." (See "Reasons for Leaving," page 84.)
Reasons for Leaving
When researchers delved below the surface of those findings, they discovered that compensation is actually more of a "pull" than a "push" factor. In other words, it doesn't account for why people leave one position as much as it explains how they choose from among other options. Compensation weighs heavily in the decision because it can be evaluated from the outside; other factors that influence satisfaction-such as management style and advancement opportunities-are hard for candidates to assess until they are employed within a company. Also, it is important to remember how sales a rep's profiles contributes to the importance of pay. High performers are highly motivated to achieve. And they have a strong need to know-and to be recognized for-how much they are achieving. Money serves as an excellent tangible communicator of that measurement.
The survey data led Hay researchers to conclude that the tangible rewards of employment (pay and benefits) are simply the minimum returns that employees look for from their jobs-the threshold of acceptability. What truly differentiates employers in workers' minds is how the company behaves toward them and the degree to which it fulfills their psychological needs.
To put it all in perspective, pay is important. It clearly impacts the flow of talent into companies-and out of others. Reps themselves claim it is the reason they leave 17 percent of the time. But, there are many other reasons, with management philosophies and practices heading the list. In Hay's experience, most reps who leave their jobs move to another company; few move into nonsales jobs or leave the industry altogether.
As a group, pharmaceutical companies do a superb job of using compensation to meet the "threshold of acceptability" for employment. The industry still deserves its reputation as a sector that pays its sales people handsomely, despite the fact that salaries in other industries have gained ground during the past few years. The starting annual salary for an entry-level sales rep is about $4,000 higher for a pharmaceutical employee than for the average sales personnel in other industries. Total compensation is about $10,000 higher. It is interesting to note that the gap has almost disappeared for product managers, whose average base salary is $96,700, with total compensation at $111,700. For product managers in other industries, the figures are $96,900 and $106,700 respectively.
Many pharma companies take great pains to see that they stay competitive within their own industry. Most increased their salary structure in 2001 in response to competitive market conditions, with a median adjustment of 3.8 percent. Furthermore, the majority of companies targeted the market median (50th percentile) for base salaries, but a remarkably large number aimed considerably higher when it came to total compensation. Forty-two percent targeted the 75th??90th percentile for sales reps' total cash compensation (base plus incentive/bonus), and half targeted above the 50th percentile for total direct compensation, which adds in long-term incentives. That practice ratcheted up the pay scale for everyone the following year.
The correlation between tenure and annual cash compensation also continues to be strong. A Level I sales rep with one to two years in the job earns a median of $44,100 in base salary and $51,600 in total cash. In sharp contrast, a rep with 20 years of experience earns nearly twice that: $72,700 in base and $91,000 in total compensation.
Merit increases for sales and marketing positions averaged 4.5 percent last year. A slight majority (58 percent) of companies use a mixture of quantitative and qualitative measures to assess performance, with about three-quarters of the weight going to quantitative measures. Forty-one percent of the responding companies rely exclusively on quantitative measures. By far the most frequently mentioned factor used to determine merit increases for sales people and management alike is adherence to the company's core values. Other relevant factors include bonus results, team skills, and the need to adjust comparative ratios. As in the past, the most prevalent type of plan continues to be "base salary plus multiple variable incentive." (See "What Color is Your Paycheck?")
What Color is Your Paycheck?
According to the survey, most sales and marketing personnel are eligible for short-term incentive compensation, and 60 percent of companies offer long-term incentives to sales and marketing staff, usually through nonqualified stock options. It is the upside potential of such plans that puts pharma companies ahead of other industries in total pay.
There is a general trend in all industries toward offering equity in the company as a reward, and many companies who've not yet made the leap are at least considering it. Equity has almost become an expected part of the overall pay package. The bigger question is not whether to offer equity, but whether it should be treated as a benefit or as an incentive. Industry observers report that companies that treat it as an incentive get a lot more mileage out of it.
Within general industry, the variable percentage of the total cash compensation package decreased in every sales and marketing job category last year. In the pharma sample, though, there was no clear trend. Just as many job categories saw an increase as a decrease in the percentage of pay that pharma companies make variable.
Typically, incentive compensation is about one-quarter to one-third of pharma sales reps' total compensation. For the most experienced reps, the average incentive compensation was 29 percent of their base pay in 2001, compared with 9-10 percent for sales reps in other industries. The exact percentage, however, varies greatly from company to company.
Although the amount of incentive compensation awarded clearly varies by performance, pharma companies are going all out to see that everyone gets rewarded. Last year, general physician sales reps received, on average, a bonus that equaled 37 percent of their base salary, an increase of 10 percent over the previous year. The best performing reps earned a bonus equal to 59 percent of their base salary. What is most remarkable is that even the lowest performing 10 percent of reps received incentive compensation that equaled 32 percent of their base. That is double the percentage reported in the 2000 study. That begs the question: did the lower performers really deserve it? And are the true stars receiving enough of an incentive to differentiate them and their performance?
Generally, companies have between five and eight incentive plans in place at any one time, but that average obscures the fact that some have as many as 40 different plans in operation. Clearly, pharma companies are trying hard to tailor their plans to specific job types and changing market situations. Doing so also demands that they modify their plans frequently. The typical life expectancy of a compensation plan is three years. Compensation plans that have been in place longer than that are out of date and unlikely to produce the desired effects.
Not only are pharma compensation plans short-lived, they are extraordinarily complex. From its experience across a spectrum of industries, the Hay Group can attest that the pharma industry's incentive plans are among the most complex in existence, particularly with respect to the number of variables considered. And that is not good.
When it comes to variables in an incentive plan, less is more. Sales people can focus on only so many things at once. When given too many metrics, they simply concentrate on a few of their own choosing. Three solid metrics are optimal.
By The Numbers
By far the most common quantitative performance measure is "performance against target." The most common qualitative measure for general physician reps is "teamwork," and for hospital reps, "customer focus." (See "By the Numbers" and "Qualities that Count.")
Qualities that count
It may be that, in an attempt to treat everyone fairly and to make use of the multiple data sources available, companies are over-engineering their individual plans and actually doing themselves a disservice.
Pharma sales reps are paid more lavishly than their counterparts in other industries, and employers often tailor their plans to the rep's situation, so what do the reps have to say about it?
A healthy 70 percent of general physician reps believe that their salary and incentive compensation is "fair"-equitable both internally and externally. Yet, less than 50 percent of those reps believe that their incentive compensation accurately reflects their performance. And nearly a third of the responses were negative on the subject. In most reps' minds, something is not right about how their performance is monitored and measured. That finding clearly should be examined in greater depth, but it is likely that even the perceived gap between performance and compensation fails to account for most of the attrition the industry is experiencing.
Marketing and product management seem to be coming into their own as true professions within the industry, rather than as stops along the way in a sales career path. Qualified marketing and brand managers are in high demand as their functions become increasingly important because of the current emphasis on branding and direct-to-consumer and -patient advertising. Based on past experience with pharma companies, Hay researchers conclude that companies' directives are no longer driven exclusively by sales, but encompass marketing input as well.
The observation is not yet evident within salary data for product managers, but it is for market researchers. Market research analysts and managers saw their target total cash-the amount one earns if they achieve 100 percent of their goal-increase upward of 10 percent from 2000 to 2001. Increases for product managers were much more modest and have shown no clear trend in recent years. (See "Research Pays.")
Programs and services that ease the tug-of-war between work and family life provide one more incentive for employees to stay with their employer. When the offerings are unique and demonstrate an understanding of employees' special needs, they serve as evidence that a company cares for its staff. A few pharma companies are striving to accommodate employees' personal needs through alternative work arrangements.
Although a relatively small number of the total respondents completed that section of the survey (18), their responses do provide a valuable portrait of alternative work policies and procedures. In most cases, companies offer the alternatives of job sharing or working part time to sales people without regard to their tenure, but a few offer them only to employees with at least a year's service.
Only 12 percent of the company respondents give job-sharing reps their own territories, whereas 38 percent of part-time reps have their own territories. In every case, compensation, both base salary and incentive, is prorated based on full-time status. When it comes to benefits, part-time and job-sharing reps are much more likely to receive healthcare coverage than paid time off, life insurance, and sick time, but they usually must share the cost.
Companies that successfully manage alternative work options are seeing outstanding results. For example, shared and part-time territories often perform much better on average than the standard sales territory. One conclusion could be that people with alternative work schedules are more motivated to achieve outstanding results.
So, are today's compensation packages achieving what pharmaceutical companies expect them to? When it comes to attracting talent, it's clear that manufacturers have been using compensation as a lure, especially during the past few years of rapid sales force expansion.
But once incumbents settle in and deal with the realities of the job and workplace, generous compensation is not a particularly effective means of retaining them. If it were, today's frustrating turnover rates in segments, such as general physician reps, would not be so high. A money-based model of employment is out of sync with a workforce that has ample employment options.
The real concern is whether compensation can achieve its primary goal-to direct and focus behavior toward meeting company objectives. Given the number of sales reps who do not see a sufficient link between performance and pay, it is safe to conclude that many of pharma's reward strategies are not delivering the return that they could and should.
As the industry's focus shifts from expansion to retention, companies must come to understand what motivates people to stay and deliver superior performance year after year. Then they must put as much care and attention into creating an appealing company culture as they do into developing compensation packages that attract people in the first place.