Sales Force Survey

January 1, 2006
Bob Davenport

,
Carrie Fisher

Carrie is a Principal at Hay Group and the project director of the Hay Group Pharmaceutical Sales Force Effectiveness Study. Carrie can be reached at carrie.fisher@haygroup.com.

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-01-01-2006, Volume 0, Issue 0

Big Pharma's hiring slowdown is not translating into a growing demand for contract sales organizations.

It takes a full-time crew of 17 ironworkers and 38 painters working year round to maintain the Golden Gate Bridge. Their work is never done; no sooner do they repair and paint one area of the 4,200-foot span, then the corrosion from the sea air requires that they start in on another. In a similar way, compensation managers in the pharmaceutical industry are involved in their own never-ending effort to perfect the systems they use to measure and reward the marketing and sales organization. Compensation plans, at least in this industry, are works in progress. They can never be "done."

Percentage of Voluntary Turnover

One reason a compensation plan is so complicated: It needs to provide incentives for a wide variety of behaviors. At the same time that it articulates strategy and directs behavior, the compensation plan must motivate the right achievement, and offer rewards that retain the top performers and attract fresh talent. To do that, it must be forever adjusting to corporate goals, keeping pace with the market, and incorporating advances in data sources. Hay Insight's 2005 Pharmaceutical Sales Force Effectiveness Study, conducted in partnership with Pharmaceutical Executive, illuminates the current pay practices of 52 participating pharmaceutical companies and reports on the changes they expect to make in the coming year. The results presented here indicate that the pharmaceutical employment market is, indeed, changing—and that many existing practices will require further tinkering.

Target Pay Pogitioning: Total Cash Compensation

Some of the study's highlights:

  • The rate of sales force expansion varies by type of pharmaceutical company—Big Pharma is not expanding, while biotech and specialty companies are.

  • Sales staff turnover is in the double digits, and highest among specialty pharma companies.

  • Most companies target the market median for base pay, saving their more competitive posture for incentive compensation.

  • Companies are trying to spread the wealth by lowering the threshold required to receive an incentive payout.

  • The targeted positioning of incentive compensation has shifted slightly downward relative to the market median over the past few years.

  • Qualitative measures for determining incentive compensation are currently out of vogue.

  • Almost half of the surveyed companies pit their reps against one another with relative ranking to allocate incentive compensation.

  • The complexity of incentive-compensation plans often blurs the distinction between levels of performance, and thereby minimizes pay differences.

Staffing: Turning a Corner

Three years ago, we asked in a Pharm Exec Sales Force Survey how long the pharmaceutical industry could continue expanding its sales force. Today, if Big Pharma's sales-force bubble has not quite burst, it is definitely deflating. None of the survey participants representing big companies predicted that their sales force would grow "somewhat" in 2005, much less grow "a great deal." In contrast, 15 percent of the biotech companies and 22 percent of the specialty pharma companies surveyed planned to grow "a great deal" and another 65 percent and 18 percent, respectively, planned to grow "somewhat" over the course of 2005.

As would be expected in a generally healthy employment climate, voluntary attrition among general practitioner and specialty reps remains high across all types of pharma companies. Companies predicted in the previous survey that it would reach 14 percent for GP reps and 15 percent for specialty reps in 2005. Interestingly, turnover is higher in specialty companies than in Big Pharma—that's a first. Double-digit voluntary attrition puts an extra burden, and cost, on the staffing departments of companies attempting to expand their overall sales forces. Conversely, attrition rates may be a blessing for companies with plans to scale back.

Although two out of three surveyed companies have plans to introduce new products, none of the participants anticipate that they will be using Contract Sales Organizations (CSO) any more than in the past, even though rep turnover is high. (Big Pharma companies are the heaviest users.) In fact, 44 percent of companies surveyed said they intend to use CSOs less often. It appears that Big Pharma's hiring slowdown is not translating into a growing demand for temporary sales people.

For the past few years, the industry's sales battle cry has been, "Improve sales-force productivity." So it is somewhat surprising that, in 2005, companies reported that they expect nearly every type of salesperson to make fewer calls. On average, GP reps are now expected to make eight calls a day, down from nine in 2004. This change could simply mean that companies are being more realistic in their expectations, considering the difficulty reps have in gaining access to physicians. Or they may be emphasizing the need for quality interaction with physicians, as opposed to calls made simply for the sake of recording an office visit.

Marketing: Gaining Ground

The pharmaceutical industry has traditionally been a sales-dominated business (in contrast, for example, to the consumer packaged goods industry, which is dominated by the marketing function). Over the past few years, however, the balance of power is shifting toward marketing. Although there was no spike in compensation for marketing positions over the past year (as was observed in other recent years), anecdotal evidence shows that companies are giving thought to how marketing positions are leveled, what competencies are required in different marketing positions, how performance expectations are set, and how people advance through the marketing ranks. For example, they're evaluating the value of a background in pharmaceutical sales for the career ladder they offer a marketer.

Base Salary: Losing its Edge?

Four of five pharmaceutical companies have formal salary structures in place for their sales organizations, and an equal number periodically alter them based on market data to respond to a competitive employment market.

The mix of base salary and incentive pay is shaped by an organization's competitive objectives. In general in 2005, companies aimed to make base salary about 75 percent of total compensation; the rest is incentive compensation. This year's study suggests a continued trend toward targeting cash rewards at or above the industry median, a strategy intended to help attract and retain sales talent. Companies, however, reported a greater tendency to target the median, rather than above it, for base salary. Just over three quarters of the respondents reported that they targeted the median for their sales reps' base salary.

Respondents reported that their median salary increase between 2005 and 2006 was 4.0 percent, just half a percentage point higher than in other industries. (Just five years ago, pharma's median salary increase was 2.6 percentage points higher than other industries.) However, the median base salary for all levels of sales reps combined rose almost six percent (from $62,400 to $66,300) last year, most likely because of competitive pressures.

The starting salary for an entry-level sales rep in the pharmaceutical industry is just 10 percent higher than for a beginning salesperson in other industries. However, once incentive compensation is factored in, the average entry-level pharmaceutical rep earns 32 percent more than his or her counterpart in other industries.

While the average merit-increase percentage won't change between 2005 and 2006, the factors determining an individual salesperson's merit increase will. The number of companies relying on compa-ratios (an employee's base salary divided by the salary midpoint for his or her particular job and level) is growing (from 34 percent in 2004 to 43 percent in 2005). Meanwhile, the number of companies taking note of team skills has doubled (from 6.4 percent in 2004 to 13 percent in 2005), although it remains small.

Slightly more than half of the reporting companies (53 percent) still use bonus-plan results in calculating a sales rep's merit increase, compared with 64 percent last year. Using bonus-program results (which are primarily measures of sales) to calculate merit increases is considered double dipping. While it may be easier and more convenient than having to evaluate reps on other measures, using bonus-plan results places too much emphasis on one calculation that may be flawed in its own right.

Employment Options: Bending and Stretching

In an effort to accommodate different work-life balances, nearly half (44 percent) of the participating companies offer sales reps the opportunity to share a job and/or to work part time. What is more, compared with last year, they are making these options available to people sooner: 70 percent have no minimum tenure requirement for job sharing and 94 percent have none for part-time work. So it is quite common to be able to step in off the street into a part-time or job-share sales position.

For traditional health and wellness benefits, companies are more likely to pay the full cost for part-time employees than they are for job-share employees. The company pays the full cost of health insurance and life insurance in 67 percent and 50 percent of the cases for part-time sales reps, and 50 percent and 40 percent of the time for job-share reps, respectively.

Incentive Compensation Eligibility: Spreading the Wealth

The typical incentive-plan threshold, or lowest level of goal attainment at which a payout can be received, dropped from 80 to 90 percent in 2004 to 70 to 83 percent in 2005, so that more performers can receive payouts.

New hires are no longer afforded a leisurely orientation period before they are expected to begin contributing—and before they can begin earning under the regular incentive plan. Over the past several years, the trend has been to put new hires into the regular incentive plan sooner and sooner (after seven months in 1999 and just two months in 2004), a clear attempt to ramp up productivity. The fact that many companies are hiring mid-career reps who are seasoned and do not need the same degree of training before hitting the streets also contributes to this trend.

Three-quarters of the plans reported in the study do not have a cap, or maximum amount that can be paid out in incentive compensation. Of those plans in 2005 that do have a cap, the maximum payout opportunity for outstanding performance is between 125 and 145 percent, which represents a shift downward from 2004 when the maximum was between 120 and 200 percent for "outstanding" performers.

Slightly more than half (55 percent) of the companies in the survey design separate incentive plans for the first months of a product's launch to push early sales. The optimum period for a separate new-product compensation plan is six months.

Market Positioning: Hitting a Moving Target

The difficulty in setting a competitive incentive-compensation target is that the market median is obviously influenced by what all companies do collectively and is, therefore, a moving target. Despite many companies' attempts to exceed the industry median, which would raise it, the median has fallen slightly, with more companies intentionally targeting the market median for sales reps, rather than shooting to exceed it. In 2005, nearly half of all companies in the survey (49 percent) targeted the median, compared to 42 percent in 2004 and 39 percent in 2003. However, slightly over a third of participating companies (36 percent) target the 75th to 90th percentile.

Performance Criteria: Throwing in the Kitchen Sink

The success of sales force incentive-compensation programs depends largely on an organization's ability to measure individual performance against target goals. Given the very real differences that territories can have in potential (due to a variety of demographic factors, such as managed care impact, physician prescribing trends, etc.), setting fair and equitable goals is difficult. Frustrated by their inability to set territory-level standards, some companies simply set the same goal for all reps. Goals can be either quantitative or qualitative, or some combination of both.

The survey data indicate that prescription volume, revenue, and market share continue to be the most prevalent primary criteria (49 percent, 38 percent, and 31 percent, in that order) used to determine incentive-plan payout. Qualitative measures, especially major-business-objective (MBO) results and managers' appraisals, tend to be used as secondary measures.

It is worth noting that the relative importance of quantitative performance criteria has increased, suggesting that managers are more comfortable applying them than qualitative measures. In 2005, a full 72 percent of companies reported that they use quantitative measures exclusively, up from 62 percent the year before. In addition, companies that use a mix of quantitative and qualitative measures are increasing the weight they place on quantitative measures for nearly every sales position except national accounts manager.

Measuring performance by numbers—as opposed to other factors, such as customer focus, teamwork, product knowledge, and territory management—does not necessarily spell simplicity. Many companies continue to maintain fairly complicated plans that factor in more than three performance metrics that often involve "monster" algorithms. (We recommend that three be the limit.) This year, 22 percent of the responding companies fell into that category, compared with 15 percent last year. The percentage of companies using more than three metrics for specialty reps doubled between 2004 and 2005 (from 12 percent to 24 percent).

The most common payout mechanism is performance vs. target/quota/goal, which is used as the primary mechanism in 60 percent of plans. Matrix calculations (metrics that incorporate two variables) are used by a third of plans as a primary mechanism and 49 percent of the time for GP reps. This is an increase from 36 percent in 2004 and is another way that companies have added complexity to how rewards are determined.

Pharmaceutical/biotech employers, of course, want to distinguish between levels of performance and aim to distribute incentive compensation so that the superstar receives twice the incentive payout of the average performer. But by watering down their plans with too many measures, most companies only pay their outstanding performers one and a half times the incentive compensation they pay the average performer.

Distributing the incentive budget based on a relative ranking of sales peoples' results is steadily gaining in popularity with companies, if not with their employees. Overall, about 56 percent of companies use a relative-rank calculation as part of incentive-compensation payout. Thirty percent of companies use relative ranking as the primary method of paying most of their field reps.

While using ranking to determine payout is clean, easy, and has an inherent logic, it can push friendly competition between reps into something much more adversarial. It also makes it difficult for reps to track their rewards as they go along. To do so, they have to know:

  • The performance (e.g., market share) of competing reps

  • Their own performance

  • Where that performance falls compared with other reps in the company.

Total Rewards: Looking at the Whole Picture

The good news for sales people is that total cash compensation has continued to grow for most sales and marketing positions across the industry, regardless of the means used to calculate it. The average sales rep earned $89,600 in total cash compensation in 2005, compared with $82,900 in 2004. Increases were particularly marked among specialty sales reps. The average first level specialty sales rep's total cash compensation jumped from $73,200 in 2004 to $84,000 in 2005.

Other good news is that whereas last year some tenured district managers were earning less than their newer counterparts due to salary compression, that anomaly has been resolved with changes in pay structure. There's a steady progression in pay for district managers up through 25 years of service. The data also show a very strong uplift for tenured specialty sales reps, particularly after the ten-year service mark.

One third of the participating organizations maintain funds to be allocated at the district manager's discretion as pay "kickers." These funds are outside of the regular incentive-compensation plan and can be used to recognize a rep's contribution that is not measured in the regular plan or to compensate for the influence of managed care in a rep's territory. The existence and use of these funds underscores the fact that even with the sophisticated reward systems in place, managers often feel the need to intervene in order to compensate fairly. They are a way for managers to say, "I know that the plan calculation didn't really reflect what you did."

Companies use a variety of additional cash and non-cash rewards in an effort to recognize extraordinary sales efforts. These, in fact, often have greater impact than the formal incentive-compensation plan in directing behavior. Participants report that between one percent and 20 percent of their annual sales incentive budget is spent on awards and recognition programs, with the average being 6.8 percent.

Continuing a trend observed last year, companies appear to be increasingly linking perquisites, such as upgrades in car options and single rooms at sales meetings, to performance. Reps who want to "smell the leather" have to earn it.

Many companies also include sales staff in their long-term incentive compensation plans to reward them for performance achieved over a period of years. The plans can be based on incentive stock options, non-qualified stock options, performance units, restricted stock, or stock appreciation rights. The percentage of companies that award non-qualified stock options as part of their long-term incentive-compensation plan has continued to decline, from 72 percent in 2003 to 51 percent in 2004 to 37 percent in 2005. However, eligibility for other types of long-term incentive programs has been increasing, perhaps in an effort to reduce turnover.

The pharmaceutical market is vast, complex, and dynamic. When all is said and done, there is still no way to measure and reward the performance of the industry's sales people that is absolutely accurate, completely fair, and easy to understand and administer. Fortunately, pharmaceutical employers never stop trying to come as close to that elusive ideal as possible. Like the crew of the Golden Gate Bridge, they are motivated each year to review the situation and to make improvements.

Bob Davenport (bob_davenport@haygroup.com) is vice president and managing director for Hay Group. Carrie Fisher (carrie_fisher@haygroup.com) is a consultant for Hay Insight.

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