Sales Slip

January 1, 2007
Bob Davenport, Erin Rosner, Carrie Fisher
Pharmaceutical Executive
Volume 0, Issue 0

One fortunate consequence of a slower job market is that tenure levels are increasing: 80 percent of sales managers now have at least two years experience under their belt.

About the Survey: In this 16th Annual Sales Force Effectiveness Survey, Hay Group explored pharmaceutical companies' pay practices as well as their plans to address growing challenges. The global management consultant group teamed up with Pharmaceutical Executive to survey 62,310 employees from 53 US pharma and biotech companies. Executives from sales, marketing, and business development were surveyed in the spring of 2006, and represented a broad spectrum of industry players in terms of sales-force size, revenue, and type of ownership.

Movies like Star Wars or—a more topical example, given the slasher context—Texas Chainsaw Massacre have helped cement the role of the "prequel" in a cinematic franchise. This new film genre is based on moviegoers' intrinsic interest in knowing not just how a great story ends but in how it all started.

Slowing Salaries

Linking real life to the silver screen, the Hay Group's 16th Annual Sales Force Effectiveness Survey offers a prequel to Pfizer's high-profile reduction in its sales force—a 20-percent cut last November with additional cuts predicted this year. The bulk of this research was conducted in the spring of 2006. Even then, most companies were beginning to grapple with the dwindling profitability of their primary care physician (PCP) sales reps. They knew that most PCP reps are relegated to jobs of merchandising, yet command the salaries of consultative selling. They also knew that paying these reps without a justified return couldn't go on forever. The drama, then, as this report captures, is not just in the coming rationalization of pharma's sales forces, but also companies' strategies and tactics as they prepare for this change.

The survey's most telling finding may be that, for many companies today, the effort required to administer complex compensation plans for PCP reps—complete with algorithms, matrices, and the rest—seems out of whack with their actual worth. Companies have intentionally made their incentive-compensation schemes quite elaborate in an effort to precisely direct reps' performance toward corporate goals. Now, with no end in sight to the sales-force-profitability slide, they are finding that these incentive programs come with too many administrative headaches.

The trends outlined by the survey convey the general sense that a shakeup—or shakedown—was in store for sales forces industrywide. Still, there were some surprises.

Sales-force expansion, while less common, is still happening, particularly in the specialty and managed-care areas, where companies are staffing up for new product launches aimed at specialists and to handle the increasing influence of third-party payers.

Voluntary attrition remains very high among PCP and specialty reps, with compensation the number-one reason given for high performers leaving their pharmaceutical employers. On average, pharma sales reps are paid 15 percent more than employees in comparable positions in other industries.

However, for PCP reps in particular, total cash compensation is stagnating for the first time. But even as reps are feeling a financial pushback, key marketing positions are seeing healthy growth in total cash compensation.

Comparing Comps

The following report provides a snapshot of pharma companies' current compensation structure for PCP reps—and all the administrative difficulties it presents—and spotlights emerging trends and practices for pharma's evolving sales model.

Sales Staffing: And the Beat Goes On

Growth in overall sales-force size is far from grinding to a halt. While 63 percent of the companies surveyed anticipated no change in their staffing levels through 2006, a quarter anticipated some growth. Interestingly, all of the biotech companies reported that they intended to make little or no change in their sales-force staffing (see "Not-So-Great Expectations,").

Launch activity, the main driver of sales-force rampups, has been steady: More than 60 percent of companies in the study pitched a new product in 2006, and the same number expect to launch one or more this year. Of course, Pfizer's recent rock-our-world reversals—the downsizing of its sales force and the failure of its blockbuster-to-be, torceptrapib—likely portends greater shifts in the near future. The drug giant's cuts are expected to give other companies the impetus to lessen their emphasis on the "bombardment" model of selling, resulting in fewer PCP reps industry-wide.

At the same time, as previously mentioned, products aimed at specialists are playing a larger role in companies' portfolios, and companies will need appropriately-trained reps to sell these drugs. And more than half of all companies planned to step up their managed-care workforce to accommodate the influx of Medicare-eligible consumers and the increasing clout of managed-care organizations in the prescribing marketplace.

Not-So-Great Expectations

One fortunate consequence of a somewhat slower job market is that tenure levels are increasing. Companies report that more than 60 percent of their sales reps and about 80 percent of their first-level sales managers have at least two years of relevant experience. This is a big jump over previous years when as many as 40 percent of managers had less than 18 months of sales under their belt.

Even though 30 percent of companies have what they believe to be an effective process in place for retaining high-potential sellers, voluntary turnover remains at about 15 percent for PCP and specialty reps. Such fluidity is costly: The average "hard cost" to recruit and hire an entry-level rep is approximately $84,600—an expense the industry absorbed to the tune of over $1 billion last year.

Curiously, voluntary turnover for regional and national account managers rose to 11 percent, from six and seven percent, respectively, in 2005. This may reflect the intense pressure on these positions—this is where real selling (as opposed to merchandising) takes place. It also indicates that the competitive market for these positions is heating up, as the roles continue to grow in importance. To expand the candidate pool, companies are increasingly willing to hire sales reps without pharmaceutical experience (56 percent compared with 40 percent in 2005).

Base Salary: The Easy Part

For reps, selling pharmaceuticals still has an edge over selling widgets. The median base salary for all drug reps was $68,600 in 2006 (up from $66,300 in 2005), which compares favorably to $59,800 for reps in other industries. PCP reps averaged $61,910 in base salary, with specialty reps and hospital reps earning an average of $73,890 and $83,530, respectively (see "Comparing Comps," right).

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.

Companies also showed a greater reliance on market data to set salary ranges (49 to 50 percent for 2006 vs. 38 to 41 percent in 2005). The past year has seen a notable trend away from using internal sales/profit results (down from 41 percent in 2005 to 23 percent in 2006) toward using external data, like Xponent and Drug Distribution Data from IMS, to set salaries for reps and determine their performance.

Across all different types of reps, incentive payout is based primarily on individual performance (72 percent of all plans). Predictably, district and regional managers are also judged on their area's performance, while corporate performance is a common basis for incentive comp for national account managers.

An individual performance against a defined target is the primary mechanism used in 66 percent of incentive plans. And compared with 2005, companies are using matrix calculations—metrics that incorporate two variables—with less frequency (14 percent, compared to 34 percent in 2005).

Less than a third of firms put an upper limit on incentive payout, but when they do, the maximum ranges from 170 to 250 percent of the goal. This obviously gives companies the latitude to reward superior performance when they see it.

Other Rewards: Easy Come, Easy Go

Other perks that were once tied to performance—laptops, Internet connectivity, cell phones, PDAs, car options, and single rooms at sales meetings—are increasingly being thought of as simply the cost of doing business. (The percent of companies that gave out PDAs for performance, for example, dropped from 67 percent in 2005 to a mere three percent in 2006.) Other types of carrots—trips are the most popular, followed by cold cash—are still being offered, but these rewards account for only six percent of total incentive-compensation budgets.

In addition, pharmaceutical employers are less likely to include sales reps in their long-term incentive compensation, such as stock options. Among companies that offer such plans, sales reps were included 32 percent of the time in 2006, compared with 55 percent in 2005. This is yet another sign that companies are reconsidering the level of their investment in the sales force, relative to the return they receive.

Cash Compensation: Slow Progress, if Any

The average total compensation for all kinds of sales reps increased only slightly—from $89,600 in 2005 to $90,100 in 2006. And for the first time in recent memory, total compensation for PCP reps leveled off, signaling the end of the heyday that these sales forces have long enjoyed. Again, this reflects the fact that companies are beginning to look more closely at what they spend on PCP talent, particularly as the demand diminishes. Specialty reps, however, saw stronger growth in their total compensation, up from $99,100 in 2005 to $103,300 in 2006. For hospital reps, total comp hiked from $105,900 to $109,600. Still, even these increases are moderate by past standards.

In this survey, pharma executives were asked how competitive they intended reps' compensation to be compared with other companies. Most participants responded that they wanted to offer their reps pay packages that were at least at or above the industry's medium pay. However, the difficulty in setting a compensation target in this way is that the market median for reps' pay is influenced by what all companies do collectively. Therefore, it is a moving target. Since no company intentionally targets below the market median, the effect is to ratchet up the true median, so that many companies end up paying more than they intended—which helps explain why pay rates have gone up for so long.

That said, all pharmaceutical companies continue to target at or above the median, with a "median target strategy" somewhat more prevalent in 2006 than 2005 (54 vs. 49 percent). However, in 2006, none of the companies surveyed targeted rep compensation at the 90th percentile or above. Clearly, the much-discussed pay inflation of the past decade is beginning to diminish.

Sales and Marketing: New Balances

Since performance is measured against a target, the creation of that target is key to the integrity of the entire compensation system. Yet setting sales quotas is an inexact science at best—particularly in the primary care arena. Companies rise to this challenge typically by using a combination of factors, including actual territory results (89 percent), overall company goal/objective (86 percent), and territory potential (61 percent). The emphasis, however, is shifting away from territory potential, as it is down from 86 percent in 2005. Undoubtedly, this trend reflects the fact that companies are uncomfortable attempting to predict a territory's "true" potential, given the influence of external factors such as managed care. As a result, more transparent elements, such as actual sales targets, get more weight in the goal-setting process.

Other changes also are underway. For several years, the marketing function within pharma companies has been gaining in size, stature, and influence. This is noteworthy in an industry so traditionally focused on sales. While the scales have not tipped toward marketing—and aren't likely to any time soon—companies continue to recognize the value of marketing and reward their marketers richly. Product managers earned on average $129,300 in total compensation in 2006, while senior product managers raked in $157,800—both up seven percent or more from 2005. These increases stand in sharp contrast to the 0.5 percent increase granted to the industry's sales reps. Even senior specialty sales reps did not fare well in comparison, with only a 0.6-percent increase in total compensation.

As more and more pharma and biotech companies grapple with the burden of administering highly sophisticated incentive-compensation plans for their sales organizations, it is only natural that they begin to question the value of the effort. Until such a time as PCP reps can interact with physicians as consultants in the sales process, they are increasingly functioning as highly educated, very sophisticated, superbly trained—and generously paid—merchandising reps. In essence, PCP reps deliver product information and distribute samples. In the harsh light of economic reality, does the current pay structure for these positions still make sense?

One answer is to raise the percent of total comp represented by base pay for the PCP sales force, recognizing that these reps simply don't have a lot of direct impact on the actual sale. At the same time, companies can simplify the structure of their incentive plans, as many are starting to do. This would end some of the administrative misery—and free up companies to measure and reward positions, like specialty sales and corporate account roles, that have a more direct impact on sales volume. Time will tell, of course, if companies follow through with these changes, but the motivation is mounting—and the once-distant rumblings, as seen with Pfizer, are upon us.

Bob Davenport is vice president and managing director for Hay Group. He can be reached at bob_davenport@haygroup.com. Carrie Fishercarrie_fisher@haygroup.com and Erin Rosnererin_rosner@haygroup.com are consultants for Hay Group Insight.