When Will the Bubble Burst?

January 1, 2003
Michele Goldberg

,
Bob Davenport

,
Tiffany Mortellito

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-01-01-2003,

Years ago, a cereal maker ran a commercial in which children who'd eaten oatmeal for breakfast floated to school, snug in a protective bubble of warmth. Today, the same imagery comes to mind with respect to the country's 85,000 pharmaceutical salespeople.

Years ago, a cereal maker ran a commercial in which children who'd eaten oatmeal for breakfast floated to school, snug in a protective bubble of warmth. Today, the same imagery comes to mind with respect to the country's 85,000 pharmaceutical salespeople. They are protected to a certain extent from the chilling winds of the economy, and they ride high above other salespeople when it comes to compensation.

Despite the economic struggles that other industries face, pharma enjoys relative health and vitality. Companies continue to expand their sales forces, and the competition for talent is as fierce as ever. The most desirable candidates have multiple offers to choose from, and top performers can change jobs easily. In such an open job market, employers naturally turn to compensation as a key strategy for attracting and retaining talent. Consequently, sales reps are the happy beneficiaries of escalating salaries and more and better perquisites.

The results of the 2002 compensation module of Hay Group's annual Sales Force Effectiveness Study confirm that many of the same compensation issues that have challenged pharma companies for the past few years are still in play today. With their compensation plans, companies are still looking for ways to:

  • distinguish themselves from one another in the clamor for talent

  • attract experienced employees, both in sales and marketing

  • drive top performance

  • retain talent.

When Will Enough be Enough?

Each year, the number of salespeople calling on a finite population of doctors breaks a new record. Logic suggests that, at some point, the market will be saturated with sales reps and pharma companies will stop sending more out. But the industry hasn't hit a turning point yet, and it looks as if additional salespeople will keep on coming, like the brooms in Fantasia's memorable sorcerer scene. In 2001, 60 percent of the companies participating in the survey expanded their sales forces, while none decreased in size. About the same percentage reported plans to expand their forces in 2002. Companies are, it seems, in their own "arms race." They are all after the maximum number of physician impressions, and no one wants to be the first to cut back.

The only sign of a slowdown can be seen in the use of contract sales organizations. Fewer companies use contract sales forces than a year ago, and among those who use them, more than a third expect to decrease their use in the future. It could be that manufacturers are relying on them less because they have become more efficient at hiring their own sales organizations. In fact, one company hired nearly 400 new sales reps in six weeks.

Turnabout in Turnover

In recent years, company recruiters have been pressed not only to hire additional reps, but to replace those lost to voluntary attrition. Turnover among primary care physician reps peaked at 19 percent in 2000, then shrank to 12 percent in 2001. Although the trend may be related to the general economic picture and a change in workers' outlooks after the catastrophes of September 11th, pharma companies also deserve a good bit of the credit. Hay Group's 2002 Recruitment, Retention, and Motivation in the Pharmaceutical Industry study shows that nearly 60 percent of participating companies have increased their focus on, and implementation of, new programs and initiatives designed to improve retention.

On the other hand, turnover among specialty physician reps increased slightly from 9 percent in 2000 to 11 percent in 2001. Demand for those reps resulting from the growth of specialty sales forces may explain that increase in turnover. Even this seemingly small change could be a concern because specialty reps are an elite and experienced group-generally the last ones a company wants to lose.

Most interesting is the fact that among high performers, pay is the number one reason for leaving a company. Among average and low-performing reps, the primary driver of attrition remains, as it has traditionally, the person's immediate supervisor-with compensation running second. (See "Why They Leave," page 46.) That high-performing reps are motivated by money is no surprise, but the extent to which that sets them apart from others may be. Companies that place increased emphasis on rewarding top performers are obviously on to something. They should not forget, however, that even within that group, the "immediate supervisor" is the second most often reason that people choose to leave.

Basics of Base Pay

During the past few years, it seemed that salaries for salespeople within general industry were closing in on those paid by the pharma industry. But the latest statistics show that the pharma industry has stayed ahead of other industries by 20 percent. Between 2000 and 2001, the pharma's median salary increase was 5.5 percent, while general industry's was 3.9 percent.

At the same time, US pharma companies are trying hard to stay ahead of one another. Fully half, in an attempt to attract and retain the best sales representatives and managers, target their total cash compensation between the 75th and 90th percent of what the marketplace offers. (See "Targeting the Top," page 46.) That trend is reminiscent of Garrison Keillor's mythical Lake Wobegon where "all the children are above average." Pharma companies are striving for the same statistical impossibility of maintaining above-average salaries for everyone. The result is that the median spirals upward just as companies try to come in above it. Because those companies collectively move the whole frame of reference, it makes it difficult for any individual one to pull ahead of the crowd and set itself apart with its pay practices. Despite their best efforts, all that most companies manage to do is to maintain their compensation at parity with the competition.

Who Gets a Raise?

The vast majority of companies apply merit increases every 12 months. Conformity with core values was cited most often as a criterion for determining a merit increase, and the percentage of companies that take company values into consideration rose from 51 in 2001 to 60 in 2002. That trend will likely continue upward as a result of the Pharmaceutical Research and Manufacturers of America's (PhRMA) codes for ethical marketing practices. More than 80 percent of the participants in Hay Group's annual Pharmaceutical Sales Effectiveness Conference indicated that their companies have established formal policies and programs to address the ethical conduct of their sales forces.

Another criterion commonly used for determining merit increase is the compa-ratio, which divides an employee's base salary by the salary midpoint for the particular job and level. The ratio shows an individual's position within their current pay grade. Use of compa-ratios to calculate merit increases rose dramatically-28 percent to 45 percent-between 2001 and 2002. Presumably, companies are using compa-ratios to ensure that their salaries are competitive as a defensive measure against voluntary attrition.

An entry-level primary care sales rep earns an average of $47,000 in base pay-up from $45,800 in 2001-and a top-level primary care sales rep earns an average of $82,300 in base pay, compared with $81,000 for 2001. Oncology sales reps and their district managers are the clear winners in the base pay department. Compared with their counterparts in primary care, oncology sales reps earn 30 percent more, and oncology district managers earn 13 percent more than their reps. (See "Primary Pay," page 48.)

In terms of growth from the previous year, hospital and specialty reps-oncology reps in particular-experienced the biggest increase in salary and total cash, but the pay for primary care representatives was fairly flat. That may reflect the fact that companies now face a greater retention challenge with specialty reps than with those detailing to primary care physicians. Companies have a keen interest in differentiating pay appropriately between specialties. They recognize that there are different pay markets-according to the demand-for each specialty, and they want their compensation to reflect that.

Among field sales managers, the healthiest increase-nearly 11 percent-in base salary was among senior district managers. That trend could indicate the value placed on experienced first-line managers when record numbers of them are new to the job.

Despite companies' obvious efforts to pay more than others-not only in comparison to industry in general but in relation to one another-only about half of pharma salespeople seem to recognize their relative advantage. Just under half (48 percent) rate their salary as competitive, which is a more favorable arrangement than employees gave other industries, but it still leaves plenty of room for improvement.

Dangling a Giant Carrot

Incentive pay is, on average, 25–30 percent of sales employees' base salary. Because 75 percent of companies target above the 50th percentile of sales rep salaries in other industries in total cash, they put a lot of emphasis on their incentive plans as the means for employees to reap the rewards of successful performance. (See "How Big is Their Bonus?")

The success of a sales incentive program depends largely on the company's ability to measure performance against goals. Half of the reporting organizations use a mix of quantitative and qualitative factors to measure performance with the average mix being 83 percent quantitative and 17 percent qualitative. The most popular mechanism for determining incentive payout continues to be comparing performance to goals.

On the other hand, the practice of ranking reps to determine payout has become less common, having dropped by 50 percent from 2001 to 2002. Again, the most popular mechanism is comparing performance to goals.

In most sales plans (82 percent), incentive payout is based primarily on individual performance, which is measured on several levels. In primary care rep plans, 86 percent measure individual performance, 24 percent measure performance of territory-level sales rep teams (often called pods or mirrors), 7 percent measure district performance, and 14 percent measure regional performance. (Note: participants could choose more than one response.)

According to the data, companies are placing a greater emphasis on territory-level performance-which includes individual and pod/mirror performance -and are less likely to supplement individual performance measures with broader ones such as division or corporate performance. The industry's effort to keep measurements to what is directly within the salesperson's "line of sight" is laudable.

The catch, though, is that as companies rely on teams to sell their products, through internal mirroring and external co-promotions, the ability to measure an individual's performance at the territory level becomes more difficult. Territory-level performance data are clearly not the same as individual performance data when more than one rep works the territory. Relying exclusively on territory sales data makes it difficult to distinguish between reps who are pulling their weight and those who are not and could destroy a company's pay-for-performance strategy.

Across all employee groups, there is a strong pay-for-performance link, with the top 10 percent of performers earning a substantially greater portion of their base pay as a bonus and the bottom 10 percent earning substantially less. For instance, among responding companies in the 2002 study, the top 10 percent of primary care sales reps earned an incentive that was 76 percent of their salary compared with the lowest 10 percent of performers who earned an average bonus of 21 percent of base pay. In the 2001 study, the top 10 percent of sales reps earned 59 percent of their salary in bonus compared with 32 percent for the lowest 10 percent of performers. Clearly, the gap is growing. The compression in payments across varying levels of performance that was common in years past has begun to disappear as companies reserve more of their bonus pools for top performers.

A Work in Progress

Companies are still fine tuning their compensation plan designs, and the survey revealed the following trends and challenges:

  • A move toward simplicity. For the past few years, companies have over-engineered their incentive compensation plans only to reduce their effectiveness. In a genuine effort to be fair, they have tried to take into account all of the data with which they are inundated-a classic example of "too much of a good thing." But plans are only manageable with up to three variables, and beyond that their effectiveness diminishes because they lack the focus needed to inspire and direct employee behavior. Although base salary plus a multi-variable bonus is still the most prevalent type of plan-67 percent of plans reported-more companies are starting to use a single variable (23 percent).

  • New ways of setting quotas. Setting appropriate goals remains one of pharma companies' biggest challenges. They do not receive information about unreported scripts, and the information they do get often arrives after a substantial time lag. The process is further complicated by the impact of managed care, new products, and competitive behavior. Companies continue to experiment with what they put into the mix, but the one constant is a steady increase in the number of companies that use market share as a criterion. (See "Moving the Goal Post.")

  • Internal equity issues at the district manager level. About 30 percent of the industry's district managers have one year or less of managerial experience-the highest percentage with short-term experience in the past four years. To attract candidates and fill their need for managers, companies have frequently had to entice new hires with salaries that top those of incumbents. Salaries reported for DMs with one year of tenure in their company are 13 percent higher than those with six to ten years of tenure. Salaries for DMs with only two years of tenure are also higher. Naturally, that upsets internal equity and causes discontent.

Marketing: Coming into its Own

There are signs that the marketing function is coming of age within pharmaceutical companies. In a benchmarking Hay Group survey among 12 leading pharma companies in 2002, the participants characterized themselves as slightly more sales-driven than marketing driven. A few years ago, the characterization would have been very much more one-sided towards sales.

Between 2001 and 2002, positions in product management saw moderate salary growth, and the percentage increased with the job level, suggesting that there is a demand for more experienced people. Also, the higher levels of product management were paid incentives as a percent of base that approached 20 percent-less than what sales people received but still a relatively substantial payout.

Companies tend to apply their corporate incentive plans to marketing/ product management positions rather than having distinct plans as they do for sales positions. What's more, few, if any, develop joint incentives for sales and marketing to encourage collaboration between the functions. Given the growing importance of marketing to sales success, companies may be well advised to establish a stronger link between the specific challenges of marketing and those employees' incentive compensation.

For the time being, sales people in the pharma industry continue to enjoy the effects of an employee's market. As they float along in their protective bubble, they can feel safe knowing that their employers are still motivated to make their compensation plans ever richer, easier to understand, and more realistic and fair.

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