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Pharmafocus Europe Autumn 2008

Pharmafocus Europe a Wiley-Blackwell publication

Pharmaceutical companies are becomingincreasingly focused on retaining keysales staff, and this means there is an

ever-growing need to consider ways toleverage variable compensation (incentiveprogrammes and reward and recognitionprogrammes) as a strategic tool formaximising the return on their investment intop talent.

In addition to retaining top sales performers,there is also a push to further motivate thesales force and align behaviour with corporatestrategies, especially given the changingpharma marketplace.

Traditionally, pharmaceutical companieshave attempted to attract and retain high-performing sales staff by offering competitivetotal compensation packages comprising ofbase pay, benefits, bonuses and recognitionprogrammes (contests and awards). In recentyears, companies have balanced this goal withbudgetary constraints by devising variable payschemes which account for a increasinglylarge percentage of compensation and pay forhigh performance.

Use of variable pay in EuropeAcross the European countries, the proportionof variable pay compared to fixed pay variesby a factor of almost three-fold (see figure 1).This therefore influences the leverage that canbe achieved from individual bonus schemes inthese countries.

Currently, the industry’s emphasis is shiftingvisibly from recruitment to retention activities.The effects of voluntary attrition among salesrepresentatives are expensive, resulting as theydo in recruiting costs, training costs, lost timeon territory and lost client relationships - theHay Group estimates the total cost perindividual to be Euro 65,000. In order tocombat this companies must ensure theirexisting sales force remains productive,motivated and committed by developing andrefining strategic incentive and rewardprogrammes. As the trend is towards an overalldecrease in the total number of sales reps,pharma firms must ensure that they retaintheir best sales staff and therefore engage in anon-going process of adjusting variable paypractices to ensure that retention goals arealigned with other critical business objectives.

When talking to sales representatives, theconversation eventually turns to sales data andincentives. There always seems to be threemain themes: the plans are unfair, the plans aretoo complicated - and therefore hard tounderstand - and lastly that it takes too long toreceive payouts.

Given the need to retain top talent, alongwith the desire to improve motivation in thesales force, there is a clear case for plandiagnosis in the pharmaceutical industry. Thisis a critical step in the continuousimprovement process for incentivecompensation.

In plan diagnosis, there are three key areasthat should be analysed: evaluating the planitself, understanding the processes andinvestigating the technology.

PlansThe diagnostic evaluation of incentivecompensation plans focuses on three areas:

1. Inherent issues2.Plan metrics3.Plan bias

Such an activity follows a methodologywhich results in the evaluation of underlyingissues and the identification of alternatives toimprove the plan design.

Inherent issuesWhen incentive compensation plans aredeveloped there are various inherent issuesassociated with the business that are oftenoverlooked; this results in poor plan design.

Products grow at different rates dependingon their position in the product life cycle.Analysing one company’s product portfolioshowed that for one product in its early lifecycle those territories with higher marketshare grew faster than territories with lower

market share while the other two productsthat were later in their life cycle grew with theopposite dynamics.

However, the company had not realisedthese differences, so quotas had previouslybeen set that were independent of theterritories’ starting market share. To correctthis, quotas had to be modified based on eachterritory’s initial market share or a marketshare/market share change matrix-based planshould be adopted. In the later case, the bonusamounts were scaled, based on the products’dynamics.

Geographic evaluationEvaluating performance by geography canidentify inherent issues due to variations inlocal prescribing guidelines; again, these arerarely considered when setting quotas. Onesuch case showed that territories in the westpart of the country consistently under-performed while territories in the eastern partwere consistent high performers. Aftermodifying the quotas to take intoconsideration the local regulatoryrestrictions, this bias was eliminated.

Plan metricsCompanies define their plan metrics duringplan design but rarely do they evaluate,during or at the end of the year, whether thepre-defined metrics were actually achieved.

Key payout metrics are:

• Target payout• Average payout• Lowest payout• Highest payout• Percentage with no payout• Payout at 90th percentile• Pay to 10th percentile• Median achievement

This is a critical aspect of plan diagnosisbecause it provides valuable input into theimprovement of plan design either mid-yearor for the following year. Also, mostcompanies have defined corporateperformance characteristics that should befollowed – such as the distribution ofachievements and associated payouts.

In one example, the diagnostic found thatonly 7 out of 69 territories were actuallyachieving target and receiving bonus payout.As a result, the company re-evaluated both itscorporate sales forecasts and also its overallplan design to ensure better quota accuracyand a more appropriate distribution ofachievements.

Plan biasWhen designing incentive compensationplans there are two conflicting characteristics– easy to understand vs. plan fairness.Performing a plan diagnostic helps to identifyany bias in plan design. The information canthen be used to reduce plan design bias forthe following year.

Typical biases involve historic sales, market

potential, market share and growth rates.Two such diagnostics are provided below

(see figure 2). In the plan on the left there islittle correlation between starting sales andpercent achievement – so there is no bias inplan design due to initial sales volume; theanalysis on the right shows a plan with clearbias due to starting sales volume.

Another plan diagnostic evaluated thecorrelation of market share to planachievement. Despite a five-fold variation inmarket share, the plan had been well designedand showed no bias due to market share –each territory had a similar opportunity toachieve.

TechnologyIt is surprising that many pharmaceuticalcompanies are still using homegrownsystems, custom-built applications orspreadsheet-based incentive compensationtools. Most of these applications are slow andinaccurate, do not provide easy visibility intothe business rules of the plan, lack audit trailsand version control, cannot easily support thecomplex rules required for new sales forcemodels and involve significant manual entryand continual re-programming.

As a result, they create frequent disputeswithin the sales force about compensationpayouts, which are not only time-consumingand costly to resolve, but also create anatmosphere of distrust within the sales force.This can result in shadow accounting, lowermorale and higher turnover.

In addition, it takes 4-6 weeks after receiptof the data to produce IC reports and at leastan additional two weeks for the payouts to bemade. Unlike in other industries, life sciencescompanies are not realising the full benefitsof a world-class enterprise IC applicationwhere business rules can be quicklyconfigured, complex organisationalstructures and allocation rules are easilymanaged and it only takes a few days toproduce the IC reports with full access toexecutive dashboards.

SummaryPharmaceutical companies should reviewtheir plans and make changes on an annualbasis, representing a process of continualimprovement rather than periodic upheaval.By performing routine plan diagnostics, acompany can rapidly identify any underlyingissues with their plan design and takeproactive steps to resolve them. This reviewcan take place over multiple countriessimultaneously to allow for benchmarkingagainst regional guidelines and sharing ofbest practice along with ideas forimprovement between multiple countries.

Most companies understand qualitativelythe impact of poor plan design but fewrecognise that the financial ramifications canbe large – due to increased turnover, reducedmoral, loss of selling time, lost competitiveadvantage, increased administration andfailure to achieve corporate objectives.

Plan diagnosis is a critical step in thecontinual evolution required to ensure goodplan design.

Hold onto your salesforce with a fair and easily

understood incentive plan

Stephen Fox is the global leader of the SalesPerformance Center of Excellence. He can becontacted on tel: +1.610.238.4292 or via e-mailat: sfox@us.imshealth.com

Giving staff a good reason to stay can help make the most out of yourinvestment in their talent, says Stephen Fox.

IMS - Sponsored feature

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Figure 2: Analysis for bias in plan design based on starting sales volume

Figure 1: Across European countries there is almost a three-fold difference in the use of variable pay

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