Pharmaceutical Sales Compensation

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1 Past, Present and Future With highlights from the Towers Watson/Synygy Survey of Strategic Sales Incentive Plan Design and Governance in the Pharmaceutical Industry By Elliot Scott

2 Past, Present and Future There has been ongoing and dramatic change in pharmaceutical and biotechnology sales. The sales force arms race of not long ago has given way to wave after wave of downsizing; many primary care blockbuster drugs have come off patent, with fewer new blockbusters to take their place, and generic market share is increasing. At the same time, specialty sales force coverage is expanding in many therapeutic areas, as are e-detailing and telephone coverage. Features-andbenefits detailing to physicians is giving way to account management, while promotion to consumers continues to grow and find new forms. Meanwhile, mergers and acquisitions continue to drive industry consolidation, and health care reform remains a question mark. In spite of these dynamics, pharmaceutical sales compensation plans have remained remarkably consistent. Pay mix, performance measures and payout mechanics have evolved, but within tight boundaries. But there are signs of more dramatic changes to come, as companies begin to change their coverage models in response to cost pressure and the different ways in which buying decisions are being made. Since 2005, Towers Perrin (now Towers Watson) and Synygy have collaborated on a survey of pharmaceutical sales compensation plan design and governance. It has become one of the primary means by which companies in the industry measure their plans against those of their competitors, as they grapple with how to make their plans more effective, efficient and aligned with changing business priorities. Forty companies, with a total of more than 78,000 sales representatives, participated in our most recent survey. The survey casts light on three types of issues in pharmaceutical sales compensation plan design: Perennial issues More recent issues Emerging issues This paper explores these issues and highlights relevant findings from the survey. Perennial Issues Getting the sales rep pay mix right Arguably, one of the most persistent issues facing pharmaceutical companies over the years has been what the right pay mix is for a sales rep and how much upside earnings potential there should be. And the short answer is, it depends on the company and on its business strategy.

3 As a rule, greater pay at risk and greater upside potential motivate stronger sales results. But just how direct is the impact of a pharmaceutical sales rep, and is there a risk of excessive incentive pay levels driving inappropriate behavior that could ultimately prove very costly to the company? Over the past 10 to 15 years, the average pay mix has crept upward, from around 80/20 (base/incentive) to closer to 70/30, but has leveled off. Overall, the industry has relatively consistent practices in this regard. But smaller, specialty and biotech companies tend to have plans with more risk and upside potential, reflecting the greater influence of the salesperson in those companies. Figure 1. Primary care representative pay mix 9 base / 1 incentive 85% base / 15% incentive 4% 8 base / 2 incentive 2 75% base / 25% incentive 52% 7 base / 3 incentive 24% 65% base / 35% incentive 6 base / 4 incentive 5 base / 5 incentive Percent of companies selecting Figure 2. Specialty representative pay mix 9 base / 1 incentive 85% base / 15% incentive 3% 8 base / 2 incentive 22% 75% base / 25% incentive 36% 7 base / 3 incentive 31% 65% base / 35% incentive 6% 6 base / 4 incentive 5 base / 5 incentive 5% 1 15% 2 25% 3 35% 4 Percent of companies selecting

4 Setting quotas and measuring performance Another perennial issue facing pharmaceutical companies is whether to measure prescriptions written by the full universe of physicians in a geography or only those written by physicians that have specifically been targeted by the company. For years, companies have always measured the full universe. Then, in an effort to support sophisticated targeting and routing in mirrored territories, there emerged a strong trend toward measuring targets only. In the past few years, the pendulum has been swinging back toward measuring the full universe or the universe with exclusions. Salespeople prefer the autonomy that comes from being measured on the full universe, but the shift may have more to do with data gaps and the reduction in mirroring than an effort to please the field. Figure 3. Percent of companies measuring full universe and target prescribers Both universe and target prescribers are measures 21% The full universe of prescribers 31% As s igned/target prescribers only 15% Less than universe, but more than target prescribers 26% Deciding between quota-based and relative-rank plans The perennial love-hate relationship with quotas and quota-based incentive plans is not unique to the pharmaceutical industry. Certainly, quota-based plans enjoy some distinct advantages: They level the incentive earnings opportunity when historical sales and market potential differ between territories. They enhance line of sight by giving salespeople a clear target to shoot for and because payout is not dependent on how other territories are doing. Quota-based incentive plans support teamwork by not putting salespeople in competition with one another. But in practice, they can be highly problematic and administratively burdensome. If actual sales results do not play out as forecast when the quotas were set, the budget may be wildly exceeded, or a large percentage of reps can fall below threshold, with consequent de-motivation. This leaves the company scrambling to make quota adjustments, develop add-on incentive programs or change payout curves, often with unintended consequences of their own.

5 Alternatively, incentive plans that pay out based on the relative performance of representatives can be much less of a headache, particularly from the perspective of finance and sales administration. The cost, level of participation and dispersion of pay can largely be protected from market uncertainty. Unfortunately, relative-rank plans are often less motivational and can become quite complex. After several years of increasing prevalence, relative-rank plans have become somewhat less common. But despite this decline, they remain well used in situations where quotas are less likely to hold up or where the company needs to minimize the financial risk of its incentive plans. For quota-based plans, it appears that one of the reasons they have grown increasingly prevalent is because companies have become more adept at managing quotas, in part because of more sophisticated sales performance management systems. Figure 4. Prevalence of goal-based plans Primary care representative 54% 25% 21% Specialty care representative 58% 26% 16% Hospital representative 58% 19% 23% District manager 47% 24% 29% All measures are goal-based Some measures are goal-based None are goal-based Keeping up with the multifaceted and constantly changing role of the managed care account executive While the range of ways to measure and pay pharmaceutical sales reps has remained limited and consistent over the years, this has not been the case with managed care account executives (AEs). One reason is because as the health insurance industry has evolved, the degree and type of influence that health insurers wield in the marketplace has also evolved. But another reason is that while there are many possible ways of measuring managed care AEs, none is particularly well aligned with their multifaceted roles, and all measures have data and line-of-sight issues. The result is that managed care AE incentive plans have much less consistency than plans covering the other main sales roles.

6 Figure 5. Performance measures used in managed care account executive incentive plans Percent of companies selecting % 52% 48% 45% 38% 17% Management assessment Account performance Area of influence performance National performance Formulary or plan-level measurements Multiple of rep average More Recent Issues In recent years, the following issues have driven changes at the margins of pharmaceutical plan design. Optimizing the performance of quota-based plans Paradoxically, quota-based sales incentive plans are dominant and increasing at a time of increased market uncertainty, which undermines the accuracy of territory-level quotas. Not surprisingly, this phenomenon has raised the question among pharmaceutical companies of how to optimize the performance of their quota-based plans. Our study results show that these companies are creatively managing this issue in a couple of ways. First, it has become less common for quotas to be set only at the start of the year. Rather, it is increasingly likely that quotas will be recalculated periodically during the year, and the quota for an upcoming quarter will not be communicated until the end of the previous quarter. Improved data management capabilities make more frequent quota setting more feasible than in the past.

7 Figure 6. How frequently are quotas set and measured? All reporting companies 18% 12% 48% 9% 12% Large-tier 7% 79% 7% 7% Mid-tier 11% 22% 44% 11% 11% Specialty Quotas set annually, divided into periods, measured discretely Quotas set annually, divided by periods, measured year-to-date Quotas set by period, measured discretely Quotas set by period, measured year-to-date Combination of period and annual quotas and measurements Second, companies are increasingly willing to make both positive and negative retroactive adjustments to quotas and payouts alike. In the past, such adjustments were less prevalent and were more frequently made only when they favored the sales representative. Figure 7. Positive and negative retroactive adjustments to quotas and payouts Allow positive and negative adjustments 4 No retroactive adjustments 18% Allow positive adjustments only 42%

8 Lowering the overall cost of sales compensation plans without losing the ability to attract and retain high-performing employees Pharmaceutical companies have been under increasing cost pressure a trend that is likely to continue. They have been looking for ways to lower their compensation cost while maintaining the ability of the plan to attract, retain and motivate employees. But even in a down economy, meaningful reductions to fixed compensation are not feasible, and reductions to incentive earnings potential disproportionately impact the most productive salespeople. Far more substantial cost savings can be had from changes to head count or coverage. Nevertheless, we have seen a few actions designed to lower costs. One, as noted above, is the increased willingness of companies to make retroactive quota and payment adjustments in favor of the company. Another has been an increase in the use of caps. Figure 8. Mechanisms used to manage windfalls Decelerate payouts (soft-capping) 35% Allow management discretion 18% No capping mechanism used Each measure is capped 15% 15% Predetermined incentive pool 1 Overall earnings are capped Cap based on portfolio achievement 3% 5% 5% 1 15% 2 25% 3 35% 4 Percent of companies selecting We have also heard many reports of reductions in contests, perks and award trips. It will be interesting to see if the trend continues as the job market picks up. Emerging Issues While the definitive solution to each of the issues outlined above may never be established, there is an advantage to be gained by addressing them thoroughly. But in the coming years, there may be an even greater advantage from addressing the following emerging issues in pharmaceutical incentive plan design: With the shift in emphasis away from features-and-benefits detailing, there have emerged a variety of account management roles, as pharmaceutical companies seek to build and retain market share by partnering with physician practices. What is the best way to measure and reward these new roles? And what practices from other industries where strategic partnering is more prevalent can be brought to bear in pharmaceuticals and biotech?

9 With the increase in telephone detailing, e-detailing and third-party sampling, not to mention account managers and clinical consultants, traditional pharmaceutical sales representatives are increasingly part of an integrated team, beyond just the team of reps in a geographical territory. How can sales compensation be used to align the objectives of the new team and manage channel conflict, while preserving individual pay for performance? Direct-to-consumer promotion has become increasingly sophisticated and targeted, with pharmaceutical companies more able than ever to establish direct relationships with the end users of their products. And sales representatives are becoming more closely involved with the delivery of value-added services to patients, facilitating reimbursement, administration, and support services. How, if at all, does sales compensation need to evolve to support this dynamic? In recent years, there have been a number of investigations by the FDA into compliance violations, such as off-label promotion. Sales compensation plans can be a clear risk area. How do companies ensure that their plans discourage compliance violations, while remaining motivational? We look forward to exploring these issues in future versions of the survey as well as in our work with clients. About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. About Synygy Synygy is the largest and most experienced provider of sales performance management (SPM) software and services. These include SPM solutions for: sales compensation management (incentive compensation; rewards and recognition; and total compensation); sales communications management (sales portals; reports, dashboards, and analytics; and analyses, alerts, and answers); sales goal management (territories and channels; quotas and objectives; and pipeline analysis and forecasting); and sales process management (recruiting, evaluating, and training; data repository and data processes; and workflow processes). Based in Chester, Pennsylvania, with extensive operations in Europe and Asia, Synygy has achieved 19 continuous years of success.

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