Incentive Compensation Presented by: Asheesh Sharma, Senior Principal Erik Christianson, Associate Director Peter Koniaris, Associate Director November 11, 2015
WELCOME!! Today s webinar hosts Chris Walls PMSA Organizer Asheesh Sharma Senior Principal, Axtria Erik Christianson Associate Director, Axtria Peter Koniaris Associate Director, Axtria 2
PMSA Sales Planning & Operations Webinar Series All PMSA Webinars available via http://www.pmsa.net/conferences/webinar Promotion Response Modeling 9/16/2015 Sales Force Size and Portfolio Optimization 9/30/2015 Territory Alignments & People Placement 10/14/2015 Targeting & Call Planning 10/28/2015 INCENTIVE COMPENSATION Today All Webinars at 12:00 noon Eastern time 3
Incentive Compensation is an integral part of the overall sales planning process Processes Segmentation & Promotion Response Sales Force Design Sales Force Deployment Sales Activity Plan Sales Quota, Incentive Compensation Sales Operation Measurements High level Function Brand Optimization Sales Size & Structure Alignment Call Plan Compensation Execution and Measurement Function Segmentation & Targeting Promotion Response Modeling Portfolio optimization Field Force size and structure Sales Territory design Alignment maintenance ZIP movement, Account movement & Roster management Call plan design Call plan optimization Call plan rules Business rule capture Field collaboration/ adherence Compensation plan design Design simulation Goal setting Plan implementation Plan administration Reporting Library of KPI Library of reports ipad reporting Web reporting Ad-hoc reporting 4
Today s webinar has the following objectives Provide an overview of incentive compensation plan design Discuss goal setting process, methods and considerations Provide an overview of IC administration process Address your questions 5
Incentive Compensation complex and exciting Product lifecycle and ecosystem driven metrics Pay for performance Deployment and sales force structure changes Lots of external feeds and many external data sources Forecasts Models and Process Divisions, legacy systems, upstream and downstream connections Millions of dollars paid Thousands of payees Millions of transactions and sales units Payer/channel influence Plan Complexity Data Feeds Goals Integration Volume Rate of Change People Transactions Improving operational efficiencies Payee Management Visibility Dynamic environment with industry structure constantly morphing Requires constant adjustments to ensure pay for performance Reorgs, Disputes, Self- Service, Approvals Dispute Resolution Split Automated QCs Flexible Scalable Maintainable Plan Management Adjustments Transfers and Eligibility High need for reporting with lots of reporting generated Need data views into sales and competitors 6
A well executed IC design process builds harmony between all key components of the compensation plan Firm s Compensation Philosophy Customers and Products Organization and Territories Benchmarking Pay Curves, Time Periods / Frequency Job Design Performance Measures Total Target Cash Risk Analysis Goals Sales Crediting Excellence and Upside Organization strategy and compensation guiding principles play a heavy role in blending these elements together. Pay mix decisions to arrive a total target cash compensation need to be aligned with industry benchmarking as well as financial modeling. Excellence upside forms a key input into pay mechanics. Performance measures conversion into payouts with frequency needs to have robust risk analytics based on varying performance distributions and sales vs. forecast levels. Data Considerations 7
What are the guiding principles of an effective IC Plan? My IC Plan Should Drives Accountability Tight Alignment with Job Design Tight Alignment with Brand Strategy Fiscal Responsibility Flexibility Simplicity Additional Considerations Motivation Disruption/Change Management Administrative Burden Rewards and drives accountability for financial outcomes Rewards and motivates workforce on aspects of job duties Motivates field force to fulfill brand specific growth and volume objectives Plan should guard against unexpected/unintended consequences Provides flexibility and control in managing incentive budget Should be able to flex with evolving selling and services roles Ability to add/drop brand from team or individual geo portfolio Easy to communicate to the field Reasonable number of metrics Guiding Principle Aligned with Strategic Objectives Simple Pay for performance Equity Motivation Fiscally responsible Challenge Ignored often in design process with micro focus on To Do Increased complexity Accountability and measure of influence challenged with team selling and multiple selling roles High regional variances, geotailored selling models Reduced motivation by overengineered Challenges in forecasting, quotas, design parameters 8
Key Design Questions that we see coming up again and again Focus of Comparison: Where should the emphasis of the IC plan be placed? Differentiation: How much variance should there be between IC pay of high and low performers? What is the right balance between the What and the How? What is the right balance between individual, team and organization performance? How much of the bonus will you put at each level? Internal Competition Low / All the same Objectives & Results Vs. Vs. Vs. Team Collaboration High / Very Different Behaviors and Competencies Individual Vs. Company At what level and how are targets decided? Should you have quotas at all? Where would you aim your pay mix or leverage? 75-25, 80-20, 90-10? How frequently should payouts be made? Will this be compatible with measures and tracking ability? How will it affect cash flow of participants? How can you ensure equity across teams/business units? President s Cup or Circle of Excellence design considerations: How would you handle transfers and mid year changes in design? 9
Plan Design Options available to IC Design Team Ranking Goals Commission Pool Grid Pro Promotes competition Easy to implement Compensation pool gets divided fully with no overflow Flexibility to adjust (market conditions) Most fair and equitable Incorporates potential No cap for top performers Simple and easy to understand Very motivating (especially at launch) Can be designed to be self funded Flexible design Compensation pool gets divided fully with no overflow Simple way to set up an equitable Plan when geographies are very different Multiple metrics Undermines teamwork Capped Motivation issues Con Limited budget control Administrative burden Communication and understanding of Goals Setting Methodology Tend to be biased - territory size, location Limited budget control Challenges in off label promotion Very complex Performance to pay relationship is not known in advance Difficult to establish equitable levels Limited budget control 10
Common IC Plans Incentive plans need to align with business plan objectives at each stage of the product lifecycle Reward for goals Maintain relationship Manage IC budgets Reward early sales Encourage competency enhancement Encourage call adherence Encourage growth of volume/market share Blunt competition Start setting sales goals Control IC Budgets Protect current business Prepare for LOE Reduce IC budget allocation CSO driven strategy Launch Growth Maturity Decline Off Patent/Generics Commission plans MBOs Goals Volume growth based plans Market share growth based plans Goal based plans Goal based plans Performance Index Ranking Performance Index Ranking Grids Integrate IC plan with other brands Phase out from Incentive plan CSO plans 11
Today s webinar has the following objectives Provide an overview of incentive compensation plan design Discuss goal setting process, methods and considerations Provide an overview of IC administration process Address your questions 12
Goal Setting Process built upon analytical models and approaches that are true to business context and equity Universe and Baseline Target, Total Dirt, Semi-Dirt Understand territory level and customer (account) data Research product and market, and current attainments Review forecasts to be used in Goal setting Establish forecast that should be allocated to the field Identify Potential Models Build Analytical Database Establish markers for territory potential Correlation study Define algorithm for scaling sales over gap period Study data to identify models and analytical approaches Execute Models and Set Goals Test and execute model Perform Equity Analysis with Caps and Floors Expected growth Analysis Make adjustments as appropriate Refine Goals Optional Goal Refinement by Managers Business rule driven workflow Final Goal QC + Payout Mechanics design Payout curve / grid design Payout simulator Generate Whatif calculator for field Risk Assessment Distribute Goals 13
National level forecast is parsed to compute sales team level forecast number National Forecast Exclusions Accounts, Prescriber Whitespace Exclusions Forecast at Sales Force Level Allocate Goals at Territory Level 14
Tradeoffs between complexity and fairness Current Market Share Growth Goal setting methodologies: The right one needs to balance communication and equity Potential Based Market share driven approaches Maintenance plus potential territory contribution Current Market Share Untapped Potential Competition Maximum Achievable Share Historical Data Based Territory Contribution Maintenance plus standard growth or absolute growth Trend approaches 1,200 1,000 800 600 400 200 0 Fixed 10% Growth Terr 1 Terr 2 Terr 3 Terr 4 Terr 5 Historical Sales Quota (Maintenance + Growth) Composite Performance Frontier Promotion Response Additional markers based on qualitative inputs Corporate objectives, business situation and product lifecycle play an integral role in selection of model 12% 10% 8% 6% 4% 2% 0% 60% 70% 80% 90% 100% Baseline Market Share Performance frontier 15
Goal setting models are tested for equity and fairness Chosen model should be exposed to a series of diagnostics (fairness & equity) tests on historical data to check if it is optimal Fairness testing is important to ascertain if there is equal opportunity for all to earn. Some of these checks include: Attainment distribution and statistics Should be a normal curve with minimal outliers Minimum and maximum attainment should have limited gaps Standard deviation should be under 10% Correlation checks Attainment should not be highly correlated to the parameters used for setting goals (A high co-relation would imply bias) Segmentation analysis Territories are divided based on multiple parameters to check for bias within the segments. This includes: Geography level regions / areas Absolute Volume; volume growth etc.. 16
All models are exposed to a series of diagnostics (fairness & equity) tests on historical data to arrive at the optimal model Test Attainment Distribution # of Territories 80 70 60 50 40 30 20 10 0 <=88% 2 4 2 6 88% - 91% 91% - 94% 18 24 94% - 96% 41 65 73 66 59 296 263 310 314 320 204 33 131 14 4 6 96% - 99% 99% - 102% % Attainment 102% - 104% 104% - 107% 107% - 110% 110% - 113% >113% 350 300 250 200 150 100 50 0 Test attainments to check biases in distribution and key parameters 17
Today s webinar has the following objectives Provide an overview of incentive compensation plan design Discuss goal setting process, methods and considerations Provide an overview of IC administration process Address your questions 18
Incentive Plan Administration requires robust process with focus on quality Data Month Roster Data Process & Validations Computations Data Month Roster Roster & Eligibility Processing Roster Validation Report Updated/Corrected Roster (if needed) Final Roster Org Data Sales Data Automated & Analyst validations Input Validation Report Input Validation Updated/Corrected Input files Computations (payouts & Rewards) and Output Validation Updated/Corrected Output documents Master Table Ranking Reports Monthly Reports Payroll Contests/Awards The IC Administration process must be focused on quality, and engineered for efficient implementation of changes 19
State of IC Operations in our Industry: Wide spectrum on execution maturity Poor Inaccurate reports distributed to field Long cycle times Inflexible with changes difficult to implement IC resources low communication effectiveness with the business Payouts occur late or with errors Home grown/custom system requiring significant support A major business change may cause the IC process to break down Litigation risks Occasional errors in reports distributed to field Manageable cycle times Menu of plan options Implementable with relative ease Business has a positive view of IC personnel Payouts occur on time with few errors Vendor sourced tool implemented and stable Business changes require significant effort and time Error free reports and payouts delivered on a consistent schedule Cycle times minimized Excellent Easily configured plan options Business views IC personnel as partners Strong Alignment with support processes (CP and Align!) Best in class tool in sourced/out sourced to minimize cost Major business changes absorbed within standard timelines SOX compliance with audit trails 20
IC Reports today need to be mobile ready 21
Common Mistake: Plan Effectiveness needs to be continuously monitored 22
Today s webinar has the following objectives Provide an overview of incentive compensation plan design Discuss goal setting process, methods and considerations Provide an overview of IC administration process Address your questions 23
Questions?