Pharmaceutical companies squeeze sales incentives

Layoffs are not the only way that pharmaceutical companies are cutting sales-force costs. In response to financial pressures including the recession, many companies have also been restraining reps’ compensation by trimming incentives and reducing salary increases.

According to the 2009 Incentive Practices Research (IPR) Study, a survey of incentives at 44 pharma companies by management consulting firm ZS Associates (Evanston, IL), 39 percent of surveyed companies adjusted their compensation programs over the last year in response to the downturn.

These companies used a variety of belt-tightening approaches: More than half of them stopped increasing target incentives, and more than a quarter reduced increases to base salaries—though only 12% said they did not increase base salaries at all.

29% of the companies reduced or eliminated special performance incentive funds (SPIFs) -- incentives for short-term programs associated with events such as drug launches. “Not surprisingly, cost control seems to be a priority,” said Stephen Redden, leader of ZS' Incentive Compensation Practice. “More companies want to see proof of ROI” before they will approve these programs, he said.

Perhaps more surprising is that average target compensation actually increased by 8% over the previous year’s study. Redden said that may reflect factors such as the weeding out of lower-paid sales reps as companies slashed sales forces in response to factors including closed-door physicians’ offices. “There are fewer reps than last year, and those that remain tend to be the best performers,” he said. In addition, companies participating in the survey this year included a greater proportion of specialty reps, who tend to be higher paid; excluding that effect, the increase over 2008 was about 3%, Redden said.

Incentives continue to account for about 25% of total compensation. Quota-based bonuses are still the most common, used by 61% of companies with more than 400 sales people; bonuses determined by ranking are also widely used. Quota-setting fairness continues to be the number one incentive issue facing companies; it is inherently difficult due to local variation in payer policies, competition and demographics, according to Redden.

"Pharmaceutical and biotech companies today face the challenge of keeping costs down without sapping sales force motivation," said Chad Albrecht, associate principal with ZS Associates' Incentive Compensation Practice and the lead on the study. "While setting accurate quotas must be a priority, shorter performance periods will help companies deal with the uncertainty of the current sales environment and allow them to assess and correct quotas at shorter intervals."

Nevertheless, Redden said, the value of a good salesperson is still recognized; high performers bring in 2-2.5 times the target compensation--and even more in a handful of cases. “Top-performing sales reps are as well paid as ever,” he says.