January 24, 2020

A successful pharma launch sales compensation plan design for a new product is critical to not only ensuring the product gets out of the gates quickly, but also in establishing a lasting position in the marketplace. The sales force and the incentive compensation plan against which they are compensated play a crucial role in maximizing a pharma product launch. However, there are several challenges in launch sales compensation plan design and many common solutions that unfortunately prove to be inadequate. We will explore three such challenges pharma, biotech and medical device companies face and some common solutions for launch sales compensation to avoid.

National Goal Setting

Challenge: Difficulty in setting accurate national goals
Sales incentive compensation plans are typically designed assuming the national goals are set accurately. However, setting national goals for launch products can be very challenging for a number of reasons, such as lack of historical data, hesitance of physicians to adopt a new product, the inevitable uncertainty that surrounds a product launch, etc. When launch national goals are set at unattainable levels, sales representatives become demotivated as they realize they will not earn the bonuses they thought they would, and ultimately disengage and slow their selling activity.

Common solution to avoid: Post-plan period mitigation
When national goals are set too high and the sales force is not making adequate bonuses, a common but ineffective solution is post-plan period mitigation, in which the company takes some remedial action after the plan period has ended. Oftentimes, companies mitigate the lack of bonuses paid out by providing an extra bonus to the sales force. Such action has very little ability to motivate and drive behavior as the sales force has no way of knowing during the plan period if a mitigation will take place (and, if so, in what form) and, accordingly, has already become demotivated and disengaged.

Differences in Territory Opportunity

Challenge: Determining how to address differences in opportunity across territories
Often with a new launch product, especially one with differential advantage and no competitive sales data, it is difficult to accurately assess the expected sales from each territory. If sales incentive compensation payouts are based on a goal-based plan or variable commission plan, results will show huge differences in payouts across territories due to inaccurate assessments of opportunity.

Common solution to avoid: Rank order sales compensation plan
Another common solution in being unable to assess opportunities across territories is to institute a rank order sales incentive compensation plan. Although the highest sales get the highest rank and thus the highest payout, it is less likely to see runaway payouts with a rank order plan than with a straight commission plan. Nevertheless, rank order sales compensation plans have significant limitations, such as how two representatives who achieve nearly the same level of performance can earn very different payouts because of a difference in ranking, and representatives don’t have as much control as compensation depends on the rankings of peers.

Payout Structure

Challenge: Designing a payout structure that maximizes sales
If motivated sufficiently, a sales force of equally skilled sales representatives assigned accurate goals should all achieve roughly the same level of performance: around goal (with a small portion performing much higher and a small portion performing much lower). Thus, the payout curve for a product launch must be designed to motivate the sales force in a way that will also maximize sales.

Common solution to avoid: Acceleration of payouts after goal
If a goal-based sales incentive compensation plan is adopted, there are a number of payout curve pitfalls to avoid that may seem to maximize sales, but actually demotivate the sales force. For example, oftentimes the payout curve will be designed to accelerate payouts once the sales representative reaches goal or will feature a step payout at goal. However, because most representatives will achieve around goal (as discussed above), the accelerated payouts will be out of reach for the vast majority of the sales force. This, ultimately, has the opposite effect on motivation, which, accordingly, does not maximize sales.

Common solution to avoid: Extra bonus tied to national performance
Another common payout structure adopted for a pharma, biotech or medical device launch is to reward the sales force with a special bonus if/when the company achieves its national goal so as to encourage the sales force to work together and share insights. This solution has two primary limitations: first, given the nature of a product launch, typically not enough time has passed to be able to learn and share insights regarding what does and does not work; second, compensation dependent on national performance limits individual control over compensation, decreasing motivation and thereby sales.

Conclusion

The sales incentive compensation plan against which a pharma, biotech or medical device sales force is compensated has tremendous ability to ensure that a new product performs as strongly as possible during its critical launch phase and establishes a lasting position for itself in the marketplace. When designing the sales compensation plan for your launch product, be sure not to fall into the trap of using some common solutions that actually have the opposite effect than intended, whether it is how to account for difficulty in setting national goals, how to address differences in opportunity across territories, or how to design a payout structure that maximizes sales.