October 29, 2019

Correctly designing a goal-based sales compensation payout curve against which a pharma, biotech or medical device sales force earns bonus is critical to ensuring not only that the sales force receives motivating and equitable payouts, but also that the company is financially protected and knows how much budget to allocate to its sales force. However, too often, the budget being spent at the conclusion of the plan period ends up far above or below what was expected. Let’s explore three common pitfalls in designing goal-based payout curves and how they can undermine a company’s budget.

Let's Talk about Payout Curves

Pitfall 1: Runaway at High Attainment Levels

One common pitfall in pharma sales incentive payout curve design is continuing to award high incremental payouts at high levels of attainment. This pitfall has the potential to result in a pharma, biotech or medical device company greatly exceeding its sales compensation budget when national performance is at/slightly above goal.

Consider the payout curve shown below. As sales representatives exceed their goals, their bonus payout continues to increase significantly—large increases in attainments translate to even larger increases in bonus payout. Under such a payout curve, even just one sales representative with an attainment over 115% could cause a significant hit to the company’s budget. A successful sales force should be well compensated, but without proper dampening of payments at high levels of attainment, a good year could cause the company to pay out too much bonus to its sales force.

Pitfall 2: Asymmetry Around 100% Attainment

Another common pitfall with goal-based payout curves occurs when payout to a representative below goal does not balance out payout to a representative who is above goal by an equal amount. This pitfall has the potential to result in a pharma, biotech or medical device company exceeding its budget despite missing its national goal.

Consider the payout curve shown below, which is linear from the pay threshold to 100% attainment and then convex from 100% to 110% attainment. Under this payout curve, a 2% drop in attainment (from 100% to 98% attainment) would lead to a 1.5% decrease in payout whereas a 2% gain in attainment (from 100% to 102% attainment) would lead to a 4% increase in payout. Because attainments should be distributed symmetrically around goal under a well-designed sales incentive compensation plan (i.e., in a bell-shaped curve), the asymmetry of the payout curve around 100% attainment results in an imbalance in which payout to a representative falling below his/her goal does not offset payout to a representative who falls above his/her goal by an equal amount.

Pitfall 3: Steep Payouts Far Above/Below Goal and Flat Payouts Around Goal

The final payout curve pitfall we will examine occurs when the payout curve is steep at attainments far above and below goal, and relatively flat at attainments around goal. The intent behind this type of payout curve, such as the one shown in the figure below, is threefold: (1) encourage representatives below their goal to keep pushing, (2) reward representatives who far exceed their goal, and (3) mitigate the impact of poorly set goals by minimizing payout differences around goal.

However, each of these reasons undermines the sales incentive compensation plan. First, it is critical for goals to be set accurately and equitably. Rather than trying to mitigate the impact of inaccurate goals through the payout curve, either a new goal setting methodology or an entirely different type of compensation design should be adopted. Second, the purpose of a goal-based structure is to motivate sales representatives to achieve their goals. This means that the payout curve should provide the most encouragement around goal and thus be steepest around goal, where most of the sales force should fall. Instead, this payout curve accelerates at levels at which there are the fewest representatives—significantly above and significantly below goal.

Conclusion

One of the most crucial aspects of designing a goal-based sales incentive compensation plan is ensuring that the payout curve against which the sales force is compensated achieves a balance between properly rewarding and motivating the sales force, and financially protecting the company such that the budget paid out falls in line with what was expected. Avoiding these three pitfalls will help ensure your goal-based payout curve not only incentivizes and rewards your sales force, but also results in payouts that don’t undermine the company’s budget.