Pitfalls to Avoid When Designing Your Sales Compensation Plan for COVID-19
March 30, 2020
In order to mitigate the impact that COVID-19 will have on pharma, biotech and medical device sales representatives, sales incentive compensation plans must be changed almost immediately. But in these times of uncertainty, it is difficult to know what life sciences sales compensation plans should look like. Despite all this uncertainty, there are three sales compensation pitfalls COVID-19 brings that should be avoided. Let’s explore these three approaches and why they should not be adopted.
Pitfall 1: Guaranteed Pay
One common COVID-19 sales incentive plan design approach is to guarantee a certain amount of pay for each representative. For example, every sales representative will receive at least $4,000.
However, this means that a representative who gives up on selling would be paid the same amount as a representative who sees an opportunity to increase market share in the fact that her competition shares the same unfavorable selling conditions and thus continues to push. Even if the guaranteed payments were added on top of whatever payout each representative earns, these times are so unprecedented that the impact on sales could still mean these two representatives would earn the same amount. This inequity would result in a demoralized sales force.
Pitfall 2: Management by Objectives (MBOs)
Another sales incentive compensation approach often advocated during uncertain times is management by objectives (MBOs). Although there are variations, most often MBOs are structured such that managers are asked to rate their sales representatives on a numbered scale, such as 1 being the lowest value that can be awarded and 5 being the highest value.
In almost all cases, managers award close to the maximum number of points in every category for every representative, resulting in very little differentiation between representative performances. This, ultimately, achieves the same outcome as guaranteed pay—poor-performing representatives are paid the same as top performing representatives, and those top performers perceive the sales compensation plan as unfair.
Pitfall 3: Rank Order
Even outside times of chaos, rank order sales incentive compensation plans have significant limitations. In times of chaos, such as now, rank order plans will often reward the poor performing sales representatives better than those who perform well. Even segmenting territories is unable to mitigate this inequity since a pandemic typically does not hit geographies equally. For example, consider segmenting on volume during COVID-19; a state with strict movement restrictions and a state with more flexible movement restrictions may both end up the in large volume territory segment even though their conditions vary drastically.
A number of other factors complicate the ability of rank order to properly reward top performers; for COVID-19, some of these factors are seasonality, access to drive-in pharmacies, and demographics in different parts of the country.
Conclusion
Although all three of these pitfalls seek to mitigate the impact these uncertain times will have on pharma, biotech and medical device sales representatives and their performances and payouts, they unfortunately end up resulting in a demoralized sales force due to their inability to reward top performers better than bottom performers. In each case, the demoralization of the sales force caused by these sales incentive compensation plans will last longer than the pandemic itself. The most demoralized members of the sales force will likely be the top performing representatives, who may become so disgruntled that they seek to leave the company.
