The Worst and Most Common Incentive Compensation Plan Designs - #1
#1 - Rank-of-Ranks
Throughout The Marketing Advantage’s (TMA) 35 years of developing, evaluating, and innovating sales incentive compensation plans for pharmaceutical, biotech, and medical device companies, TMA has encountered many poorly designed compensation plans. Here we will discuss the #1 worst and most common plan designs that fail to motivate the sales force and ultimately lead to declined sales—Rank-of-Ranks.
Rank-of-Ranks
The use of Rank-of-Ranks, where one product metric is ranked, and that rank is added to another ranked product metric before the sum is ranked again, is surprisingly common. This approach, while seemingly logical, often creates confusion and inefficiency. When The Marketing Advantage replaced this scheme with a more engaging IC plan, we consistently observed an increase in sales performance.
So why does Rank-of-Ranks perform so poorly? The main issue is that a sales rep doesn’t control the amount of earnings they can make—it’s dependent on how others perform. The more control a rep has over their own outcomes, the more engaged and motivated they tend to be. In a Rank-of-Ranks structure, reps have no clear understanding of how an additional 5% in sales or performance will impact their earnings. Without this clarity, motivation decreases, and reps are less likely to push for those extra gains, which ultimately harms overall performance.
The most common misconception with Rank-of-Ranks is the belief that using one metric based on percentage change and another based on unit change creates a fair balance. This methodology is perceived as equitable since percentage change favors smaller volume territories, while unit change favors larger volumes. However, this approach basically guarantees that both small and large volume territories will never be at the top. While they may score well on one metric, they will not perform as well on the other, which results in an overall mediocre rank. This leads to a lack of motivation, as reps in both small and large territories are consistently held back from achieving top-tier performance.
So why use Rank-of-Ranks? The head of sales compensation planning at a large pharmaceutical company once told me, "It’s too hard to design different IC plans, especially with multiple sales teams." While this may seem like a practical reason, it is ultimately a poor excuse that could result in significant financial loss for the company.
Conclusion
Forced ranking demotivates sales reps by creating ambiguity and a lack of control over their earnings, thereby reducing overall sales performance. The decision not to invest effort in creating more effective plans will cost far more than any perceived inconvenience. Simple, clear, and well-structured sales compensation plans are key to achieving better results, even if they require more effort to design.
