Off to a Running Start:

Launch Sales Compensation Pitfalls to Avoid

When preparing for the ever-critical launch phase of a new product, it is critical to design a sales incentive compensation plan that gets out of the gates quickly and achieves fast adoption.  Let’s explore some pitfalls to avoid in the design of the sales compensation plan for your product launch.

Introduction

The launch of a new product is one of the most critical phases—if not the most critical phase—of a product’s life cycle.  The ability to maximize the new product as quickly as possible as well as secure a lasting position for the product in the marketplace is largely contingent upon a successful product launch.  A crucial component of a successful launch is the sales force and the incentive compensation plan against which the sales force is compensated; however, there are several factors that make the sales compensation design process for launch products especially challenging, and many common solutions that biopharma companies adopt to solve these challenges lead to errors in sales compensation design.  In this white paper, we will explore some common pitfalls to avoid in designing the sales compensation plan for your product launch.

The sales incentive compensation plan is critical to ensuring that sales representatives are properly rewarded for their selling efforts and, accordingly, motivated to continually push the new product.  However, the incentive compensation design process for launch products is especially challenging due to factors such as lack of historical data, difficulty in setting national goals, difficulty in assessing differences in opportunity across territories, hesitance of physicians to adopt a new product, and the inevitable uncertainty that surrounds a product launch.  These factors often lead to errors in sales compensation design that ultimately jeopardize the success of the launch and, consequently, put the long-term success of the product at risk.

Let’s explore some common pitfalls biopharma companies should avoid in launch sales compensation design.

Pitfall 1: Adopting a Forced Rank Sales Compensation Design

Forced rank sales compensation plans are one of the most popular designs adopted for a biopharma launch.  Not only do they provide the ability to know how much will be paid out under the plan in advance, but they do not require differences between territories to be assessed while ensuring top selling territories are rewarded and poor selling territories are penalized.  The most commonly adopted forced rank plan consists of rankings based on volume and payouts awarded in levels (i.e., top 10%, then next 10%, etc.).

However, not only should forced rank sales compensation plans be avoided for all stages of the product life cycle, but they should be avoided for the launch stage in particular because forced rank:

IS OFTEN BIASED BASED ON TERRITORY CHARACTERISTICS

Often results in payouts that are more a function of which territory the representative is in than the representative’s performance because certain parts of the country are more likely to adopt a new product than others

DOES NOT PAY FOR PERFORMANCE

Ranking loses relative performance differences (i.e., how much better is rank 1 versus rank 2 versus rank 3), so representatives can earn very different payouts for very similar performances or, alternatively, very similar payouts for very different performances

RESULTS IN UNSUSTAINABLE PAYOUTS TO TOP PERFORMERS

Awards large payouts to the same top performers plan period after plan period as territories that have fast adoption continue to have larger volume, causing disgruntlement once a new, more discerning plan is adopted under which such payouts cannot be earned

Thus, forced rank sales compensation plans are a dangerous choice for the launch stage of the product life cycle as they ultimately disengage the sales force during the stage that is most critical to securing the product’s long-term success.  In contrast, innovative launch designs such as scoring plans, creative commission-based plans, roll-over plans, etc. can better motivate the sales force to continually drive sales throughout the entire launch and allow a smooth transition to a post-launch plan.

Pitfall 2: Mitigating After Plan Period if National Goals are Too Optimistic

Sales compensation plans are typically designed assuming the national goal is set accurately.  However, factors such as lack of historical data, unknown speed of adoption, etc. make setting national goals for launch products especially challenging. 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 slow their selling activity.

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, such as providing an extra bonus to the sales force. Such action has very little ability to motivate and drive behavior during the plan period as the sales force has no way of knowing if a mitigation will take place (and, if so, in what form) and, accordingly, has already become demotivated and disengaged.  In contrast, what we refer to as a contingency plan, published as part of the sales compensation plan, outlines an alternative pay methodology that is triggered should national sales fall below a certain amount, thereby keeping the sales force motivated during the plan period because they know what to expect if something outside of their control occurs.

Pitfall 3: Awarding Bonus Based on National Performance

In order to mitigate the uncertainty of where sales will fall across the country as well as encourage the sales force to work together and share insights, biopharma companies often tie a part of the incentive compensation bonus, or a special bonus, to national performance.  However, sales representatives are most motivated when they have as much direct control as possible over the bonus they earn.  Tying an additional bonus or a component of the sales compensation plan to national performance limits individual control over compensation, ultimately decreasing sales force engagement and motivation.  If the sales force is not fully engaged or motivated, then sales will be left on the table, which the company cannot afford during the critical launch phase.

Pitfall 4: Using Five-Point Scoring Model for MBOs

Although more commonly utilized in the pre-launch phase, management by objectives (MBOs) are often a component of launch sales compensation plans for certain products and markets where sales may be slow to come in.  The most common scoring model adopted for MBOs is a five-point scale awarded by the manager, with 5 indicating the objective was fully met and 1 indicating the objective was not met.

Despite how often this scoring model is used, this five-point scale has significant limitations that ultimately undermine sales force motivation and equitability:

OFTEN RESULTS IN SAME SCORE BEING AWARDED TO EACH REPRESENTATIVE

Too often, managers award their representatives with the same score, typically either a 4 or 5; such scoring does not capture relative performance differences, which ultimately demotivates the representatives who put forth extra effort but received the same score as their peers

MAKES IT DIFFICULT TO DIFFERENTIATE PERFORMANCES

If managers do seek to capture relative performance differences in awarding scores, the five-point scale does not give them much of an opportunity to do so; although a solution might be to expand the scale, an expanded scale only intensifies the limitation we will explore below