Best Practice Sales Force Compensation: Diagnosis

By IMS Health

Steffen Maennche, Principal Consultant with IMS Health, reveals the business benefits to be gained from diagnosing current incentive plans. By describing the key diagnostic steps that have created valuable insights and generated real returns for clients, Steffen puts forward a compelling case for prioritising a thorough review of incentive compensation.

The world of incentive compensation is already a complex one and financial costs, wasted opportunities as well as difficult resourcing issues await the uninformed who fail to design the right model and manage it successfully.

In the past, incentive compensation schemes have often been repeated year after year and have been subjected to very little scrutiny by management. In Europe they may actually have been undervalued. Well-designed incentive compensation can, however, show the way forward by offering the essential routemap to guide reps to the right customers, products and markets.

Doing nothing about incentive compensation is no longer an option. At IMS Health we believe incentive compensation review is fast becoming a hot topic – a critical area worthy of management attention.

Change characteristics
We see the forces of change gathering which will impact on the high level design of incentive reward schemes. But the scope and intensity of these changes are unfortunately not universal or uniform in all countries, which further complicates the picture.

Partly in response to these changes, we are also seeing a number of sales force innovations in the industry. These include:

• The development of team-based selling and account teams, in part driven by the growing influence of central bodies such as the UK’s NICE and primary care trusts and Germany’s IQWiG and sick funds
• A growing interest in qualitative measurements of the perceived value of industry to customer interaction, as well as the strength of this relationship
• The need for more measurement of adherence to all forms of compliance and company-initiated ethics programmes
• Field force adoption and utilisation of supportive technologies such as CRM and closed loop marketing

Compensation schemes that recognise these innovations and the changing marketplace will represent the new best practice and help position organisations for continued success in the future.

Success criteria
Successful compensation systems will not only help strengthen the position of the company in its marketplace and align with the overall business strategy and brand objectives, but also motivate the sales force, retain the most capable sales practitioners, and be readily understood by all.

This motivational aspect is now an area of increasing interest; the focus of investment in sales force effectiveness initiatives appears to be moving away from issues around the appropriate size and structure of sales teams towards how to encourage the sales team, and the individual rep, to deliver improved results.

Such a qualitative optimization programme is increasingly often driven centrally, in particular by European-based HQs with central brand strategies and strategic goals to meet. This means that training and development, as well as frameworks and guidelines for incentivisation plans, are being increasingly drawn into the centre. As a result, corporate HQs that up to now may have allowed affiliate companies flexibility and autonomy in this area, are increasingly aware of a range of different incentive programmes across their businesses and are seeking to normalise these and/or spread best practice by issuing tighter, more refined guidelines.

Successful incentive compensation planning will always be built around a feedback loop of continuous process improvement (see Fig 1). The first process step – the diagnosis of the existing plan – is designed to provide a fast and unbiased evaluation of its current status with stakeholders and to highlight possible improvement areas.

Fig. 1 Continuous Improvement Loop in Incentive Compensation

In the diagnosis phase the incentive compensation plan is assessed against various key scheme attributes including:

• Strategic alignment: Are the key results areas reflected in what gets rewarded?
• Desirable sales force behaviours: Does the plan design generate the right set of behaviours from the sales force? For example, does it lead to ‘good quality’ calls or to many short calls? Does it mean a particular brand is promoted by reps simply because it’s easier to sell than the brand that strategy otherwise dictates should be the prime focus?

• Rewarding high vs. low performers: We also believe that organisations tend to have the quality of workforce that their compensation plan produces. In other words, if an incentive compensation plan fails to reward high performers significantly above low or average performers then low/average performers are more likely to be attracted to that organisation. Risk-taking high achievers will be put off.
• Fairness: Is the plan ‘fair’? High sales force churn driven by perceived inequities in plan design or goal settingincreases cost and leads to low morale.
• Efficient administration: Is too much effort/cost needed to create management reports? Inefficiencies mean too much overhead.
• Over and underpayments: Does the process result in errors leading to overpayments which add large financial risk to budgets? Are large numbers of reps and sales managers complaining about the scheme? Is this due to regular underpayments to them?

At the start of the review it is rarely apparent where the real ‘pain’ or failure is. Our experience tells us that it is typically found in one or more of the areas listed above.

Independent diagnostic review

Although the diagnostic phase of the review could be handled in-house by some organisations, there is a strong case for using an independent third party to evaluate its current state, particularly where the company employs local consultants familiar with local market conditions. And the good news is that such a review doesn’t have to cost a fortune and that the payback from the investment can be staggering (see Fig. 4).

Feedback from reps, gathered in confidence by a third party paying due regard to the sensitivities usually at play in this area, is likely to produce a complete picture of the current situation and the state of sales force morale. Using an evidenced-based consultancy with a track record in this area also provides the opportunity to benchmark results against unpublished external data collected from similar organisations around the world. The independent, unbiased and complete nature of the data gathered and professionally analysed and presented to management can then become a powerful enabler of change within the client organisation.

Through a planned and thorough 360 degree diagnostic review, such as the one indicated below in Fig. 2, executives will achieve a good understanding of the current state of the incentive scheme and be able to respond with greater confidence to actionable recommendations on how to improve it.

Fig. 2 The Four Diagnostic Steps

Key diagnostic steps

The initial step involves gathering four different types of planning data – including personal feedback from reps and other stakeholders – that will help diagnose the current plan and give insights into what works, what is broken and where there are opportunities for improvement. This ‘unified’ approach brings quantitative/hard and qualitative/soft data together to provide a thorough overview of the situation.

Fig. 3 Sources of Planning Data

Having gathered the data the next step is to assess the current plan to measure its accuracy and overall fairness. From this we will discover, for example, the number of r eps who receive too little or too much payout because of calculation errors; whether there is a level playing field across all the territories and product areas or whether there is an unintentional inbuilt bias; i f the distribution of payouts follows expected patterns; and if there is a clear link between performance and payout. In short, we will have a good view of the efficacy of the plan and be well placed to recommend any improvement options.

Payback

According to Gartner, there are substantial gains and avoidable losses to be saved from a properly administered incentive compensation plan. Furthermore, where the design of the scheme is improved to turn lost opportunities into new business, the potential revenue gain can be as much as 5 % of sales.

Fig. 4 The potential impact of administrating more effective incentive compensation (according to Gartner)