Employee Compensations Plans in the Pharmaceutical Industry

As per the World Health Organization, the worldwide pharmaceutical business is worth 300 billion Usd a year, a figure that is relied upon to ascent to 400 billion Usd in the following three years. It’s additionally a business commanded by impressive players, with ten associations regulating a third of the business sector, six are based in the Us and four in Europe. The greater part of the top-ten associations have deals of over 10 billion Usd a year, with 30% benefit edges. On the other hand, the pharmaceutical business depends intensely on patents for gainfulness – and when patents lapse, the deals plunge. In 2007, Forbes magazine stacked up the pharmaceutical business as the third generally productive industry by income (significantly more than oil & vigor) however in 2012, when a few major pills patent lapsed, the huge associations saw a sharp reduction in incomes.

Pharmaceutical companies traditionally have attracted and retained high-performing sales staff through offerings of competitive, total-compensation packages, which are comprised of base pay, benefits, bonuses and recognition programs. Though in recent years, due to the new economic reality and lower revenues, they apply more budgetary constraints by devising different pay schemes, which account for a larger percentage of compensation and offer more money for top sales performance. For example, across European countries the proportion of variable pay compared to fixed pay varies by a factor of almost three-fold, thereby influencing the leverage that is achieved from individual bonus schemes in these countries.

In the US, the focus has shifted from recruiting to retaining top sales personal. The costly effects of voluntary attrition among sales representatives, which results in recruiting and training costs, lost time in the territory and diminished client relationships, is estimated by the Hay Group to be $100,000 per individual. Therefore, it’s crucial for companies to take steps to ensure that their existing sales employees remains productive, motivated and committed by developing and refining strategic incentive and reward programs. The lower revenues and decreasing sales staff numbers are also important factors in the companies needs to find a way to retain their top sales personal.

There are four major elements to the compensation plan – base salary, benefits, bonuses and C&A’s (contests and awards, i.e – recognition programs). In the US pharmaceutical industry, bonuses and recognition programs account for about 25 percent of base pay. This percentage increases with higher value and more complex products, i.e. specialty products and medical devices. Bonuses are usually based on four categories: sales, activity, management by objectives (MBOs) and C&A’s. Contests are mostly short term, usually less than one year, and aimed at motivating specific behaviors, like increasing a market share for a specific patient type, or grow sales volume in collaboration with a new sales campaign. Awards typically recognize long-term behavior and can take on many forms including cash, points, trips, or simply pure recognition. Some awards can be linked to the bonus payouts; this can both increase motivation and retention.

Plan structure involves not only defining the right target pay level but also the right pay mix. In fact, determining the right pay mix is as important as the pay level. The higher the variable component of a pay mix, the higher the motivation and revenue growth. Nonetheless, it also increases financial risk to the company. This is because the sales representatives can make much higher pay with a higher variable component. The optimum mix of fixed and variable pay will be influenced by the type of product and the market. In the Medical Device industry, sales representatives sell sophisticated and highly expensive medical products and services, for which a pay mix with a lower base salary but higher variable component is preferred. This represents a higher risk/reward to the company. On the other hand, in the pharmaceutical market, a mature product is not impacted as much by representative performance. Companies in these businesses prefer a low-risk mix, which has a lower variable component and therefore limits how much a representative can earn.

Compensation plans in the industry usually expire within three years, with companies considering their plans to be discrete initiatives that either morph or remain stagnant from year to year. Most firms keep the basic structure of their programs consistent from year to year, however they review their plans and make adjustments on an annual basis to meet organizational and company objectives. This represents a process of continual improvement rather than periodic upheaval.

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