Among Life Sciences Companies, Quota-Based Compensation RulesAmong Life Sciences Companies, Quota-Based Compensation Rules

A recent survey has found that an increasing number of companies in pharmaceutical, biotech, medical products, and high-technology industries favor quota-based compensation plans over ranking plans.

The results were developed as part of the third annual incentive practices research study conducted by ZS Associates (Evanston, IL), a global sales and marketing consulting firm.

Ranking plans pay sales representatives and managers based on how they perform compared to their peers. Such plans thrived during the late 1990s as a way of managing compensation costs—especially in the pharmaceutical industry—but they have steadily declined in popularity. The ZS Associates survey revealed slight differences among companies in different industries, but affirmed that quota-based plans were favored in all of the industries surveyed.

Stephen Redden, principal and leader of the incentive compensation practice at ZS Associates, advises executives to deploy ranking plans cautiously, as they can promote unproductive competition between salespeople. “Knowing your sales compensation cost with certainty is an important objective, but using ranking plans to achieve this objective is not recommended,” says Redden. “There are ways to structure quota-based plans—and model the costs—that can provide accurate compensation cost estimates without increasing the internal competition in the field.”

The ZS survey also indicates that quota-setting fairness is one of the most pressing concerns, and cuts across all industries.

Chad Albrecht, an associate principal at ZS and the lead on the incentive practices survey, says that incentive management teams must first identify the most appropriate metrics, and then use those measures to set quotas that account for the different earning opportunities that occur across varied territories.

“In our experience, we have found that very few companies take the time to determine the true market potential for their products. They also infrequently research and purchase the data on the many variables that can affect sales,” says Albrecht. “As our study shows, quota-based plans are gaining in usage. As sales leaders implement them, they should remember that, while measuring disparities between territories when setting quotas is often a daunting process, it is well worth the effort.

“You want to motivate, and one of the most critical requirements for motivation is a belief that salespeople are being treated fairly with the quota they have been given,” adds Albrecht.

Among life sciences companies, long-term incentives—notably stock options—have been a popular retention tool for several years. Among medical product companies responding to the ZS survey, however, use of such incentives has declined to just 36% of companies, largely as a result of the Financial Accounting Standards Board requirement that options be expensed. At the same time, a majority of high-tech companies (63%) still use options-based long-term incentives. Moreover, companies in both industries cited long-term incentives as one of the most effective reward tools.

Such responses suggest that long-term incentives could be poised to make a comeback. “Long-term incentives keep your top salespeople motivated and provide an added incentive for them to stay with you,” says Albrecht. “Limited stock options notwithstanding, companies would do well to use tools like long-term cash incentives to retain their reps and keep the reps' clients with the company.”

For more information about the ZS Associates survey, visit the firm's Web site at www.zsassociates.com.

© 2008 Canon Communications LLC

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