The Major Frameworks of Commission Sales Compensation Plans and When to Use Each
September 11, 2023
One of the most popular sales compensation design types utilized in the life sciences industry is the commission-based design. Commission-based sales compensation plans are the simplest among the four major design types (goal, commission, grid and forced rank) and can be very effective across all stages of the product life cycle. In fact, a commission-based plan is, in most cases, the most effective design type for a product launch. In this blog post, we will explore the major frameworks under which the commission-based design type can be implemented and when to use each.
Major Commission Frameworks
A commission-based sales compensation plan is a plan in which each sales representative earns a certain amount of compensation for each unit (i.e., prescription, new prescriber, etc.) that the sales representative achieves. The commission is most often either a set amount for each unit (i.e., $200 for each unit achieved) or a portion of the target payout (i.e., 2% of target payout for each unit achieved).
The three major frameworks under which a commission-based plan can be implemented are:
Straight Commission
Each sales representative receives the same commission rate
Variable Commission
Commission rates vary across geographies
Tiered Commission
Different commission rates are assigned for different levels of performance
While the first two frameworks are opposites, the third can be implemented in parallel with either of the first two frameworks. Let’s explore each of these frameworks in greater detail.
Commission Framework 1: Straight Commission
Under the first commission framework, what we call straight commission, each sales representative earns the same commission rate for each unit sold regardless of territory size or opportunity (oftentimes above a designated threshold level). If alignments are set such that each territory has relatively equal levels of sales and opportunity, then straight commission is a viable option that can result in equitable payouts. However, most sales forces inevitably exhibit differing levels of sales and potential across geographies, which is especially true of the unpredictable and complex life sciences industry where managed care conditions differ so drastically across the country. This inability to address differing levels of territory size and opportunity too often makes straight commission inequitable and, accordingly, demotivating.
Commission Framework 2: Variable Commission
Under the second commission framework, what we call variable commission, commission rates vary across geographies such that each sales representative has a unique commission rate. Thus, in contrast to straight commission, variable commission can be quite equitable and motivating because it has the ability to account for differing levels of territory size and opportunity. There are a number of metrics that can be used to vary commission rates, such as goal attainment and past sales.
Commission Framework 3: Tiered Commission
The final framework we will be exploring is tiered commission, under which an individual sales representative earns a unique commission rate in different ranges of performance (each a tier). This framework is not contrary to the two discussed earlier, but rather a supplement to them; in fact, straight and variable commission plans are more often tiered than not. For example, a two-tiered straight commission plan might pay $200 for each unit sold up to 500 units (tier 1), and $60 for each unit sold above 500 units (tier 2). By slowing down payouts, tiers allow companies the ability to ensure commission rates are motivating as well as fiscally responsible.
Conclusion
The various frameworks under which a commission-based plan can be designed—straight, variable and tiered—grant companies great flexibility in tailoring a commission-based plan to the unique needs of their particular sales force and product portfolio, making the commission design type one of the most popular and effective options for countless life sciences products. The nuances that exist within each of these frameworks (i.e., varying commission rates based on goal attainment, past sales, etc.) enable further customization that only make the commission design type more appealing. Request a free consultation with us today to get started on designing the best commission-based sales compensation plan for your biopharma product!
