Four Reasons Rank Order Sales Compensation Plans Cost You Sales
October 5, 2021
Although rank order plans used to be the most popular type of sales compensation plan utilized throughout the biopharma industry due to their ease of implementation as well as the ability to know the total sales compensation budget in advance, they have increasingly lost favor as they have been proven to not drive sales as well as other types of sales compensation plans, namely goal-based or commission-based plans. Nevertheless, rank order plans continue to be utilized and, in fact, have increased in use throughout the COVID-19 pandemic due to the ability to control how much will be paid out to the sales force. This blog will explore four limitations of rank order plans that demonstrate how such plans ultimately leave sales on the table.
Limitation 1: Rank Order Does Not Have a Simple Relationship Between Performance and Bonus
For a sales compensation plan to truly be simple, a representative must be able to discern how a change in performance will translate to a change in compensation. The simpler this relationship is, the more motivated and engaged the sales representative is to drive sales.
However, this is nearly always impossible with a rank order plan. For example, consider a rank order plan in which representatives are ranked on two metrics: unit change and percent unit change. These individual metric rankings are then combined into an overall ranking against which compensation is determined.
How will an increase of three units per month affect compensation? It is impossible to determine, not only due to the complexity of combined rankings, but also the inability to know how many more units will translate to an increase in rank since an increase in rank depends on how the representatives with higher rankings perform. This latter point brings us to our next limitation.
Limitation 2: Rank Order Limits a Sales Representative’s Individual Control
Although sales representatives have some control over their individual performance under a rank order plan, the performance of the other members of the sales force matters just as much, if not more, than the individual sales representative’s performance. Sales representatives are most motivated when they have as much direct control over their compensation as possible, and basing compensation on a representative’s relative performance limits the representative’s direct control and makes the representative less motivated and engaged to drive sales.
Limitation 3: Rank Order Limits a Sales Representative’s Ability to Earn Additional Compensation
A rank order plan can be designed to either pay out representatives in levels (i.e., the top 10% of representatives according to rank all earn the same bonus, as do the next 10%, etc.) or to pay out representatives continuously (i.e., each increase in rank translates to an increase in payout). In the latter case, an increase in performance only translates to an increase in compensation if it results in an increase in rank, thereby demonstrating that a representative can increase performance without increasing compensation.
This inability to earn additional compensation for improvements in performance is even worse in a rank order plan with payout levels. With payout levels, an increase in rank does not always translate to an increase in compensation; the representative only earns additional compensation if the increase in rank results in the representative reaching a higher payout level. Consequently, a representative solidly entrenched in the middle of a large payout level towards the end of a plan period is discouraged from continuing to sell because he/she not only is unlikely to surpass enough peers to reach to a higher level, but is also unlikely to be surpassed by enough peers to fall to a lower level.
Finally, with either of these types of rank order payout curves, the top ranked representative does not have the ability to earn additional compensation for increases in performance.
Limitation 4: Rank Order Does Not Pay for Performance
Too often, rank order plans do not pay for performance. Consider a plan that ranks on change in market share and awards $25,000 for first place and $20,000 for second place. Mike comes in first place with a change in market share of 1.01 points; Jane comes in second place with a change in market share of 1.00 points. For a difference of one-hundredth of a share point, Jane is paid $5,000 less than Mike. Jane might feel that this isn’t fair and she would be right.
In a rank order plan with payout levels, two representatives could perform very similarly but end up at the end of one payout level and beginning of the next, thereby resulting in quite different payouts. Alternatively, representatives can perform very differently but earn the same payout because they fall at the opposite ends of the same payout level.
Conclusion
Although rank order sales compensation plans used to be popular in the biopharma industry, they have fallen out of favor due to their inability to effectively motivate the sales force and drive sales. Even their one large advantage—knowing the total sales compensation budget at the outset of the plan period—can creatively be incorporated into goal-based and commission-based sales compensation plan, thereby nullifying rank order’s major advantage. Rank order plans too often result in a sales force that is disengaged, without energy and just going through the motions, which ultimately ends up costing the company sales.
