Pitfalls to Avoid in Sales Compensation Design for a Multi-Product Bag
September 2, 2022
One of the biggest challenges biopharma companies face around designing a sales compensation plan for a multi-product bag is ensuring that all products in the bag get sufficient attention without taking focus away from the product(s) deemed most important. However, too often, sales representatives abandon one or more products in favor of the product(s) with which they believe they can earn the largest bonus. This is made even more challenging when a new launch product enters the mix. In this blog post, we will explore common errors biopharma companies make in designing a sales compensation plan for a multi-product bag and how to correct them.
Sales Compensation Design for a Multi-Product Bag
Total target payout for multi-product bags is typically allocated across products according to the importance the company places on each product. For example, in the three-product bag shown in the table below, product A is the most important followed by product B and then product C; the amount of target payout allocated to each product directly aligns with its relative importance:
Target Payout Allocated According to Relative Importance
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|
|
|
|---|---|---|
| Product A | 40% | 40% |
| Product B | 35% | 35% |
| Product C | 25% | 25% |
However, what if product A is twice as hard to sell as either product B or product C? What oftentimes occurs in such a case is that sales representatives push the product(s) against which they can earn the most money as easily as possible. Depending on the design of the sales compensation plan (i.e., if the plan is goal-based, then the payout curve has a large impact), sales representatives will likely put less effort into selling product A than they would in selling product B and product C. This is because not only can they likely earn more money pushing the products that are an easier sell, but, in this case, product B and product C combine to a higher weight than product A.
The way that many companies correct this is to put a penalty on overall bonus earned if certain threshold sales levels are not achieved on each product in the bag. While such a strategy does help, it does not ensure that the allocation of effort reflects the importance of the products. Typically, representatives will push the difficult-to-sell product only to the minimum threshold and then redirect their efforts to the easier-to-sell products. Thus, product A from our example would still not be getting a level of selling effort consistent with its importance.
The better way to correct this behavior is to increase the amount of target payout allocated to the difficult-to-sell product to better incentivize and more equitably reward the extra effort it takes to sell the product. Typically, target payout is increased in proportion to the relative difficulty of selling the product. Going back to our last example, if product A is twice as hard to sell as product B and product C, then final target payout allocation might look like the following:
Target Payout Allocated According to Relative Importance & Relative Difficulty to Sell
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|---|---|---|---|
| Product A | 40% | 2.0 | 57% |
| Product B | 35% | 1.0 | 25% |
| Product C | 25% | 1.0 | 18% |
Thus, the amount of target payout allocated to each product in a multi-product bag cannot only consider relative importance, but must also consider difficulty of selling.
Adding a Launch Product to a Multi-Product Bag
What if a launch product is being added to a multi-product bag? Not only do the two factors explored in the previous section apply here, but there are also two additional factors to consider:
Factor 1
Relative importance of the new product and the other products
Factor 2
Relative difficulty of selling the new product and the other product(s)
Factor 3
Amount of time needed to sell the new product (given its novelty and freshness)
Factor 4
Optimism in sales forecast of new product
The first two factors can be accounted for as described in the previous section.
For the third factor, depending on the new product’s characteristics, sometimes the novelty and freshness of the new product can result in sales representatives allocating more time than necessary to selling it. This is where the penalty mentioned earlier in this blog post can be utilized; the sales compensation plan can impose a penalty on overall bonus earned if certain threshold sales levels are not achieved on the other products in the bag. Note, however, that these threshold levels must be set such that they are readily achievable by the sales force while still posing a challenge.
Accounting for the fourth factor is the most difficult. Launch forecasts are oftentimes overly optimistic, and we recommend taking this optimism into account and being prepared for the new product to not sell as well as expected.
Conclusion
Most biopharma companies with multiple products in the bag allocate target payout according to each product’s relative importance. However, because some products are more difficult to sell than others, target payout allocation must also consider the relative difficulty of selling each product to make sure the sales force does not abandon a product that is harder to sell. Two additional considerations become important when adding a new launch product to the bag: time needed to sell the new product and optimism around the sales forecast for the new product. Allocating target payout in a multi-product bag according to these factors can ensure that your sales compensation plan is incentivizing and rewarding the behavior you want from your sales force.
