Designing an Effective Biopharma Payout Curve – Part 1: Payout Curve Shapes
April 6, 2022
One of the most important elements of biopharma sales compensation design is determining the amount of incentive compensation that will be paid out for each level of performance, also referred to as the payout curve. The payout curve has the ability to make or break sales force motivation, but the many aspects that go into payout curve design—from shape to threshold to slope—make designing the right payout curve for a biopharma sales force rather challenging. In this three-part series, we will explore the various elements of payout curve design for pharmaceutical, biotech and medical device companies: the first part will outline the core payout curve shapes, the second part will explore when each shape should be used, and the third part will examine setting thresholds and slopes.
What are the Core Payout Curve Shapes?
There are six core shapes with which biopharma payout curves can be designed: linear, convex, concave, s-shape, reverse s-shape and step. Let’s explore each of these shapes in greater detail.
Linear
Under the linear payout curve shape, payout is awarded at a constant, unchanging rate for equal increments of performance. A linear payout curve can be made up of multiple tiers, each representing a different range of performance with its own constant, unchanging rate.
Convex
Under the convex payout curve shape, the increase in payout earned accelerates rapidly with equal increments of performance. The bend of a convex curve can vary greatly, from radically convex to almost linear.
Concave
The concave payout curve shape is the opposite of the convex shape: the increase in payout earned decelerates rapidly with equal increments of performance. Like the convex payout curve shape, the bend of a concave curve can vary greatly, from radically concave to almost linear.
S-Shape
The s-shape payout curve is a combination curve that begins with the convex shape and ends with the concave shape. The increase in payout earned initially accelerates rapidly with equal increments of performance (i.e., convex) until a designated level of performance, after which the increase in payout earned begins to decelerate rapidly with equal increments of performance (i.e., concave).
Reverse S-Shape
The reverse s-shape payout curve is the opposite of the s-shape curve and thus begins with the concave shape and ends with the convex shape. The increase in payout earned initially decelerates rapidly with equal increments of performance (i.e., concave) until a designated level of performance, after which the increase in payout earned begins to accelerate rapidly (i.e., convex).
Step
Unlike the previous five shapes explored, the step payout curve is non-continuous, meaning that payout does not increase for each improvement in performance. Instead, the step payout curve is flat between designated levels of performance, and payout does not increase until the next level of performance (i.e., the next step) is achieved.
Summary of Payout Curve Shapes
Now that we’ve introduced the core six payout curves shapes, let’s summarize their similarities and differences:
|
Shape |
Continuous or Non-Continuous |
Payout Increment |
|---|---|---|
|
Linear |
Continuous |
Constant |
|
Convex |
Continuous |
Accelerating |
|
Concave |
Continuous |
Decelerating |
|
S-Shape |
Continuous |
Accelerating to Decelerating |
|
Reverse S-Shape |
Continuous |
Decelerating to Accelerating |
|
Step |
Non-Continuous |
None until next step |
Note that just as the s-shape and reverse s-shape curves are combinations of some of the other curves, so too can other combinations of the various shapes exist; we have included the s-shape and reverse s-shape curves as they are two of the most popular combinations.
Conclusion
Payout curve design in biopharma sales compensation planning involves a number of aspects, from what shape the curve should be to the threshold at which payout should begin to how steep the slope of the curve should be. In this blog post, we explored the six core payout curve shapes: linear, convex, concave, s-shape, reverse s-shape and step. Though we’ve now established the various payout curve shapes, the bigger question is when each should be used. The next part of this three-part series will explore the strengths and weaknesses of these payout curve shapes as well as when they should and should not be used.
