What Percent of the Sales Force Should Be Out of the Money? The Answer Might Surprise You
January 26, 2021
It is not uncommon to hear from sales compensation plan designers that approximately 10% to 15% of the pharma sales force should finish a plan period without having earned a bonus payout. The reasoning behind this idea is that when sales representatives do not earn bonuses, they will work harder next plan period to ensure that they do earn a bonus.
However, having a portion of the sales force out of the money poses significant limitations, and the actual percent of the sales force that should be out of the money might surprise you: zero. Let’s explore these limitations and why all representatives should earn a bonus.
Limitation 1: Having Representatives Out of the Money Costs the Company Sales
Unless the company has hired the wrong sales people, all members of the sales force should finish a plan period having earned a bonus. If a sales representative anticipates that he/she will not earn a bonus, the representative will likely give up on selling partway through the plan period: “Why should I sell if I know I am unlikely to earn a bonus?” The unrealized sales from the remainder of the plan period during which the representative has stopped selling are not just lost to the representative, but to the company as a whole. The lost sales from all representatives who have given up on selling add up; in fact, for a pharma, biotech or medical device company, 10% of the sales force giving up halfway through the plan period is equivalent to reducing the size of the sales force by 5%.
Limitation 2: Having Representatives Out of the Money Encourages the Wrong Behavior
The lack of selling partway through the plan period discussed above is typically also accompanied by the hope that poor performance will lead to an easier sales compensation plan next plan period—either through lower goals, higher commission rates, etc. Even if this is not the case, sales representatives often believe it to be true, and the belief is enough to encourage the representative to stop their selling activity.
Limitation 3: Having Representatives Out of the Money Undermines the Purpose of the Sales Compensation Plan
Recall that many sales compensation plan designers argue that representatives who don’t earn bonus in a plan period will work harder next plan period to ensure that they do earn a bonus. However, this argument admits that the sales compensation design is flawed—a good sales compensation plan sees all members of the sales force trying their hardest every plan period for the entire plan period because the harder they work, the more bonus they earn. Thus, arguing that a portion of the sales force should be out of the money because they will work harder next plan period admits that the plan is not motivating all of the sales force to work hard in the first place.
Conclusion
Although many sales compensation plan designers advocate that 10% to 15% of the sales force should finish a plan period without having earned a bonus payout, the actual percent is zero. If a sales representative gives up on selling partway through the plan period due to the unlikelihood of earning a bonus, then (1) the company will face lost sales, (2) the sales compensation plan will be encouraging the wrong behavior, and (3) the sales compensation plan will undermine its very purpose of motivating the sales force to work as hard as possible. All sales representatives should be engaged, motivated and selling a product with their best effort at all times.
