Buying The Pharm

By Malcolm Fleschner

According to the annual sales and marketing employment survey of pharmaceutical sales professionals conducted jointly by the Hay Group and Pharmaceutical Executive Magazine, in 2003 the average new entry-level pharmaceutical sales rep earned a $62,500 salary. No doubt that’s a sizable starting wage for nearly anyone with the possible exception of professional athletes. And while average compensation is up across the pharmaceutical industry, top performers’ incomes may not be rising as rapidly as those of newcomers.

Compiled from the responses of 45,000 participants in pharmaceutical sales, marketing, national accounts, business development, sales training and sales administration, the survey results indicate that increases in overall cash compensation reflect a greater focus on incentive pay rather than higher base pay. In an effort to improve effectiveness, pharmaceutical companies tend to create incredibly complex comp plans. Seventy-two of the incentive plans reported in the survey included multivariable incentives added to base salaries. The problem, say the survey’s authors, is that complicated rules structures tend to confuse participants, who wind up operating the same way they always have, while hoping that their standard practices will nevertheless still yield incentive income. As a result, fewer than half of all sales reps feel the incentive payments they receive accurately reflect their performance.

Because of this focus on incentives that provide salespeople with somewhat unanticipated financial rewards (as well as other factors), overall compensation in the pharmaceutical industry has been getting squeezed toward a median that leaves top performers feeling underpaid. The survey’s authors suggest that top sales reps should earn roughly 200 percent of, or twice the incentive compensation of the average performer. The actual figure today is closer to 140 percent. This leads to instability and turnover, as these high achievers start looking around for more appreciative pastures.

The survey also analyzed some of the other compensation trends affecting pharmaceutical sales. One trend on the decline is the practice of ranking, in which reps are compensated based on how they perform against one another. While ranking is a simple system that offers the advantage of a predictable budget, it also tends to motivate reps merely to outpace each other when the real objective should be to encourage maximum individual performance. Fewer than 20 percent of the companies reflected in the survey offer incentives based on ranking.

By contrast, use of so-called “special achievement” awards is on the rise, increasing from 31 percent of responding companies in 2001 to 71 percent today. The survey authors suggest that companies offer such awards as a sop to top performers who may be victims of the compensation compression driving drug reps’ pay toward the median.

One perennial favorite, the long term incentive, remains popular, used by 59 percent of reporting companies. Most common is the nonqualified stock option plan. In the realm of stock-based rewards, however, Microsoft is the bellwether across all industries, and if Bill Gates and Company follow through on plans to switch from offering options to restricted stock grants, incentive stock options may soon fall by the wayside at pharmaceutical companies as well.

All these compensation trends may ultimately be resulting from one common source: the ongoing race to deploy more drug reps in the field. Today pharmaceutical companies employ almost 100,000 sales reps to service 250,000 physicians, and there are plenty more on the way. According to the survey’s authors, until the pharmaceutical industry can come up with a more efficient method of improving sales effectiveness than simply throwing more reps at the nation’s already beleaguered medical professionals, compensation plans will require ongoing tweaking in an effort to keep reps paid in an attractive, fair, equitable and manageable fashion.