When Simple Isn’t Simple: Why Your Sales Compensation Plan is Not as Simple as You Think
Over the years, the healthcare industry has progressively grown more and more complex, from the increasing influence of managed care companies to intensifying governmental regulations to new data sources. In parallel with this growing industry-wide complexity has been the call to further simplify sales compensation plans. Bridging this increasingly growing divide is not easy and raises the question of what truly makes a sales compensation plan simple. This blog post will explore why the simplicity of a sales compensation plan is actually a multifaceted concept that is more complex than often realized.
The Three Sales Compensation Simplicity Attributes of Simplicity
Oftentimes, a sales compensation plan is considered to be simple if it can be explained on an index card or during an elevator trip; however, brief does not necessarily equal simple. There are three key attributes of simplicity that must all be present in order for a plan to truly be considered simple:
It is simple for the sales representative to understand how the plan works and what is expected of them
The plan is simple for the company to implement and manage over the course of the plan period
The sales representative can determine how a change in performance will translate to a change in earnings
Though most sales compensation plans generally meet the first two attributes of simplicity, it is the critical third attribute that is oftentimes not met by a sales compensation plan. Beyond being simple to understand and simple to administer, a plan is only simple if the sales representative is able to determine how a change in performance will translate to a change in earnings. The simpler the relationship between action and bonus, the simpler the plan.
Deep Dive: Relationship Between Performance and Earnings
Imagine asking a sales representative the following question: “If you increase your sales each month by 10 scripts, how much more bonus will you earn?” The more difficult it is for the representative to answer this question, the less simple the relationship is between action and bonus, and thus the less simple is the sales compensation plan.
Consider a sales compensation plan that ranks two products on the following metrics and then combines ranks based on their weights:
Which of the three simplicity attributes does this sales compensation plan meet?
Simple to understand.
Simple to administer.
Simple to determine how a change in performance will translate to a change in earnings.
While this sales compensation plan may be simple enough to explain on a sticky note or in a short conversation, it is extremely difficult for a sales representative to determine how a change in performance will translate into a change in actual compensation for multiple reasons:
Though this sales compensation plan meets the first two attributes of simplicity, it does not meet the critical third attribute and thus cannot be considered simple.
Statistically Quantifying Sales Compensation Plan Simplicity
Simplicity is so important to the effectiveness of a sales compensation plan that it is one of the six criteria of our SCOR³ES® diagnostic assessment, a statistically-based analysis of the six critical criteria a sales compensation plan must meet if it is to be an effective and winning plan.
When SCOR³ES® statistically evaluates a plan’s simplicity, it considers each of the three attributes introduced earlier in order to provide a comprehensive view of the degree to which a sales compensation plan is truly simple and, accordingly, motivating the sales force as much as possible. Check out some of our case studies to see how much sales improved when compensation plans that did not meet all three attributes of simplicity were replaced with plans that did: in one case study, a rank order plan is replaced with a goal-based plan and in another case study, a grid-based plan is replaced with a commission-based plan.
Conclusion
When it comes to sales compensation plan design in the biopharma industry, simplicity is not necessarily something that should be viewed and evaluated in a simple way. In order to ensure that the sales compensation plan is as simple as possible—and, subsequently, is as motivating and energizing to the sales force as possible—biopharma companies must take a multifaceted view of simplicity and institute a number of checks to ensure that each attribute of simplicity is being met, especially the simplicity of the relationship between performance and earnings.
