Why Forced Rank Sales Compensation Plans are Bad for Launch Products
Although the limitations of forced rank sales compensation plans make them ineffective for any stage of the product life cycle, the stage in which they tend to be most popular—the launch stage—is also the stage in which they do the most harm. This is because a successful launch is critical to ensuring the new product gets out of the gates quickly and secures a lasting position for itself in the marketplace. However, a forced rank plan never motivates and drives sales as well as other sales compensation designs and, consequently, jeopardizes the success of a launch, putting the long-term success of the product at risk. In this blog post, we explore why forced rank sales compensation plans are so detrimental to a product launch.
The Most Commonly Adopted Forced Rank Launch Plan
The forced rank sales compensation plan typically adopted for a product launch consists of rankings based on volume and payouts awarded in levels (i.e., top 10%, then next 10%, etc.). This plan is typically adopted for multiple plan periods until sales trends definitive enough to switch to a new plan.
There are five primary reasons why this forced rank plan is adopted for a product launch; however, each of these reasons can be refuted and does not justify the use of forced rank for a launch. Let’s explore why.
Reason 1: Easy to Implement Given Uncertainty of Sales Across Territories
Because it is difficult to assess the opportunity and expected sales from each territory for a product launch, forced rank sales compensation plans are often adopted as they guarantee that the highest sales get the highest rank and, thus, highest payout while limiting the possibility of runaway payouts. Unlike goal-based and variable commission-based plans, which rely assessing the differences across territories, ascertaining territory differences is not necessary for forced rank plans and thus makes them easy to design, implement and administer for launch products.
Counterargument:
The uncertainty around how quickly sales will hit in different parts of the country is a poor reason to adopt a sales compensation plan that cannot capture relative performance differences across representatives. Certain parts of the country are more likely than others to adopt a new product, so ignoring these different rates of adoption means that certain sales representatives are likely to benefit more because of location than actual performance under a forced rank plan. If payout is more a function of which territory the representative is in than performance, representatives will disengage, and it is critical during the launch stage more so than any other stage of the product life cycle that all representatives are fully engaged and selling with the highest level of effort.
Reason 2: Rewards Top Performers and Penalizes Poor Performers
A forced rank sales compensation plan ensures that the top performers are paid well (often 2.0x to 2.5x target payout) while also ensuring that the bottom performers are penalized (often receiving no sales compensation payout).
Counterargument:
Sales compensation payouts should reflect performance—those performing similarly should be paid similarly and those who perform differently should be paid bonuses that reflect that difference. However, seldom do the performances of top performers relative to other members of the sales force warrant the large payouts they receive under a forced rank plan. Additionally, when one sales representative does perform extremely well, the difference in bonus between ranks 1 and 2 often does not reflect the difference in performance, resulting in the top performer becoming disgruntled. The major fault with forced rank plans on volume is that payouts do not take into account relative performance—a major motivator for sales representatives.
Reason 3: Pays Representatives Who Perform Similarly Similar Payouts
Launch forced rank plans are often designed with payout levels because it is believed that the performance differences of representatives who fall in the same payout level are not large, so rewarding all sales representatives who fall in that payout level the same amount of compensation is consistent with the idea that representatives who perform similarly should be paid similarly.
Counterargument:
Payout levels only exacerbate the ability of a forced rank plan to pay for performance. Sales representatives in the same payout level can perform very differently, but all earn the same payout, leading to disgruntled representatives. Furthermore, representatives could miss the next payout level by a very small amount of performance, thus barely missing a higher payout, which also leads to representatives becoming disgruntled. Finally, if payout levels are large, then representatives in the middle of a payout level near the end of a plan period have little incentive to continue selling as it is unlikely that they will reach the next payout level by the end of the plan period.
Reason 4: Allows Time for Data to Come In
Utilizing a forced rank sales compensation plan for a number of plan periods ensures that by the time the company is ready to switch to a goal-based, commission-based, grid-based, etc. sales compensation plan, there is sufficient data to successfully design a more discerning plan.
Counterargument:
Forced rank plans based on volume almost inevitably keep rewarding the same top performers plan period after plan period as territories that have fast adoption continue to have larger volume (note, though, that this is frequently a factor more of the physicians in the territory than of the sales representative assigned to the territory). Not only does this mean that the plan is not properly identifying top performers, but these “top performers” come to expect the large payouts they receive (typically 2.0x to 2.5x target payout). Furthermore, such large payouts are not sustainable in the long-term once a new, more accurate plan is adopted, leading these representatives to become disgruntled when the plan change occurs.
Reason 5: Provides Ability to Know Sales Compensation Budget in Advance
Forced rank sales compensation plans provide the ability to know the total sales compensation budget in advance, so there is no concern for runaway payouts if the national launch forecast is exceeded, which can happen with commission-based plans for a product launch. Additionally, overall compensation can be tied to national performance by applying a kicker that increases payouts if national goals are exceeded and reduces payouts if national goals are missed.
Counterargument:
While it is beneficial to know the amount that will be paid out to the sales force in advance, this is not a sufficient reason for adopting a sales compensation plan that is unfair and does not properly capture relative performance. This is especially true given that there are other launch plan designs that not only better motivate the sales force, but include measures that ensure fiscal responsibility while rewarding reps properly and sufficiently, such as scoring plans, creative commission-based plans, roll-over plans, etc.
Conclusion
Despite their popularity for biopharma product launches, forced rank sales compensation plans are a dangerous choice for this stage of the product life cycle as they ultimately disengage the sales force during the stage that is most critical to securing the product’s long-term success. Instead of forced rank plans, biopharma companies can adopt innovative launch plans such as scoring plans, creative commission-based plans, roll-over plans, etc., all of which capture relative performance performances and, consequently, motivate the sales force to continually drive sales throughout the entire launch. Request a free consultation with us today to get started on designing a motivating and equitable launch sales compensation plan for your sales force!
