A well-designed commission structure, a.k.a incentive structure, is the cornerstone of a motivated and high-performing sales force in pharmaceutical sales.
The commission or incentive structure, as such, for pharmaceutical sales reps is pretty straightforward. However, choosing what structure is beneficial for your business and sales teams is the tricky part. You can always base it on your competitors and the market standards.
In this blog, we’ll just stick to discussing the common commission structures in pharma sales.
What do you need to know about pharma sales?
In pharma sales, sales reps are called territory sales representatives or managers. They are assigned territories that generally refer to specific geographic areas.
In the territory assigned, sales reps are responsible for creating and executing strategies for targeting key accounts, scheduling visits, and achieving sales targets.
Before diving into the commission structures, let’s look at some common facts about pharma sales:
- In a territory, a sales rep can be responsible for more than one product or category.
- Sales reps can have category/product-wise targets and overall targets.
- In the U.S., territory sales reps work as individual contributors
- Sales reps have a fixed base salary and a target-based variable compensation (commission/incentives). Base salary is based on the market benchmark, geographical location, employee experience and other influencing factors.
- The commission payout is generally quarterly, whereas the fixed salary is paid monthly.
Types of commission structure for pharmaceutical sales
In general, there can be three types of commission for sales reps in pharma:
Unit-based rates
They get paid a commission for every unit of medicine they sell. For instance, $1 for every unit. This generally works when the reps are selling a specific product at a static price point.
Fixed-revenue-based commission
They get a percentage of revenue upon achieving the target quota. The percentage is fixed. For instance, 10% if you hit your quota.
Tier-based-revenue commission
They get incremental commission percentages on achieving target quotas of different tiers.
For instance, 10% if you hit $10000 and 13% if in-between $10000 to $20000.
You can mix these and create a commission structure. Here’s an instance of a tablet called X that’s their focus product:
Here, it is a unit-based commission rate but also with incremental tiers.
Read: Best practices for incentive compensation for pharma sales reps
Accelerators in pharmaceutical sales
Here are the common accelerators to motivate pharma sales reps:
Win-back
Win-back is a strategy where sales reps can get a commission for the previous quarter if they exceed quota in the current quarter.
You can set up eligibility criteria for win-back. It can be as follows for sales reps:
- Should have met the minimum achievement criteria in the previous quarter to be eligible for win back. For instance, 100% can be the quota target with 10% commission, and 80% can be the eligibility criteria for win back. It means, they will get 0 commission in that quarter for doing 80% but are eligible for a win back in the next quarter. If the sales rep exceeds the quota in the next quarter, they can also get a commission for the previous quarter.
However, the win-back commission rate is generally lower than the actual commission rate (let’s say 6% against 10%).
- Cumulatively, the previous and current quarters should exceed the quota target. If 100% is the target, and if sales reps do 80% in Q1, they have to do 120% in Q2 to cumulatively come to 100% and get a commission for Q1.
Bonus for focus products
Companies choose a few focus products and encourage their sale, particularly for a period. Sales reps who achieve targets for these focus products get a bonus over and above their usual commission.
You can also use it as a tool to encourage consistent performance over a year. For instance, if a sales rep consistently achieves the highest tier or hits a 100% quota target, they can be awarded a bonus at the end of the year.
De-accelerators in pharmaceutical sales for the territory sales reps
Here are the common de-accelerators in pharma commission structures:
Clawback
A clawback is a provision that allows a company to reclaim or "claw back" commission payments made to sales representatives under certain conditions. A company must provide the conditions for clawback in a contract or document to employees for transparency and fairness. The conditions are typically related to the return of products, cancellation of orders, or discovery of non-compliance with company policies or industry regulations.
Read: How to train your pharma sales team?
For instance, the sales rep would have sold 1000 units to a pharmacy in Q1. However, the doctors aren’t recommending it, and the pharmacy is returning the dead stock in Q2. Here, the sales rep would have gotten a commission in Q1 which will be clawed back in Q2.
Shifting to a lower commission rate
When sales reps don't consistently perform, they can be shifted to products with fewer opportunities and low commission rates.
They can also just fall into a lower tier with a lower commission rate under the same condition.
For instance, a sales rep has to achieve 75% of the target to stay in a tier. In this case, a sales rep has to sell 14,500 units in tier 2 to stay in it or goes back to tier 1.
Design your pharmaceutical commission structure
You can now build a commission structure using the above elements for your pharma sales team. It will help you build a compensation strategy that motivates your sales team, rewards high performance, and drives sustainable growth.
We understand the difficulty in managing pharmaceutical commissions with changing territories and frequent clawbacks. You can try out ElevateHQ to automate commission calculation by setting up your plan (however complex) on the software. Talk to one of our sales reps if you are interested.
