ZS Interview: To Help Keep Top Performers, Medical Products Companies Turn to Incentive Compensation Plans

Chad Albrecht

In the medical products industry, an incentive compensation program can help increase sales, keep a company’s best salespeople in the fold and direct the sales force toward proper behaviors, such as holding the line on price.

ZS’s recently released Incentive Practices Research (IPR) annual study shows leading incentive compensation practices in medical products, and how market conditions are changing incentive compensation. For instance, because sales force retention is important for medical device companies, even in a downturn, some organizations have lowered the percentage to quota at which sales people can double their incentive compensation, according to Chad Albrecht, a Principal at ZS Associates, who helped lead the IPR survey.

Albrecht spoke about survey results in the context of medical device companies, and how market conditions and the economy are affecting incentive compensation—and why it will continue to change in the foreseeable future.

Voluntary turnover in medical products sales forces was 10%, compared to 7.5% in 2010, while involuntary turnover fell. What does this mean?

CHAD ALBRECHT: It has a lot to do with the economy. When it went into a downturn at the end of 2008 and early 2009, companies—medical products companies included—were much more aggressive than usual in pruning the bottom performers from their sales force. They focused on retaining their top performers and had to cut costs aggressively, causing a spike in involuntary turnover.

But that kind of cost cutting can only go so far. Medical products companies don’t have as many low performers left to cut. Companies are trying to increase sales growth aggressively, which leads to higher sales quotas that can cause better sales performers to start looking for new employers.

The IPR also notes the duration for new hire incentives has declined since 2009. How does that reconcile with more voluntary turnover?

CHAD: I think the two things are definitely related. Because of cuts, you have a surplus of experienced salespeople in the market, and the new hire plan isn’t as relevant. For instance, someone who is experienced in the cardiovascular market already knows the nuances of the products and the market involved. By and large, they understand what they’re doing already and don’t need a long ramp-up or extended new hire incentive plans. Improving productivity could also be a factor in pushing newly hired salespeople to get up to speed quicker.

Quota-based bonuses remain popular—nearly 90% of account managers have them. Why is that?

CHAD: It’s a continuation of a trend. Industries that have been progressive in managing sales compensation are more likely to have quota-based incentives. Medical products, and a lot of other industries, used to have plans heavy on straight commissions. But commission-based plans can make driving growth difficult, whereas a quota plan clearly captures management expectations and growth in expectations.

Also, because companies want to incorporate potential in quotas, it’s important to mention weighted index goals. Companies are using more weighted index goals, and it supports the notion that medical products companies have become more sophisticated in the way they approach sales compensation. Ten, 15 years ago, you saw quotas in which everybody’s sales had to grow the same amount— everybody had to grow 8%, for instance, to reach quota. Now, if I’m an established salesperson, I might think, Wow, I already have 60% market share, and I’m clawing to hold on to every account that I have, and I’m supposed to grow 8%?

It’s a sign they want to find out the potential in the territory as opposed to applying a blanket number, which tends to be unfair to territories with lower opportunity, because they are higher-share territories or territories with limited managed-care access.

Was there anything particularly telling about quota levels?

CHAD: Medical products companies in general lowered the percentage to quota that salespeople needed to double incentive pay. I think that’s a reflection of difficult goals and forecasts the sales force has had in the past, and concern about high performers making sufficient money so they don’t want to leave.

Incentive compensation managers are handed an unreachable goal in many cases, and they can’t control that. But they can control how they structure the payout curve. There are things they can do to make sure an unreasonable forecast doesn’t cause their best performers to leave.

The cost of turnover in medical products sales is particularly high. How does that affect incentive compensation?

CHAD: It can take a long time to build up the needed expertise to be an effective salesperson in medical products, so there’s a tipping point in how difficult you make quotas, and how low incentive pay can fall. If there’s a double-dip recession, companies can probably continue to stretch goals, but if there’s a recovery, companies would be unwise to pay 80% of the sales force below market range due to high quotas, and risk losing sales talent.

Plan comprehension and complexity, as well as communicating the plan to the field, were rising concerns. Why was that?

CHAD: Plans are often too complex, which causes field confusion and limits the motivational value of the plan. When a plan is too complex, it’s usually because there are too many cooks in the incentive compensation “kitchen” who add individual components to the plan without thinking of them holistically.

Weighted index goals may be fairer, but might not seem so on the surface. If you say “quotas are going to be weighted to represent opportunity,” explaining fairness is harder than simply saying “you have to reach $1 million in sales to make quota.” The sales force will ultimately understand that weighted index goals might be more fair, but it takes additional work to help them see that.

Long-term incentives as a reward vehicle rose in popularity. What’s behind the increase?

CHAD: As I said earlier, the cost of turnover for medical device salespeople can be prohibitive because it’s hard to replace accumulated knowledge, not to mention clients. Long-term incentives keep your top salespeople motivated, and give them a reason to stay with you for the long haul.

Do you see the state of the economy reflected in the IPR survey?

CHAD: Yes, I do. About three-fourths of medical products companies incorporated price considerations into their incentive plan. And of those companies, 78% said that they used revenues as a metric in incentive compensation.

My hypothesis for this high percentage is price pressure—if you start discounting, your payout is going to become a lot lower. There’s a lot of price pressure in all industries, and companies are using margin or average sales price as a metric to make sure they get their sales force not to cut price. What else do you see reflected in the IPR survey?

CHAD: What I see is that companies are making sure that their incentive compensation ensures solid retention with their best performers—but they’re not exclusively focusing on that top 20%. Because if you lose the middle 60%, you’re also in trouble. They aren’t as concerned with the bottom 20%, obviously, but they need to make sure unrealistic forecasts aren’t driving out a high percentage of their sales forces.

That companies paid a low percentage of total incentive compensation budget, like only 94% of budget for territory or account managers, may show that companies need to readjust their forecasts to help retention.

About the Expert: Chad Albrecht

Chad has worked with clients in numerous industries, including medical products, to create and implement motivational sales incentive plans, set fair and challenging sales goals, and help implement incentive administration plans.