Cost Control a Priority for Pharmaceutical and Biotech Companies in Down Economy

- New study from ZS Associates shows companies focused on operational efficiency and increased oversight of their sales incentive compensation programs -

EVANSTON, Ill. - July 23, 2009 - Faced with financial pressures related to the economic downturn and continued patent expirations, companies in the pharmaceutical and biotech industries are adopting new sales models and adapting their sales incentive compensation programs to account for these changes.

According to the 2009 Incentive Practices Research (IPR) Study by global management consulting firm ZS Associates, the economic downturn alone has led a significant number of companies (39 percent) to take action. While 29 percent of these companies reduced increases to their sales force's base salaries and either decreased or eliminated short-term supplemental incentive programs, several others chose to closely review annual increases to their target sales incentives. Only 18 percent of these companies lowered their sales quotas to account for the economy.

"Pharmaceutical and biotech companies today face the challenge of keeping costs down without sapping sales force motivation," said Chad Albrecht, associate principal with ZS Associates' Incentive Compensation Practice and the lead on the 2009 IPR Study. "That's exceedingly difficult at a time when company forecasts continue to be aggressive, payouts are uncertain and nearly every salesperson thinks their quotas are too high. While setting accurate quotas must be a priority, shorter performance periods will help companies deal with the uncertainty of the current sales environment and allow them to assess and correct quotas at shorter intervals."

Quota-Setting Remains Top Concern

Despite the fact that many reps think their quotas are too high, companies say they are focused on ensuring fairness. For the second consecutive year, quota-setting fairness is the top concern for pharmaceutical and biotechnology companies, according to the IPR Study. With many factors influencing local market potential for pharmaceutical products - such as payer policies, competition and the local demographics - quota setting is an inherently difficult process, according to Stephen Redden, principal and leader of ZS' Incentive Compensation Practice.

Though quota-based bonuses are still the most common compensation structure, relative-based, or ranking, bonuses, remain a popular way to
control costs. Among pharmaceutical companies with sales forces of 400 representatives or more, 61 percent of companies surveyed use quota-based plans and 51 percent use ranking plans.

"Pharmaceutical companies are looking for ways to control payouts, and ranking plans allow them to control their incentive compensation budgets," Redden said. "Still, companies should be wary of relying too heavily on ranking plans. These plans don't account for variances in earning opportunity between territories and can often create damaging competition between representatives. An alternative approach that can help companies control costs while ensuring equal opportunity is to use quota-based plans indexed to national performance."

Governance Structures Ensure Compliance

The increased focus on cost combined with promotional compliance and financial reporting regulations have led pharmaceutical and biotech companies to make a more concerted effort to monitor their sales incentive compensation plans.

According to the 2009 IPR Study, 93 percent of companies surveyed have a group that oversees their incentive compensation practices. For 71 percent of these companies, a cross-functional team made up of individuals from across the organization, watches over the plan.  Seventeen percent use a team of dedicated incentive compensation professionals.

"Pharmaceutical companies have always been concerned with incentive compensation plan accuracy, and some form of governance has always
existed, but companies are adopting more structured oversight today in response to recent regulations and a renewed emphasis on cost control," Redden said. "An effective governance structure helps companies ensure that incentive payouts are financially responsible and that incentive compensation plan designs meet business needs with efficiency while keeping administrative costs under control."

As the most comprehensive survey of incentive practices available today, ZS Associates' 2009 IPR Study for the pharmaceutical and biotechnology industries includes participants from 44 U.S.-based companies, representing 127 sales teams. ZS produced separate reports for the medical products and devices and high-tech industries.

For a copy of the executive summary of the 2009 IPR Study for the
pharmaceutical and biotechnology industries, please e-mail
[email protected]


About ZS Associates

ZS Associates is a global management consulting firm specializing in sales and
marketing consulting, capability building and outsourcing. Founded in 1983 by
Andris A. Zoltners and Prabhakant Sinha, professors at Northwestern
University's Kellogg School of Management, the firm today is comprised of
four affiliated legal entities with more than 1,100 professionals in 18 offices
around the world. It has assisted more than 700 clients in 70 countries.

As the largest global consulting firm focused on sales and marketing, ZS
Associates has experience across a broad range of industries, including
pharmaceuticals, biotechnology, medical products and services, financial
services, transportation and high-tech.  ZS consultants combine deep
expertise in sales and marketing with rigorous, fact-based analysis to help
business leaders develop and implement effective sales and marketing
strategies.

For more information on ZS Associates, call +1 847.492.3602 or visit
www.zsassociates.com.

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