As an extension to our learning and application of Payout Curves, here is last one of the series. We started with learning about fundamentals of payout curve followed by best practices in designing payout curves. With this article we will learn about different type of payout curves that are used widely in the pharma industry, and when to use them.
Different types of incentive plans
There are two basic incentive schemes that define all the different incentive plans — Commission and Bonus.
Commissions are a set percentage of sales generated in the territory paid to sales personnel. The commission rates are determined on the gross margin of the product and how much the company is willing to share the revenue with the sales personnel. If the sales are generated solely from the effort the sales personnel make, the commission is set to a higher rate. If there are other market factors involved, the commission rates may be reduced. Commission plans are preferred if the territories have similar potential and the sales cycle are less than 90 days.
On the other hand, bonus structure generally pays the sales personnel a percentage of sales achievement or specific objective. Bonus plans may also pay a fixed dollar instead of a percentage of incentive target when the sales personnel achieve a predefined milestone. These plans work best when the territories have uneven potential or if the sales cycle is longer than 90 days.
Some firms may also use a mix of bonus and commission plans to iron out the inconsistencies in territory potential and to also motivate the sales personnel to generate higher revenue.
Linear Payout Curves
Linear payout curves pay the salespeople on a linear curve where each percentage achievement corresponds to a specific payout. The payout could be a percentage of the product or portfolio target or may be a specific dollar amount.
The Linear curve can have a constant, progressive, regressive or mixed relationship with the payouts.
A constant linear curve will pay the salespeople on a particular rate regardless of the sales achievement. Although this method prevents undesired sales timing behavior, but it is not motivating enough for the salespeople to strive for sales beyond their objectives.
Progressive curves solve this problem by introducing a higher rate of payouts above target, where the rewards for making sales suddenly jumps if the sales are made above quota. This rewards your top performers and motivates them to achieve greater sales. On the other hand, it also brings its share of challenges of setting the correct quota for each territory, managing sales timing, managing disproportionate effort to boost sales of product where quota is met and preventing windfall sales when forecasts are too conservative.
Regressive curves tend to reduce the rate of payouts once a certain benchmark is achieved. This is the least popular method among salesperson as it hinders their capacity to earn high incentives. Such curves are used mostly when there are serious production/logistic limitations and when the product sales are under forecast.
Mixed linear curves combine the progressive curves and the regressive curves to make the best out of motivating the salespeople to achieve more than their quota and provide protections of cost when the forecasts are uncertain. The challenge for such curves is to administer as it may become complex and to set accurate goals across territories to manage fairness.
Step curves are mostly used in tiered plans where each tier has a different commission rate or bonus amount. Step curves would be beneficial in scenarios where the market is unstable and the forecasts are not accurate, but you want your salespeople to just put some additional efforts to reach the higher tier and earn additional income. Such curves help the company keep a tight control on the costs and they usually set the step ranges where they are sure that the return on the sales would be good.
Step curves are the norm for ranks plans, as each rank or a group of ranks may be paid a certain percentage of target or flat amount as incentives. Following are few examples
When you want to have multiple measure to determine the payout for a product, you can use the matrix curve approach. The sales strategy and the quality/measurability of data may vary across products and channels. In such scenarios, the management may choose to rely on multiple metrics to determine the payout. For example, the management may want to tie the payout to sales achievement as well as sales growth to determine the product payout. On the other hand, the management may want to put qualifiers of a different metric to on the achievement for a salesperson to earn incentives on one product.
Payout matrix can either be additive or synergistic. Two or more metrics may keep adding incentives for a product based on different criteria or may be plotted on a matrix to produce a singular payout.
We will explore them in the below graphs.
With the availability of multiple types of curves and the thousands of permutations and combinations, these curves should be able to cover almost all payout scenarios. A company may choose one or more metric, one or multiple curves or a combination of curve types, to cater to different products and segments. A company should understand its product and the market, the culture of the salesforce and what they want it to be, and the company’s strategic goals, to be able to design an effective payout curve.