Transcript - IMS Health

The pharmaceutical 

industry is very 

conservative and best 

described as slow 

followers so they don’t 

adapt to change very 

quickly. 

Transcript 

Modernizing Incentive Compensation Plans 

Thought Leader: Stephen M. Fox, Global Practice Leader, Sales Performance Center 

of Excellence, IMS Management Consulting 

Recording Date: 3/16/2010 

In this episode, I meet with Stephen Fox, Global Practice Leader, Sales Performance 

Center of Excellence at IMS Management Consulting. We talk about incentive 

compensation plans in the pharmaceutical industry – why the incumbent plans 

aren’t working and how new solutions have emerged that improved the accuracy 

and efficiency of plans. Stephen was featured in the January 2010 issue of 

PharmaVOICE in an article on incentive compensation plans. 

I’m Dan Limbach, your host and producer of the PharmaVOICE Webcast Network. 

Dan: Welcome to the podcast program, Steve. 

Stephen: It’s great being with you today, Dan. 

Dan: Steve, you’ve worked on all three sides of the pharmaceutical industry, 

including pharmaceutical companies, consultants, and vendors. What’s your unique 

perspective on incentive compensation? 

Stephen: Well, that’s a very interesting question because people who work within 

the pharmaceutical companies really only see their own incentive compensation 

plans and they don’t have insights into how other companies operate. From 

interacting with a large number of companies, I have found that since most 

companies use the same consulting firm to advise them on their IC plan design, 

most companies – though not all of them, I mean some are innovators out there – 

but most companies tend to have similar or identical IC plans and what’s even more 

surprising is that some of these IC plan design concepts are about 10 years out of 

date. 

Dan: Well, that sounds like cause for concern. Why do you think their IC plans are 

so antiquated and can you give us some examples? 

1

The incentive plan was 

based on total sales 

volume, so there was a 

complete disconnect 

between the marketing 

strategy and the sales 

incentives. 

Transcript (continued) 


Stephen: Well, in my opinion, the pharmaceutical industry is very conservative and 

best described as slow followers so they don’t adapt to change very quickly. 

Companies tend to continue to use the same approaches they’ve used for many 

years, especially when they are under the misconception that the consulting firms 

they’re using are supposed to be the experts. Let me give an example. 

The marketing strategy for one company’s product was to initiate therapy on 10 mg 

of the drug and if that didn’t control the disease, then the patient should be titrated 

to 20 mg. However, the incentive plan was based on total sales volume, so there 

was a complete disconnect between the marketing strategy and the sales 

incentives. A better approach would have been to design the IC plan so that the 

representatives were incentivized on the percentage of new to brand prescriptions 

that went to the company’s 10 mg dosage, and then to have a second incentive 

based on the percent of patients on 10 mg, that were switched to 20 mg versus a 

switch to a competitor product. That way, the representatives would have been 

incentivized exactly inline with the sales and marketing strategy, rather than merely 

on total sales volume for the product. 

Dan: Well, these sound like some new and innovative ideas for incentive 

compensation. I’d like to go a little deeper. Can you explain what’s behind this 

shift? 

Stephen: Absolutely. I think there are three things that are driving this. First of all, 

there are new data sources that give us access to measures and metrics that were 

previously unavailable. I actually presented at the PMSA last year in 2009 on 

Innovative Uses of Patient Level Data for Incentive Compensation. This new data 

source is opening up a whole range of new approaches for incentive compensation. 

Let me give an example. 

A company found that for one of their products, if patients received three 

prescription refills, then there was an 80% chance that the patient will be on the 

drug for 12 months. So instead of setting quotas based on total sales or total script 

volume, we use patient level data to design an incentive program based on the 

percentage of patients on initial therapy that then went on to receive three refills. 

This approach aligned the tactical implementation with corporate strategy. 

2

The second industry phenomena 

that is changing incentive plans 

are the new commercial models 

that are being rolled out across 

industry. 



Now this type of incentive plan would never been done previously with NRx or TRx 

data, but it’s now possible using the new patient level data sources. 

The second industry phenomena that is changing incentive plans are the new 

commercial models that are being rolled out across industry. This is creating new 

job functions, new roles and responsibilities and new client interactions. As a 

result, we now need incentive programs to motivate and reward these people in 

these new positions. It can’t be the same old sales based volume approach. 

Companies are defining new key performance indicators and this is driving the 

creation of new performance metrics. And with new data sets and new 

performance metrics, we can no longer use the same old software to manage our 

incentive programs. 

So the third change that’s happening is that companies are starting to reevaluate 

their incentive compensation software and they’re replacing their old IC applications 

with next generation applications, but we can talk about that in more detail later on. 

Dan: Certainly, but I’ll make sure we come back to the software issue. Can you 

describe additional ways that incentive compensation plans can be improved? 

Stephen: Yes, let me give you a few more examples. One company asked us to 

evaluate why high performing territories were high performing and why low 

performing territories were low performing. From our analysis, it became very 

apparent that high performing territories tended to be in geographies that were less 

controlled by managed-care companies and low-performing territories tended to be 

more disadvantaged by managed care restrictions. The company who wasn’t taking 

managed care influence into consideration when they were setting their sales 

objectives. So territories with equal sales and equal potential got the same sales 

quota, irrespective of the managed care access. So, when setting quotas, it’s 

important to factor in the influence of managed care, but few companies actually do 

that. 

3

It may seem logical that 

territories with equal sales 

and equal potential get the 

same sales quota, but if a 

territory is trending up, then 

it will easily exceed quota 

while if another territory is 

trending down, it will never 

reach quota. 



Recently, a company was evaluating their IC plan design and when we looked at 

their design, we found that territories that had high sales growth were over 

performing while territories with low sales trends were under performing and the 

reason was that their plan design was based on historic sales and didn’t take into 

consideration the sales trend. It may seem logical that territories with equal sales 

and equal potential get the same sales quota, but if a territory is trending up, then it 

will easily exceed quota while if another territory is trending down, it will never 

reach quota. 

As a result, the company is now investigating using trend-based quota methodology. 

Now, this approach is more complicated because it involves creating statistical 

trending models for each individual territory, which requires new statistical 

software, new skills, and much more time to develop plans and it leads us to the age 

old question: do you want simple IC plans or do you want IC plans that are fairer? 

Another example is a problem that many companies are facing. How do you create 

incentive programs for products that have multiple indications or have on-label and 

off-label usage? Using patient level data, one client was able to distinguish 

between on-label and off-label prescribing because if the product was prescribed 

concomitantly with the drug from a specific therapy class, this would indicate the 

drug was being used on-label. If it was prescribed as monotherapy or co- 

prescribed with different therapeutic products, then it’s off-label use. This helped 

them to quantify on-label and off-label usage so they can now design incentive 

plans that only reward representatives for on-label product usage. 

Another approach to this type of analysis involves the use of medical claims data. A 

profile or persona can be created that defines patients where the product’s usage is 

for the one specific disease or diagnosis rather than alternative diagnosis. This 

persona is then overlaid onto the patient level data and each patient in the database 

is assigned a percentage probability if the product prescribed matches the required 

diagnosis, then a cut off of maybe 75 or 80 percent probability is used to aggregate 

the data assigned to the required diagnosis. This can then be used to create 

differential incentive plans for products with multiple indications. Now these kinds 

of examples can only be done using the newly available patient level data. 

4

The strategic advantage 

comes from the 

functionality available and 

how the company uses a 

software. 



Dan: I love the real world examples. Steve, earlier in our talk, you mentioned 

incentive compensation software. What can you tell us about developments in this 

area? 

Stephen: First of all, let’s start by asking a couple of rhetorical questions. If you 

wanted a spreadsheet application or an email package or word processing 

program, would you ask a consulting firm to custom develop that for you? Well, of 

course not. You’d buy it from Microsoft, which is a software company and what 

about an EOP application, would you custom develop that? Well, again the answer 

is no, you’d buy a CP. 

So why should incentive compensation software be any different? Maintaining 

customs software, whether you do it internally within your own organization or 

whether you get a consulting firm to do it for you, doesn’t give a pharmaceutical 

company any strategic advantage, which is why companies are implementing 

enterprise applications, such as SAP, Documentum for document management, 

Lombardi for business process management, and business intelligent tools by 

Cognos and Business Objects. The strategic advantage comes from the 

functionality available and how the company uses a software. 

Even if the consulting firm can bring an army of offshore resources to custom code 

an incentive compensation application, it’s still inefficient in the long run. A 

software company that provides an enterprise application will continue to bring 

enhancements and new modules that upgrade and extend the IC functionality. If a 

company uses a custom application, then they have to conceive and design all that 

new functionality themselves, which takes months of effort and they also have to 

pay for the extra software development and maintenance. They’re also locked into 

that one consulting firm and they no longer have the opportunity to become vendor 

independent. 

One of the best practices for outsourcing and the reason why companies deploy 

enterprise applications rather than vendor-developed custom software is to ensure 

that the ongoing administration of the application is vendor independent and they 

can then move to other outsourcing companies either for financial or performance 

reasons. As a result, some companies are now replacing their custom in-house 

5

It took us a lot of time and 

money and people to 

maintain the application 

and to reprogram each time 

the IC plans change or the 

sales force structure 

change. 


incentive compensation applications or their consultant-developed incentive 

compensation applications by an enterprise incentive application. 

Now, I’ve personally gone through this twice myself. I worked at one company that 

maintained its own internal IC application. This was very resource incentive. It took 

us a lot of time and money and people to maintain the application and to reprogram 

each time the IC plans change or the sales force structure change. So we brought 

in a consulting firm to deploy their customer application, but that didn’t really help 

us much because their solution didn’t have all the functionality we needed and it 

still took of an army of people to maintain it. 

So the company then switched to an enterprise application and that delivered all the 

functionality that we required with about one-third of the previous support stuff. We 

also had guaranteed upgrade pathways for future enhancements and new modules, 

which were developed and deployed directly by the software company and then 

made available to all the clients. 

Dan: That sounds good. What are some other benefits to an enterprise solution? 

Stephen: Enterprise IC applications are much easier to maintain. The IC plans are 

considered rather than programs. Gartner published an article suggesting that 

there’s somewhere between 3 percent and 8 percent overpayment of bonuses, 

which can be mitigated by deploying an enterprise incentive comp application. 

Dan: Microsoft Office is relatively inexpensive. Can’t companies just use Excel to 

track sales and calculate commissions? 


Stephen: Price Waterhouse Coopers reported that 90 percent of all financial 

spreadsheets have errors, yet many smaller pharma companies still use Excel to 

manage their IC plans. We worked on a project to document the business 

processes for a pharma company that was using 11 integrated spreadsheets to 

manage their IC plans. When we looked at their spreadsheets, we found formulaic 

errors resulting in overpayments of about 10 percent of the bonus payments. 

6

The other trend on 

technology side is the 

movement to software to 

service or on-demand 

applications. 



Another pharma company with an in-house developed IC application using very 

complex incentive comp business rules and very complicated software structures 

were unable to forecast their future bonus payments. At the end of the year, they 

found they were 20 percent over budget, which was very embarrassing because 

they didn’t know that until they calculated their bonus payments, which didn’t 

happen until March the following year. So can you imagine the conversation in 

March between the VP of sales operations going back to the president of the 

company saying hey, remember my sales force bonus budget from last year? Well, 

we’re now three months since the following year and we’ve just found out we’re 20 

percent over budget for last year. 

Dan: So what’s keeping companies from switching and doing it the right way, 

especially if it’s cost effective? 

Stephen: Unfortunately, people don’t want to own up to those types of errors, which 

makes it more difficult to cost justify deployment of new software. 

Dan: So given these challenges, where do you see the market heading? 

Stephen: The other trend on technology side is the movement to software to 

service or on-demand applications. Again, there’s no strategic advantages to 

pharmaceutical company buying then installing and maintaining hardware or 

licensing software, implementing it, managing all the version control, doing backup 

and restore, database tuning, disaster recovery, all of the other administrative tasks 

it takes to support an IC application. So companies are moving to purchase on 

demand where the entire application is delivered as a service. That is, the software, 

hardware, infrastructure, together with all the ongoing IT support, maintenance and 

version upgrades are all provided by the software company on a per user fee basis. 

The two classic examples of this kind are Salesforce.com, which are providing sales 

force automation software as a service, and Callidus, which is providing incentive 

compensation software on demand. 

Dan: Well thanks for all those outstanding examples, that’s great stuff. So how 

would you summarize the changes that are occurring in the incentive compensation 

arena within the pharmaceutical industry? 

7

In summary, incentive 

compensation is really 

becoming much more 

efficient and more effective. 



Stephen: I think companies are starting to recognize that there are ways of 

improving their legacy, incentive compensation plan designs to reduce bias and to 

make plans fairer. New data sources are driving sales, marketing, and sales 

operations people to reevaluate the measures and metrics they use for incentive 

compensation. So their incentive programs are better aligned with their product 

strategy. 

The deployment of new commercial models is creating a whole new set of 

incentive compensation objectives, and companies are turning to on-demand 

enterprise incentive compensation software to accommodate all these changes 

and to enable deployment faster and cheaper than consult and build applications 

with the added benefit of eliminating a lot of non-strategic IT activities. 

In summary, incentive compensation is really becoming much more efficient and 

more effective. 

Dan: Well that sounds like great news for everyone involved. Steve, I’d like to 

thank you for sharing your thought leadership and expertise with us today. 

Stephen: It’s been a pleasure talking with you. 

And that does it for this episode. For more information on incentive compensation 

plans, visit www.IMSHealth.com, and don’t forget to check out our other podcasts 

at PharmaVOICE.com/podcasts. 

Until next time, I’m Dan Limbach. 

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About This Company 


Operating in more than 100 countries, IMS Health is the worldís leading provider of 

market intelligence to the pharmaceutical and healthcare industries. With $2.2 

billion in 2009 revenue and more than 50 years of industry experience, IMS offers 

leading-edge market intelligence products and services that are integral to clientsí 

day-to-day operations, including product and portfolio management capabilities; 

commercial effectiveness innovations; managed care and consumer health 

offerings; and consulting and services solutions that improve productivity and the 

delivery of quality healthcare worldwide. Additional information is available at 

http://www.imshealth.com. 

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Transcript - IMS Health

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