This white paper looks at a simple but important research question – why do pharma companies have incentive compensation (IC) plans that cap their at-risk sales rep compensation? This paper provides reasons why such caps are not justified on both theoretical and empirical grounds, notes counterarguments to those who argue for IC caps, and offers two typical case studies that reveal both negative financial and behavioral effects of having caps on IC plans. The adverse effects from these case studies affirm expectations from theoretical modeling and prior empirical evidence.
Yet, despite a wealth of theoretical analysis and practical empirical evidence on sales rep compensation that says IC plans should not have caps, a significant proportion of pharma companies have just that. The likely #1 reason is budget control, and that can often stem from uncertainty around demand forecasting and its connection to sales force goals and payouts. Companies need a partner who is an expert in connecting these dots for them, and appropriately utilizing the IC budget to get the most out of the sales force. Uncapped IC plans are an important part of this, as is expertise in setting goals and understanding the relationship between goals, IC pay curves, and budget.
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