Five Incentive Compensation Plan Changes

Driving Performance, Profitability and Innovation

Sales or incentive compensation continues to be one of the primary performance levers within the life sciences industry. However, according to Alexander Group’s Sales Compensation Trends Survey, over 90% of life science firms are dissatisfied with their current sales compensation plans and are actively seeking change. This reflects the challenging 2023 that most life science companies endured.

Organizations are looking to drive more accountability in their plans while incorporating limited management by objectives (MBOs) to ensure longer-term focus. The following five key areas highlight where life science companies are focusing their efforts to drive performance, profitability and innovation via incentive compensation plans.

1. Pay for Performance

Life science firms are shifting towards more aggressive pay mixes (higher pay at risk models) to ensure sellers’ incentives are aligned with business outcomes. 60% base and 40% target incentive pay mix is most common per Alexander Group’s benchmarks. Only 15% of companies have a 50/50 or more aggressive pay mix. Additionally, 3 out of 4 companies either have or are incorporating minimum performance thresholds in plans.

Organizations are also realizing that growth will come from stealing market share – displacing incumbent competitors is challenging, and a few companies are reflecting this effort in their plans. These can range from incentive multipliers for cracking into named accounts or new market segments, or MBOs like multi-threading (i.e., building a network of key relationships within named accounts).

2. Technical Roles

Life science companies are redefining technical roles (Product Specialist, Field Application Scientist, Market Specialist, etc.) to drive revenue. Firstly, these roles are shifting to more aggressive pay mixes. Secondly, companies are adding individual measures into the plan (vs. only team or galactic goals in the past) to motivate technical experts to actively contribute to sales efforts. Finally, organizations are realizing the virtuous cycle of successful adoption that leads to expansion sales with an account.

Post-sales activities often fall outside traditional compensation plans. However, expansion opportunities arise from existing accounts. Life science companies are introducing MBOs to incentivize post-sales efforts. Specific success metrics (e.g., on-time installation), rather than subjective measures (e.g., NPS, customer satisfaction) ensure targeted rewards.

3. Profitability

Companies realize discounting strategies can drive short-term sales but may erode long-term profitability. Two-thirds of life science companies have considered, but not implemented, profitability measures in the primary seller plan—implementation remains a challenge. First-line sales managers play a pivotal role in minimizing discounting. Select life science companies have introduced a profitability measure in manager plans to strike a balance by incentivizing managers to focus on sustainable growth.

4. Linearity Bonus

Private equity (PE)-owned life science companies are embracing linearity bonuses to reflect quarterly emphasis. These bonuses reward consistent performance throughout the year, encouraging sellers to maintain momentum. By linking sales compensation directly to deal progression, organizations ensure a steady revenue stream. Monthly incentive payments can further reinforce this shift, emphasizing consistent performance. While 4 out of 5 companies use annual performance period, select firms are shifting to semi-annual or quarterly plans which drives linearity and offer quota allocation flexibility at the expense of administrative burden.

5. Service Contracts and Warranty Revenue

Service contracts and warranty agreements have always contributed significantly to life science companies’ revenue. Recognizing this, organizations are exploring ways to align compensation with these critical revenue streams, and incenting sales teams to promote service contracts during the instrument sale locks in sustained income. This enables the organization to stay in close touch with lab and researchers to uncover expansion opportunities. Separate measures ensure that sellers are motivated to focus on service contracts during instrument sales negotiations.

Final Thoughts

Life science companies are planning major changes to their incentive compensation plans and are adapting swiftly to changing market dynamics. They realize that success lies in aligning incentives and performance. Companies are focused on driving more performance, profitability and innovation in their incentive compensation plans.