Pharma Talent: Paying Sales Force Bonuses within a Fixed Budget

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Read and analyze the case, “Pharma Talent: Paying Sales Force Bonuses within a Fixed Budget.” Submit your answers to the following questions (maximum total length: 2 pages single-spaced):

  1. What is your assessment of the first three incentive plans?
  2. What are the ideal behaviours that will set the stage for PT and Natural Health to both be successful?

S w 9B12A041 Rocky Campana wrote this case under the supervision of Professor Michael Taylor solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; email Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-10-17 Holden Garabedian, a regional business manager for Pharma Talent, was sitting at home mulling over the structure of and problems with his newest sales team in Ontario. Pharma Talent was a contract sales company for pharmaceutical companies across Canada. The company promised its clients that its representatives would drive sales at a lower cost than what the client would incur if it had its own sales force. Garabedian’s main concern was the bonus structure for his representatives. In order to meet the client’s high standards, Pharma Talent had all teams on a pay-for-performance structure. Historically, the company had contracts with products that targeted physicians (e.g., prescription drugs or medical devices). Garabedian, who had joined Pharma Talent in July 2011, was leading the company’s first contract with an over-the-counter (OTC) product. In this contract, representatives called on pharmacies across Ontario. Typically, the pay-for-performance structure was based solely on the sales made by each representative. Unfortunately, Garabedian noticed immediately that this was not in line with how the client wanted to drive business in each pharmacy. Furthermore, due to the structure of the different territories in Ontario, many of Garabedian’s team members thought the bonus was unfair and very discouraging. Garabedian knew he had to fix the bonus structure quickly. He had both the client breathing down his neck as well as his team not working as productively as he would like. He needed to ensure that the bonus structure accomplished three main objectives: 1. That it promoted behaviours that aligned with the client’s objectives for the team and reinforced behaviours that ensured that Pharma Talent was meeting the client’s goals. 2. That the team felt that it was fair and that everyone had an equal opportunity to be the top performer. 3. That the total cost of the sales team was within Pharma Talent’s budget for this particular account. Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. PHARMA TALENT: PAYING SALES FORCE BONUSES WITHIN A FIXED BUDGET Page 2 9B12A041 OVER THE COUNTER PHARMACEUTICAL INDUSTRY The industry was very fragmented, with the top three leaders holding only 30.5 per cent of the market. Johnson and Johnson (Tylenol, Band-Aid, Listerine), GlaxoSmithKlein (Abreva, BreathRight, Tums) and Jamieson Laboratories (vitamins and minerals) were the leaders in the OTC segment. Due to this fragmentation, it was always a challenge for companies to try to get space and differentiate themselves on cluttered pharmacy shelves. OTC products were sold in Canada in any location that had a pharmacy, including big box stores, grocery stores and stand alone pharmacies. Stores such as Wal-Mart, Loblaws, Shoppers Drug Mart and Rexall sold most OTC products in Canada. PHARMA TALENT Pharma Talent started in 2006 after Camdon Arksey (owner and founder) determined there was a need for a company that could provide a contract sales team that drove business for the client. In the past, Arksey had worked for several large pharmaceutical companies, and it was clear to him that the industry was shifting towards contract groups rather than in-house sales teams. He thought that the time had come to develop a company that could meet these companies’ needs. Pharma Talent grew slowly, managing some small accounts across Canada with companies such as Takeda, Bayer, Valente Pharmaceuticals and Paladin Labs. All of these accounts focused on products that were promoted to physicians. Pharma Talent felt that it differentiated itself from other contract sales companies for many reasons. First, it offered a “turnkey” sales force. This meant that Pharma Talent provided recruiting, training, data management and tracking, detailed call data and field management. Detailed call data was a key success factor for the company. Most brokers currently did not provide data from the field or even pictures, which came at an added cost to the client. Second, Pharma Talent was dedicated to the client. Pharma Talent only worked on products mandated by the client unlike other broker teams, who could have up to 40 products, potentially from different companies, per representative. Finally, the company promised an attractive return on investment (ROI) that could be proven through field data. THE CLIENT In 2010, Pharma Talent secured its first client that focused on OTC products, Natural Life. Natural Life had five natural health products that were sold in banners3 such as Costco, Rexall, Loblaws, WalMart, Independent Pharmacies and Shoppers Drug Mart (SDM) across Ontario. Their main product was the bestselling natural health product for colds and flus in Canada. 1 All monetary figures are in Canadian dollars. “OTC Pharmaceuticals in Canada,” MarketLine Industry Profile, February 2012. 3 In this industry, retailers are often referred to as banners. The distinction is made because one retailing company may operate with several store banners. 2 Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. The OTC pharmaceutical industry was comprised of all pharmaceutical products that could be sold without a prescription, including cough and cold remedies, vitamins and minerals, medicated skin products and traditional medicines. In 2010, the Canadian OTC market was valued at $2,728.91 million and was expected to grow by 15 per cent by 2015.2 Page 3 9B12A041 Natural Life was experiencing many problems at store level on which they felt a sales team could have a large impact. First, the company expected each representative to meet with the pharmacist at each pharmacy. Having the pharmacist recommend Natural Life products was very important because nine out of 10 times a consumer would follow through with such a recommendation. Furthermore, the pharmacist was the only one in the store allowed to recommend OTC products. Second, the company wanted the representative to ensure that the products were always on the shelf. In the past, Natural Life experienced large losses due to stock outs.4 The company hoped that representatives would work with the store manager or owner to prevent these stock outs by increasing minimum orders,5 projecting demand and ordering prepacks.6 Finally, Natural Life wanted to increase the amount the product was displayed in each store. Generally, Natural Life paid for the amount of shelf space at each store and wanted sales representatives to ensure that this space had their products in it as well as to use their relationships with the managers to gain more space. Natural Life also paid a significant amount of money for large displays to be set up in the store. Often times, these were not used, and the product was put directly on the shelves. It was very important to Natural Life that representatives worked with the store managers to get these displays up for as long as possible. Natural Life knew it was tough to compete with the large players in the market and ultimately wanted representatives to make personal relationships with each store to ultimately increase distribution,7 in-store marketing and pharmacist recommendations. Natural Life had three in-house account managers at the head office in Toronto, Ontario. These account managers worked directly with the head office of each retailer. These account managers had the responsibility to ensure that each banner purchased enough stock before the cough and cold season to fill their stores shelves from September to March. Natural Life did not want the Pharma Talent representative’s primary objective to be ordering stock but to work with store managers to ensure there was always stock on the shelves and to supplement the stock in the stores by ordering if necessary. THE SALES FORCE In 2010, Pharma Talent started to work with Natural Life in Quebec. The sales team consisted of a regional business manager and five representatives throughout the province. The way representatives interacted with pharmacies in Quebec was significantly different than the rest of the country. It was not uncommon for most of the pharmacies to do all their necessary ordering through a representative, and therefore these representatives were responsible for driving sales. Furthermore, Quebec’s Natural Life division was separate from the head office in Toronto. In 2011, Pharma Talent expanded their sales force to Ontario with one regional business manager and seven representatives. Each representative managed 200 to 300 stores in their assigned territory. These territories included Ottawa-Kingston, Toronto Central, Toronto West (Mississauga, Waterloo, Guelph, etc.), Toronto East (Peterborough, Oshawa, etc.), Niagara-Hamilton and London-Windsor. Sales of 4 Stock outs occurred when the shelf was empty because the product was sold out. A day of not having the product on the shelf in one store during peak season could cost the company thousands of dollars. 5 Minimum orders were the amount of stock left in the system to prompt a reorder. For example, if at a certain SDM the quantity of product dropped below two, the computer would put in an order. 6 Prepacks were a display for the store floor or shelf with a pre-determined amount of product. 7 Distribution refers to the amount of product that is displayed in the store Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. In the past, Natural Life had a broker represent its product, but over time it realized that its major products were not being adequately represented among the 50 other products in that broker’s portfolio. Natural Life wanted a sales force dedicated to its products but not at the cost of an in-house sales force. Page 4 9B12A041 Each representative was mandated to complete a minimum of 120 calls per month or six calls per day. Pharma Talent encouraged representatives to exceed this target and meet with 140 stores per month. Each representative was compensated on a monthly basis. The base salary each month was $2,450, which included a $300 car allowance. Furthermore, the representative was awarded a bonus that ranged from $500 to $1,500 depending on performance each month. Finally, if a representative travelled 50 kilometres away from home, they received 44 cents per kilometre. Each representative was given an iPad to record each call in detail, a Blackberry, product samples and promotional materials. Pharma Talent categorized each store for their representatives. Stores with the highest sales were visited once a month, stores with average sales were visited every other month and low volume stores were visited every three months. Representatives needed to be conscious of the different rules at each banner. Exhibit 1 describes each banner on which the representative called. An average call took between 45 minutes to one hour depending on the size of the store, the type of banner and the volume of product the store sold. A call was generally structured as follows: the representative entered the store and signed in. They would go to each location where the product was supposed to be located and record in the iPad if the product was on the shelf or sold out. If the product was not in its assigned location, the representative would take note of this as well and also looked for any displays that were supposed to be on the store floor. Once this was completed, the representative connected with an available manager to discuss stock outs, sales, incoming orders, displays, products missing in the assigned location, ordering and potential demand. Finally, the representative would wait for an available pharmacist and “detail”8 one of the products. After this conversation, the representative would then record the pharmacist’s name and whether the pharmacist currently recommended the product or not. After the call, the representative added any final notes, recorded what was discussed with the manager and the pharmacist and processed any orders. Pharma Talent always pushed for representatives to go above and beyond at each store in order to impress the client; the company encouraged representatives to send success stories, pictures of in-store displays they may have created and distribution data that the regional business manager could present monthly to Natural Life. It was this type of evidence that set Pharma Talent apart from other contract sales organizations. EVOLUTION OF THE BONUS STRUCTURE Pharma Talent had changed the bonus structure twice over the first three months that the representatives were in the field. Unfortunately, Garabedian was concerned that the client and the representatives were still not content with the current structure. He himself had received complaints from his representatives. The amount of money allocated for the bonus was $7,000 each month. Since the dollar value charged to the client was fixed, so was the bonus. Therefore, each rendition of the bonus was some form of standard distribution. Furthermore, to be considered for a bonus, the representative needed to ensure the minimum amount of calls were filled each month. 8 A detail involved talking to the pharmacist about a specific product’s features and benefits. It also gave the pharmacist time to ask any questions, comment on the product or express concerns. The information from these conversations was invaluable to Natural Life. Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. products in each territory could vary significantly. For example, a SDM in Toronto Central could sell $75,000 dollars per year in product while the top grossing store in Windsor might do only $15,000 in sales per year. Page 5 9B12A041 Bonus Structure #1 This bonus structure had a significant number of problems. First, it focused on dollar sales rather than percentage increase of sales. Therefore, those representatives with higher volume stores had an advantage over other representatives. Second, this did not account for the stores that put orders through on their own system. Therefore, representatives were not given credit for orders they influenced at the store level but that were processed through the store company’s system. Finally, it awarded representatives for almost none of Natural Life’s key goals in stores. Representatives were spending most time in stores in which they could make sales, which were not always Natural Life’s key customers. Table 1: First Bonus Distribution st Representative’s ranking 1 2nd 3rd 4th 5th 6th 7th Dollar Amount ($) 1,500 1,250 1,250 1,000 750 750 500 Bonus Structure #2 Arksey designed this structure with the support from his vice president of sales (VP Sales). Implemented for two months, this bonus structure awarded representatives for two different behaviours. Half of the bonus was still based on the dollar amount of product ordered through the iPad, and the other half awarded representatives for increasing the amount of product locations in the store. For example, if a representative was able to display the product at the pharmacy or in front of the check-out register, the representative was awarded one point. The representative with the most points received the highest bonus. These two factors were awarded individually. Therefore, a representative could be first in sales and fourth in product locations. Table 2 shows the distribution in dollars for this bonus. The problems with this bonus structure were evident. It still did not address the problems with the original bonus. Although it did add another component, representatives found it very unclear and easy to lie about. All they had to do was click the “added” button on the iPad to get credit. It was completely on the honour system. Furthermore, a representative was not credited for added displays on the store floor. They were only credited for increasing the product’s shelf space. Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. Implemented for two weeks, the first bonus structure was modeled after every other team Pharma Talent had, including the Natural Life team in Quebec, and was based completely on sales. Pharma Talent awarded the highest amount to the person who processed the highest dollar amount through their iPad. The standard distribution for this bonus is shown in Table 1. This standard structure was designed by Arksey. Page 6 9B12A041 Table 2: Second Bonus Distribution Sales Ranking Dollar Amount ($) 750 625 625 500 375 375 250 Increasing Shelf Space 1st 2nd 3rd 4th 5th 6th 7th Dollar Amount ($) 750 625 625 500 375 375 250 Bonus Structure #3 The third bonus structure was the first in which Garabedian had input but was still significantly influenced by Arksey and his VP Sales. After a significant amount of pressure from Natural Life, they removed the sales portion of the structure. Natural Life did not want representatives to feel pressured to push sales in the store, hoping instead that the representative would offer customized solutions for each store depending on its needs. If a store had too much stock, the representative would ideally spend just as much time finding ways to market it in that store as if a store had not enough stock, in which case they would spend time ordering in store displayers and product. This bonus structure focused on two main elements. The first was pharmacy calls; Pharma Talent had noticed a decrease in the number of pharmacists on whom representatives were calling. In order to promote pharmacist calls, each representative was given credit for the number of pharmacists who recommended the product and the total number of calls per month. Therefore, if a representative called on 100 pharmacists in that month and 70 recommended the product, the representative would get 170 points. The second element of the bonus structure focused on store calls and product on the shelf. A representative was given a point for each call logged and was also given a point for the store having Natural Life products and displays out in their proper place. This was called a perfect planogram. If a store was out of stock for a product, if a display was not out or if the paid locations did not have the product on shelf, a representative was not awarded a point. Therefore, if a representative visited 130 stores and 100 of them had a perfect planogram, that representative was awarded 230 points. Once again, the two categories were awarded separately, and the person with the highest number of points received the highest dollar bonus. Furthermore, the range of the distribution was decreased. Table 3 shows the values for the third bonus program. Though this bonus system aligned more with Natural Life’s goals, it still did not satisfy the representatives. Most of them felt that it did not award the best performer but was like a lottery: you never really knew who was going to get the highest or the lowest. Furthermore, it was still very easy for representatives to cheat since all the documentation put through the iPad was on the honour system. Finally, it was very unclear how a representative determined if a pharmacist actually recommended a product. Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. 1st 2nd 3rd 4th 5th 6th 7th Page 7 9B12A041 Table 3: Third Bonus Distribution Dollar Amount ($) 700 575 525 500 500 425 275 1st 2nd 3rd 4th 5th 6th 7th Front store ranking Dollar Amount ($) 700 575 525 500 500 425 275 POTENTIAL STRATEGIES Garabedian knew that something needed to be done with the bonus structure. Pharma Talent had never had a team working with an OTC product in pharmacies before, and it was evident there were quite a few growing pains. The bonus was meant to motivate the representatives to perform above and beyond the normal standards. Furthermore, Pharma Talent wanted to constantly impress its client in order to keep its contract. The current bonus structure seemed to match with some of Natural Life’s goals, but it was not working for the representatives. Garabedian felt that the team was racing through their visits to try to make their numbers higher. He also noticed that since this structure had been implemented, more stores than ever before had a perfect planogram. He did not want the representatives to lie about what was going on in the stores because this would ultimately skew the data provided to Natural Life. Natural Life’s account managers used this data to work with each store’s head office. Furthermore, the new structure completely departed from sales, and he wondered if his representatives were even trying to sell products in the stores. Garabedian knew he could modify the current structure or suggest something new to the owner of Pharma Talent. Regardless of what he suggested, he needed to back up how it would benefit both Pharma Talent and Natural Life. Furthermore, he needed to promote what Natural Life wanted to do in the stores. This included pharmacy detailing, ensuring perfect planograms (no stock-out, product/displayers situated where they were indicated for each store), increase distribution (increasing minimum orders, ordering through store systems, ordering displayers, increasing shelf space and locations in-store) and ensuring that expensive in-store displays were making it out on the floor and staying there for as long as possible. Though the possibilities seemed endless, Garabedian had come up with three suggestions. He wondered if any of these, or a mixture of them, would work. Field Assessments One alternative was to conduct assessments during field visits with the sales representatives. Generally either Garabedian or a health care professional from Natural Life visited each territory once a month. Garabedian thought this would be a great time to evaluate each representative’s pharmacy visit. He figured he could give two scores for each visit, one for the pharmacist visit and one for the front store visit. Then, using a similar distribution as the previous structure, the representative who was evaluated the highest would get the highest bonus. The other half of the bonus would still be attached to the data each Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. Pharmacy Ranking 1st 2nd 3rd 4th 5th 6th 7th Page 8 9B12A041 representative entered. Garabedian hypothesized that the best-scored representative should also score highest on the half of their bonus that was based on their self-scoring. The only problem was the logistics of this system. In order for it to work, someone had to visit the representatives every month. Though this was always the goal, it did not always pan out depending on how busy each month was. This was especially the case for London-Windsor and Ottawa. These field visits sometimes fell to the side due to distance. Another alternative was to set goals for each sales representative. Though this would be the hardest to convince Pharma Talent to adopt, Garabedian was passionate about trying to find a system where at least a portion of the bonus was based on individual performance. Ideally, this would create more collaboration between representatives and less hostility, which would translate to better results for Natural Health. Important things such as photos from pharmacies, extra initiatives and sales from displays could be evaluated for the individual bonus. He could also customize the individual goals each month depending on the goals of Natural Health. Regardless of how this system would work, Garabedian wanted to ensure that all the allocated $7,000 was going to the representatives. He wondered what this structure would look like. Special Incentives In November, Natural Health wanted to push representatives by adding “clip strips”9: for each clip strip the representative hung, he or she was given $5 dollars in a gift card of their choice. The representatives had to send picture proof for each clip strip hung and could get up to $200 dollars. This idea went over very well for most of the team, and Natural Life was happy with the amount of additional distribution they foresaw in stores. Garabedian wondered if, on top of the current structure, different contests each month could align with Natural Health’s goals. Hopefully, this would give representatives the opportunity to feel that they were appreciated and gave them the opportunity to enjoy some additional incentives. The biggest problem with this structure was getting Arksey to spend a little more money each month and to get Natural Health on board to give more to their representatives. CONCLUSION Garabedian had only been with Pharma Talent for a few months, but he knew things had to change. He needed to ensure that the bonus system motivated the representatives to meet Natural Life’s objectives. He also needed to make sure it was a fair, easily understood system for all representatives. Finally, it needed to meet the financial constraints set by Pharma Talent’s owner. Could Garabedian make a new system that would better suit the team? Did he need to sit down with Arksey and try to outline a different strategy for the team? After three modifications, should he just leave the bonus alone? He knew anything was possible as long as he persuaded Arksey that it would make the client happy and would meet Pharma Talent’s financial constraints. At this point, the bonus system that was meant to motivate the team seemed to be more discouraging than anything. Garabedian had a meeting with Arksey next week, and he wanted to have a plan of action for his team ready. 9 Clip strips were a way to display product. They hung from the shelf and could hold up to 12 units of product. They promoted impulse buys and new users. Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. Individual Goals Page 9 9B12A041 Exhibit 1 PHARMACIES THAT REPRESENTATIVES CALL ON Percentage of calls Shoppers Drug Mart 50% Approximate volume of sales at an individual store ($) 5,000 – 75,000 Pharmacy expectations - Katz Group (Rexall, Guardian) 20% 1,000 – 50,000 - Loblaw Group 10% 2,500 – 20,000 - Metro Group 10% 1,000 – 10,000 - Walmart 5% 20,000 – 100,000 - Independents 5% 500 – 5,000 - Does not order product from representatives, has their own distribution network Has 5 to 6 pharmacists Displays Natural Life’s full product line in 3 sections of the store Sells the most Natural Life’s products Will order product through representatives Has 2 to 3 pharmacists Displays Natural Life products in one location of the store Will order product through representatives Has 2 to 3 pharmacists Displays Natural Life products in two location of the store Can order product from representatives but is mandated by head office that they do not Has 2 to 3 pharmacists Displays Natural Life products in two locations of the store Can order product from representatives but is mandated by head office that they do not. Has 2 to 3 pharmacists Displays Natural Life products in two location of the store Though a smaller number of stores, sells a significant amount of Natural Life’s products Will order product through representatives Has 1 or 2 pharmacists Displays for Natural Life’s product different in each store Authorized for use only in educational programs at Thompson Rivers University until Nov 08, 2018. Use outside these parameters is a copyright violation. Pharmacy

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