Incentive Compensation - Making or Breaking Your Success Dick Rylander President BioPharmaceutical Strategies LLC

Session Objectives To get you to ask questions and Think Out-Of-The-Box Understand why you want/need an IC plan Use IC as a tool to drive success Determining who to incentivize and why Developing an IC planning process Reviewing a case example

What is an Incentive? Main Entry: in·cen·tive Pronunciation: in-'sen-tiv Function: noun Etymology: Middle English, from Late Latin incentivum, from neuter of incentivus stimulating, from Latin, setting the tune, from incentus, past participle of incinere to set the tune, from in- + canere to sing -- more at CHANT : something that incites or has a tendency to incite to determination or action synonym see MOTIVECHANTMOTIVE

What does Motivate mean? Main Entry: mo·tive Pronunciation: 'mO-tiv, 2 is also mO-'tEv Function: noun Etymology: Middle English, from Middle French motif, from motif, adjective, moving, from Medieval Latin motivus, from Latin motus, past participle of movEre to move 1 : something (as a need or desire) that causes a person to act 2 : a recurrent phrase or figure that is developed through the course of a musical composition 3 : MOTIF - mo·tive·less /-l&s/ adjective - mo·tive·less·ly adverb - mo·ti·vic /mO-'tE-vik/ adjective synonyms MOTIVE, IMPULSE, INCENTIVE, INDUCEMENT, SPUR, GOAD mean a stimulus to action. MOTIVE implies an emotion or desire operating on the will and causing it to act. IMPULSE suggests a driving power arising from personal temperament or constitution. INCENTIVE applies to an external influence (as an expected reward) inciting to action. INDUCEMENT suggests a motive prompted by the deliberate enticements or allurements of another. SPUR applies to a motive that stimulates the faculties or increases energy or ardor. GOAD suggests a motive that keeps one going against one's will or desire.MOTIFMOTIVEIMPULSEINCENTIVEINDUCEMENTSPURGOAD MOTIVE IMPULSE INCENTIVE INDUCEMENT SPUR GOAD

5 Key factors The decisions you make about: –Why to incent –What to incent on –Who to incent –How to incent –When to Incent Will make or break your success & goals

Questions… Thinking through a plan –Why do you have a plan? –How do incentives motivate (or not)? –What are you seeking to achieve? –Will having an incentive plan motivate your people to do more? –Which positions/jobs should be incentivized? How does each of the positions impact the success parameters? –What should the components of an IC plan be? –What should you pay on? –Who impacts results? –Individual or group and why? –Are the incentives supporting the company goals

Why have an IC Plan? Because everyone else does We need to because the marketplace requires us to (to be competitive) Everyone expects it Its a motivational tool Its a way to reduce salaries It rewards only if we are successful

Have an IC plan because… It helps you achieve your goals & objectives It produces activities or behaviors that would not otherwise occur (assuming that those are the efforts that will be productive) It rewards those who actually are key to producing the results It produces an ROI that meets your need

IC Plans are a tool to meet goals Pay incentives to help assure you will meet your company goals Determine what activities and behaviors you need to assure goal achievement –Define those activities/behaviors for each position If your incentive plan doesnt get people to do what you need done, the way you need it done and when you need it done you hurt success and even run the risk of damaging performance

What to incent on? Sales? Meeting goals? Special projects? Activities? What can you measure and report on? How does each differently impact results?

Who to incent ? Most companies focus on field sales –Is that the best way to go? Do some non-field people have a major impact on success? –Who and why? Should all positions receive the same plan, payout rates, etc.? What is success? (Meeting goals?)

How should you incent? Do you use cash? Prizes? Plaques, trophies and certificates? An ongoing traveling award Contests? Stock options or grants? What level? –National? –Regional? –District? –Group? –Individual? –Combination?

When should you pay? Spot (finding people doing things right)? Monthly, quarterly, bi-annual, annual? Are the payout timeframes the same for all positions? How often do you need to pay to keep a good line-of-sight and motivate ongoing efforts?

Designing an IC process Create a cross functional team that will: a)Represent all groups who impact results b)Gather information c)Act as a conduit for two way communication and feedback d)Will evaluate the various options e)Communicate with the organization to show the effort and reinforce the results

Establish objectives timelines Establish what the team is to do –Determine who should be incentivized and why Assign a team leader to coordinate and produce summary reports following each meeting to be sent to all members Define the start/completion timeframe Create specific meeting dates with actions for each meeting Be prepared to organize the team members into either individual assignments or create sub- teams with specific responsibilities

Define the questions to answer What should the plan accomplish? What is the optimal outcome? What kind of ROI are you looking for? How will you measure success of the plan? Does the plan support company goals? Do department or group goals align? Which positions should be incentivized? Is a plan only for field sales or should it include other parts of the organization and if so who and why? How frequently should incentive be paid and why? Should an IC plan be cash only or include prizes, trips, etc.?

Assessing positions After you define which positions you want to consider for an IC plan create a template for the team members to use to organize their thoughts:

Template

Example of results of the process Goals: Develop a plan that ties each positions ability to impact results to their incentive compensation Align efforts of all positions to assure maximum effectiveness, cooperation and results

Example (contd) Territory Managers Assumptions: 1.TMs target earnings are $xx,xxx/yr = $x,xxx/qtr 2.Quarterly payouts 3 parts: Enrollments with an *objective by region/district Each TM shares equally (ex: 95% =.95) Quarterly sales target for the region Minimum of 85% to activate up to 100% Annual over 100% the rate is 2x for the +% TMs in **tiered groups (like assignments) Performance (shipments) as a % of the average for tier

Example (contd) Discussion Focus on enrollments because thats what they can most impact Tie enrollments to sales by requiring sales performance minimums as a qualifier Add an individual component by tiering like territories to encourage individual effort in conjunction with the team If annual sales (by region with nation meeting the plan) exceed the plan then their earnings are multiplied at a 2x rate. –Ex: NE region = 105% of their sales objective then their earnings are settled at 110%

RSM Assumptions: Annual target earnings are $xx,xxx = $x,xxx/qtr 80% of their time is Product 1 and 20% is Product 2 Impact is their assignment + define TMs (Super Territory) Payments made quarterly Performance (for Product 1) is based on a Super Territory which is comprised of their assignment + defined impact TMs 2 components –S.T. enrollment goal –S.T. sales objective

BD Recommendations Assumptions Annual IC = $XXk = $xx,xxx/qtr Quarterly payouts would improve effort/effectiveness Top 3 areas they can impact: Contribution 1.Enrollments 2.DCs 3.Sales Hiring/training/developing/retaining people Coaching

Example (contd) This process was repeated for each position in the field organization Ultimately this lead to plans for reps, managers, MSLs, NAMs, trainers, marketing and select non-field personnel

Non-Cash Incentives Contests Annual National Contest TMs (x); RSMs(x); NAM (x); MSL (x); BD (x) Recognizes and rewards based on IC factors Regional level contest(s) April – September & October – March Crosses years to continue efforts beyond fiscal Recognizes and rewards activities and behaviors that lead to success (not IC factors)

Special Recognition Programs Purpose: To offer a non-cash method of recognizing colleagues across the organization for efforts and are results Method: A points program where colleagues accumulate points to be used to purchase merchandise through an on-line catalog

Summary Cross functional involvement and buy-in is essential Defined, specific and measurable goals and action steps are critical A well thought out and coordinated IC plan will drive results A poorly or half baked plan will demotivate and damage results You MUST have a well thought out, tested, measurable and reported plan with sufficient frequency to keep a high visibility If you cant commit to doing it right dont do it at all Where are you at and where should you be ?