Mylan Sold Its Soul – Will Your Sales Team?
November 03, 2016
In the past weeks, Mylan made big news for raising prices by over 500% for the EpiPen, an antihistamine auto-injector used in the case of life-threatening allergic reactions. This aggressive pricing strategy was scrutinized before Congress, with news constantly unfolding about profit margins and anti-competitive practices.
At the center of this drama stands this unnerving fact: Mylan CEO Heather Bresch’s annual salary last year was reported at $18 million.
Having designed and managed pharma incentive compensation plans for many Big Pharma and medical device companies, I am not all too surprised at this extreme situation. Don’t act like you’re surprised either—this isn’t the first time we’ve seen this kind of price gouging strategy in recent years. Just last year, in 2015, CEO Martin Shkreli of Turing Pharmaceuticals was under fire for buying the drug Daraprim from Impax Laboratories and raising the price from $13.50 per pill to $750 – a 5000% increase, making treatment for the rare disease toxoplasmosis unsustainable for patients.
There is understandable public outrage over this aggressive pricing. However, this high profile case also brings to light the question: what caused this to happen? And how are the seeds of this behavior planted in any organization, even those furthest removed from Big Pharma? From executive compensation and incentive strategies to the legislative framework, we will dissect this case to address the fact that this is not just a problem plaguing Big Pharma, but any entity that drives people within the organization to a goal through incentive compensation.
Mylan’s Executive Compensation Structure – The Incentive Plan that Started It All
Let’s start with CEO Heather Bresch’s eight-figure salary. Is this just a story of greed? Yes and no.
According to the Wall Street Journal, Mylan announced in 2014 that it would reward 100 employees and executives for not only hitting but exceeding aggressive profit targets, which meant that the company’s top five executives could earn as much as $82 million. In the ensuing years, between 2014 and 2016, the price of Mylan’s EpiPen more than doubled, and the portfolio of Mylan drugs saw price hikes that ranged from a conservative 20% to 100% on seven of the company’s other products.
What is the correlation here? People are going to do what the incentive structure encourages them to do, and Mylan presented an incentive plan with a door wide open for executives to make the decisions that would benefit them most, whatever the cost. Specifically, for Mylan, the perfect storm was created by a variety of contributing factors. For starters, niche drugs like EpiPen have virtually no competitors because of the way they cornered the market. The compensation commission committee for Mylan then set up the incentives, but the plan was set up for shareholder value – either to sell more or raise the price. It was an easy decision to do a bottom line hit and raise the price, right away increasing profit. Shocking? Yes. Illegal? No. Legislation to fight this? Not yet.
In the scope of this article, we won’t be able to cover what kind of regulations and anti-competition laws are necessary to prevent this from continuing to happen in this industry, but this is a clear illustration of the principles driving this behavior.
Not Just Mylan – Take a Look In the Mirror
You may read this and consider just another conscienceless executive, proving that absolute power corrupts absolutely or that money is the root of all evil. However, don’t be so quick to stand at a distance from this scenario. The principle demonstrated in this high profile case is that incentives undoubtedly drive behavior. This applies to all companies, as all companies have sales teams that are driven by incentives to fuel the bottom line – and this is not a bad thing. It just needs to be used productively, wisely, and in the context of a well-designed incentive compensation plan that is not so easy to game.
Considering the Mylan case, there must be a trickle-down from C-level to sales. Executives are in it to win it, so they turn around and set sales plans with incentives to maneuver the company direction in a certain way. Whatever the specifics, the goal is to get salespeople to sell EpiPens at any cost, despite the huge price increase. In this case, aggressive behavior begets aggressive behavior.
However, Mylan has cornered the market with EpiPen, so their sales tactics may look different from the scenario most companies face. In fact, most industries face the opposite problem and need to write incentive compensation plans that account for strong competition. From my own experience writing compensation for Big Pharma companies, I can attest to the fact that all sales teams in these companies know what all their competitors are doing, because all data in the industry is heavily regulatedSo what do sales compensation teams do in this industry? Write incentive compensation plans that fight to the death, with aggressive SPIFs and incentive strategies. The problem with this, though, is that salespeople will hold a portfolio of products that incentive compensation plans are supposed to incentivize in a proportionate way. However, consider a salesperson’s perspective: with a limited number of hours in a day, the main question is: “What products will make the most money for me?” If milking 10% of the portfolio of products is easier or more foolproof, salespeople will game the plan. Sound familiar?
With the power of incentive compensation in mind, examine your own organization’s sales strategy: what is the current incentive structure encouraging sales reps to do? As they try to attain the highest level of benefit for themselves, is there a way for them to game the system? Is this going to drive behavior that aligns with overall business goals, in a way that keeps the company’s integrity intact? Do you have the tools to be able to answer these questions?
So what next – what are the implications?
For the Mylan case, there will be scrutiny on laws and best practices, and we will see how that unfolds, whether in compensation caps or controlled increases in price of product, increased regulations, or restrictions for price gouging. However, Big Pharma is the fourth largest lobbying group in DC, so the political battle will not be an easy one. Take note that after Mylan acquired EpiPen, the company ramped up lobbying efforts from $270,000 to $1.2 million.
As you consider how incentive structures shape and drive behavior in an organization, examine the practices in your own company and consider the best practices to maintain a sense of integrity and honest productivity. If visibility into your sales team’s incentive compensation structure is poor (or non-existent), it’s critical to take steps to consider the technology available that will allow you to gain the insight you need, whether for commission structures or the auditability of your data, before it is too late. OpenSymmetry’s vendor guide provides a comparison of the sales performance management tools currently available in the market that may be helpful to consider while evaluating your incentive compensation structure. What happened to Mylan may have been a perfect storm, but with the proper planning and evaluation, you can prevent your sales team from selling its soul – at least, because of a poorly-designed incentive structure.