Development

Preparing for the FutureNovember 15, 2011

Susan M. Snyder, Hay GroupMarc Wallace, Hay Group

1Agenda12About Hay GroupIncreasing R&D effectivenessSales force compensation3# 2011 Hay Group. All rights reserved2About Hay Group01# 2011 Hay Group. All rights reservedOur areas of expertiseWe help organizations work.# 2011 Hay Group. All rights reserved44Our global presence and capability86Offices in 47 countries2200Employees worldwide7000International clients$450 millionSales# 2011 Hay Group. All rights reserved555Representative life sciences clients

# 2011 Hay Group. All rights reserved6666Powerful HR tools to help your people flourishPutting 60 years of Hay Group expertise at your fingertipsPowerful and intuitive tools available onlineor electronicallyCompetitively pricedCreated specificallyfor HR professionalsand line managersSupport recurring processes across theemployee lifecycle# 2011 Hay Group. All rights reservedAn invitation for you...http://www.haygroup.com/surveys/Best_Companies_2011/2011 BEST COMPANIES FOR LEADERSHIP SURVEY

# 2011 Hay Group. All rights reserved8Increasing R&D effectiveness02Game-changing timesCost to valueGenericsReduced tolerance for riskGreater regulationLonger lead time for product developmentCost pressurePricecontrolPatent expirationDecline in R&D productivity# 2011 Hay Group. All rights reserved10The market share of biotech drugs is continuously increasing

The share of biotech drug sales is expected to reach almost a quarter of total drug consumption by 2014, compared to less than one-tenth in 200020002014E# 2011 Hay Group. All rights reserved11Global Biotechnology EmployeesSource: Ernst & Young Report 2011Global Biotechnology Revenues (USD bn)8% growthNote: Figures pertain to 622 public companiesThe industry appears to have turned the corner, though it has not returned to pre-crisis levels of normalcyAcross the established biotech centers, revenues grew by 8% identical to growth in 2009 after adjusting for the Genentech acquisition, but well below the 12% seen in 2008 or the high double-digit growth rates the industry was able to deliver in many prior yearsGlobal biotech sector is getting to stabilize# 2011 Hay Group. All rights reservedLarge numbers of firms undertook drastic cost-cutting measures to survive. These efforts resulted in a much stronger bottom line, propelling a sector that has bled red ink for most of its history to unprecedented levels of aggregate profitabilityBut while the focus on operating efficiency has its benefits, it has come at a high cost. In an industry where R&D is by far the biggest expenditure, it was inevitable that deep spending cuts would lead companies to slash R&D expendituresR&D expenses, which had plummeted by 21% in 2009, grew by a modest 2% in 2010 a positive development, but far below the investments that biotech companies have historically made in innovation. In 2009, 64% of US companies and 55% of European companies decreased their R&D spend; in 2010, those numbers fell to 49% and 45%, respectivelySource: Ernst & Young Report 2011Global Biotechnology R&D Exp. (USD bn)2% growthGlobal Biotechnology Net Income (USD bn)30% growthNote: Figures pertain to 622 public companiesBiotech is moving towards profitable business model# 2011 Hay Group. All rights reservedR&D productivity is down

New drug approvals of major playersTotal R&D spend (USDbn) of major playersR&D productivity ratio = # 2011 Hay Group. All rights reserved14.while R&D expense is up

# 2011 Hay Group. All rights reserved15

In 2011, we undertook a study to identify causes of R&D underperformance

# 2011 Hay Group. All rights reserved1616Our diagnosisOrganizations arent leveraging the human talent that they haveScientists are motivated in unique ways, and must be led accordinglyMost R&D leaders do not create engaging climates that energize their teamsWhile R&D leaders must demonstrate technical expertise, many have not expanded their leadership portfolio to include providing alignment, feedback, and collaborationMany R&D professionals do not believe that performance is linked to recognition; instead, they think that mediocrity is toleratedInstead of enabling innovation, organizations are inadvertently putting hurdles in place by allowing slow decision-making, risk-aversion, and lack of collaboration

# 2011 Hay Group. All rights reserved17Leading scientists isnt easyScientists enjoy solving problems, need recognition, and tend to be lonersAvoid anything that puts barriers between scientists, regardless of their title or level of expertise Facilitate free flow of information and iterative feedback loops among scientists Create opportunities for collaboration, both formally and informallyProvide rewards in the form of recognition, reputation and respect (including from top management, peers inside and outside the company, and patients)Allow the opportunity to present at conferences and to customers to build their own and the companys reputationClarify and celebrate the link between their work and its practical impact on the business and patients

# 2011 Hay Group. All rights reserved18Measuring engagement: climateClimate indicates how energizing the work environment is for employeesIt accounts for up to 30 percent of the variance in key performance measuresUp to 70 percent of the variance in climate is driven by how leaders behaveFully engaged employees are 2.5 times more likely to exceed performance expectations than their disengaged colleagues

Leadership styles Organizational climateAligned and motivated employeesResults50-70% of variance in organizational climate can be explained by differences in leadership styleUp to 30% of variance in results can be explained by differences in organizational climate# 2011 Hay Group. All rights reservedThe climate gap in R&DHow does it feel to be in R&D in large life science organizations?67% report that their current environment is tolerable (15%) or de-motivating (52%) These results are worse than those reported by other LS functions except ManufacturingResearch is worse off than Development, and when compared to other industries, ranks at the bottom of the list

# 2011 Hay Group. All rights reserved20Digging deeper: organizational climateOrganizational climate drives performanceGood working environments or climates energize and focus people to do their best. Mediocre climates dampen motivation and diminish performanceResearch shows that these aspects of climate have the biggest impact on performance: and of all the things that influence climate, leaders have the biggest influenceFlexibilityResponsibilityStandardsRewardsClarityTeam commitmentNo unnecessary rules, procedures or policies. New ideas are easily acceptedEmployees are given authority to accomplish tasks without constantly checking for approvalChallenging but attainable goals are set for the organization and its employeesGood performance is recognized and rewarded

People know what is expected of them and how they contribute to organization goalsPeople are proud to belong to the organization# 2011 Hay Group. All rights reserved2121

Digging deeper: climateOnly 17% are in High Performance climates and firing on all cylinders16% are in Energizing situations, but they are lacking the Clarity that drives business results15% are getting by in Tolerable climates, but Flexibility (innovation) drops along with Clarity and Team Commitment (collaboration)52% of the sample are disengaged, struggling across all dimensions, and De-Motivated# 2011 Hay Group. All rights reserved22

Comparing two organizations: climate

Company 1Company 2Products approved, 2007 July 2011: 4Products approved, 2007 July 2011: 9More leaders creating positive climate correlates with R&D productivity# 2011 Hay Group. All rights reserved23Leadership styles drive much of climateLeadership strength is defined by flexibilityLeaders who can tailor their behavior, or leadership styles, to a situation create positive climatesThose who do not create negative climatesOur research database, containing assessments on over 550,000 individuals from over 4,900 organizations, shows that the following styles have the biggest impact on climateAchieving immediate complianceCoerciveProviding long term direction and visionCreating harmony and avoiding conflictBuilding commitment and encouraging new ideasAccomplishing tasks to high standardsSupporting long term developmentAuthoritative AffiliativeDemocraticPacesettingCoaching# 2011 Hay Group. All rights reserved24Leadership drives engagement

Leadership differences in R&DOutstanding R&D leaders maintain their technical credibility and go beyond itProvide direction and feedbackEngage their teams in problem-solving and collaboration Leadership Styles in High Performance Climates (feedback from 124 direct reports on 26 leaders) Leadership Styles in De-Motivating Climates (feedback from 453 direct reports on 77 leaders)# 2011 Hay Group. All rights reserved25

Comparing two organizations: styleCompany 1Company 2

Leaders who use a broad range of styles create more positive climate. which correlates with R&D productivityProducts approved, 2007 July 2011: 4Products approved, 2007 July 2011: 9# 2011 Hay Group. All rights reserved26Engagement alone is insufficientWork environments have to turn motivation into productivity Strategic intentBusiness resultsEngagement

Employee effectivenessEnablement

# 2011 Hay Group. All rights reserved2727The business case for engaging and enabling employeesIncrease in employees above performance expectationsReduction in turnover ratesCustomer satisfaction ratesRevenue growthEmployee retentionEmployee performanceCustomer satisfactionFinancial success10%-40%71%x2.5High engagement only50%-54%89%x4.5High engagement +high enablementBased on linkage case studies using Hay Groups global normative database# 2011 Hay Group. All rights reserved28Issue #1

R&D NormLife Science NormLack of feedback and developmentI have a good idea of the possiblecareer paths available to meRate your opportunities for learningand developmentRate your immediate supervisor on providing you with clear and regular feedbackRate your immediate supervisor oncoaching you in your developmentTraining is available on an ongoingbasis so that I can continue mylearning and development Rate your company on providingtraining so that you can do yourpresent job well% Favorable# 2011 Hay Group. All rights reserved29Issue #2

R&D NormLife Science NormLack of focus on and recognition for outstanding performance The better my performance, thebetter my opportunity for careeradvancement The better my performance, thebetter my pay will be Poor performance is usually nottolerated at the company% Favorable# 2011 Hay Group. All rights reserved30Issue #3

R&D NormLife Science NormObstacles to innovation and collaborationEmployees are encouraged to takereasonable risks (e.g., try new ideas or newways of doing things) in an attempt toincrease the effectiveness of the organization Decisions are made without undue delay Rate cooperation among employees where you work or within your locationThis company encourages cooperation andsharing of ideas and resources across thecompany My work group receives high quality supportfrom other units on which we depend% Favorable# 2011 Hay Group. All rights reserved31Things you can do to improve R&DOur prescriptionClarify the definition of outstanding performance for individuals and for the functionDetermine the critical few metrics that align to that definition of excellenceAlign recognition and reward to those metrics, and give clear feedback about them on an ongoing basisBuild leadership capability to broaden beyond technical excellence, with special focus on developing the ability to provide feedback and to coachDifferentiate technical leadership from project / program leadership, and establish / communicate a project leadership career trackDevelop matrix leadership skills in program managementEnable innovationPush decision-making to the lowest capable levelRemove obstacles to collaboration, especially across boundaries

# 2011 Hay Group. All rights reserved32Sales force compensation03# 2011 Hay Group. All rights reservedIm from a drug company ... and Im here to help!# 2011 Hay Group. All rights reserved34Perceived strengthsHay Group Managed Markets SFE research / Pharma Executive article# 2011 Hay Group. All rights reservedFalse confidence Hay Group Managed Markets SFE research / Pharma Executive article# 2011 Hay Group. All rights reservedLimited coverage across thehealthcare ecosystemHay Group Managed Markets SFE research / Pharma Executive article# 2011 Hay Group. All rights reservedNeeded investmentsHay Group Managed Markets SFE research / Pharma Executive articleCritical for B2B partnerships and value creation !!# 2011 Hay Group. All rights reservedApplication: a payers value-selling processIdentify opportunitiesDevelopsolutionTailor value propositionNegotiateand closeIdentify client support teamTrack promised value measuresConduct account reviewsContractrenewal ticklerCall centersupportAnalytic and presentation toolsPricing guardrails and oversightRoles for sales and customer serviceMeasures, reminders and cross sellsIntegratewith CRMBrandProductsServicesPeopleProcessesFinancialsCost and Quality GuaranteesTreatment ComplianceSustain & Grow Mutual Market ShareIntegrated Indications & OffersCollaborative Research# 2011 Hay Group. All rights reserved39$Mutual economic impact of your investmentsDifference(from competitors)High ImpactIrrelevantCredible PartnerHighHighLowLowImportance(to Customers)$Door OpenersWinners$$$Deal Killers# 2011 Hay Group. All rights reservedSo, what can a business-savvy commercial team do to create real customer value?# 2011 Hay Group. All rights reserved41Five actions for creating valueThink difference, importance and economic impactSurprise your customers with opennessMeasure your partnership strengthInvest in leadership, teams and processesCover the healthcare ecosystem# 2011 Hay Group. All rights reserved42Top challengesIn 2011, Hay Group observed that clients focused on:Reflecting rolesReflecting strategyLinking pay to organizational performanceStreamlining plans for simplicity

We did NOT see:Routine updates of the planRedesigning to better reflect incumbent impactThis is reflected in the 2011 results as well.# 2011 Hay Group. All rights reservedExpectations for 2012Based on the 2012 results, we expect that:Sales compensation cost will be under increasing scrutinyTrends in solution selling will temper leverageReviewing strategy and defining the implications for the sales plan will be emphasizedTraditional challenges will be addressed with broader redesign:Goal settingLong sales cyclesTeam sales

2012 will focus on the link between growth and incentives# 2011 Hay Group. All rights reservedRule #1: If you havent defined your sales roles, you cant design sales incentivesFamiliarfriendField RepTrustedadvisorDealmakerTransactionalConsultativeFarmerHunter# 2011 Hay Group. All rights reserved45Conduct your own sales incentive and effectiveness auditAttributeLevel One Questions (Triage)Sales StrategyIs the sales strategy clear, consistent and well understood?ProcessDoes the sales process meet business objectives and create customer value?Roles & CompetenciesAre sales roles, competency models and job definitions comprehensive and actionable?Size & StructureIs the sales force designed for optimal effectiveness and efficiency?MotivationAre sales people motivated by an appropriate mix of incentives and rewards?ManagementIs sales management disciplined and focused on performance?CultureIs the required sales culture defined, cultivated and managed?ImplementationIs seamless integration achieved within sales and across functions?# 2011 Hay Group. All rights reservedIncentive plans and metricsNumber of different sales incentive plansPerformance metricsMost organizations use 1-3 metrics.The number of metrics remained consistent from last year 70% to this year 73%

Most organizations have between 1-4 sales incentive plans which are often differentiated by role# 2011 Hay Group. All rights reserved47Annual eligibility

Plan typeEligibility and plan typeComponentPercent of organizations offering plansSales Representatives90%Accounts Managers73%Channel Managers32%Inside Sales41%1st Line Sales Managers66%ComponentPercent of organizations offering plansBase salary with incentive tied to one or more performance metrics62%Base salary with bonus (e.g. discretionary or profit-sharing)4%Commission-based incentives (regardless of base salary/draw)27%Other8%Eligibility for plans remain high.Chemicals and Insurance/ Financial Services have the highest predominance of Base Salary with incentives than other sectors.Plans for Account Managers and Sales Reps were similar in components.# 2011 Hay Group. All rights reserved48Plan componentsPlan ComponentsPrevalenceMedianValueP75 ValueP25 ValueIndividual Performance75%100%100%60%District Performance8%47%100%33%Region Performance8%50%80%20%Subsidiary Performance3%60%100%20%Division Performance18%45%80%20%Corporate Performance17%25%33%15%Team Performance16%32%85%20%Other10%84%100%48%We saw a slight dip in Individual prevalence from 82% to 75% though most organizations still make that a majority of their plan.Other remains low in prevalence but has a high value in the plan assigned to it.The splits between the organization level have more to do with the specific industry.# 2011 Hay Group. All rights reserved49TTC philosophy and recent payoutsTTC Pay Philosophy for Sales RepsBelow P40P40-P50P50-P60P60-P75Above P750%5%76%17%2%Recent fiscal year incentives

P50 ValueP75 ValueP25 ValueAverageBelow Threshold5%12%0%11%Threshold to target40%69%14%42%Target to 1.5x target30%55%15%35%Outstanding and above5%16%0%12%Most organizations target above market performance for sales reps.The distribution of incentives paid was fairly normal for this past year.

# 2011 Hay Group. All rights reservedCommon Goal-Setting ChallengesCommon goal-setting challenges:High demand volatilityLong selling cyclesCyclingVariance across channels (heavy lifting)# 2011 Hay Group. All rights reservedHere are some common challgnes in goal-setting.

These are the only ones.

Refer to audience feedback.

Any others?

Have you dealt with this? If so, how?51High demand volatilityMany organizations and industries struggle with exceedingly high volatility of demand. This can frequently make it a challenge to set quality goals.Common approachPositivesNegativesRankingRemoves goal-setting entirely from the processDilutes the link between pay and performanceStrategic objectivesAllows for some common senseCommon sense is not always that commonRolling averageFocuses more on the rational trendPay will lag sustained performance for good and bad# 2011 Hay Group. All rights reserved52Long selling cyclesIf the time from initiation to close is longer than the performance period of the incentive plan, it is challenging to define a goal.Common approachPositivesNegativesMilestonesAllows recognition of sales activitiesPotentially pays for activities, not end results.Corporate ComponentMany long selling cycles have significant non-selling activities.Measuring at a higher level reflects overall successAssumes that the role is less selling and more marketing managementIt is important to consider: The frequency of opportunitiesWhere the incumbent has the most impact on the sales# 2011 Hay Group. All rights reserved53CyclingCycling occurs when a good performance sets up bad performance and vice-versa.Common approachPositivesNegativesRolling averageSmoothes varianceMay allow for some coastingIndividual goalsEnforces ownership mentality in the territory or channelRequires increased planning and sales administration.Different measuresFocus on area where there is more impactPotential challenge for perceived plan equity.# 2011 Hay Group. All rights reserved54Variance across channelsChannels are so different that some reps have a windfall, others have an unachievable target.Common approachPositivesNegativesCritical success factorsAllows for flexibility within a strategic framework.Additional administrationDifferentiated measuresBest matches heavy liftingNeed to identify other measures.# 2011 Hay Group. All rights reserved55Contact informationSusan M. Snyder, Hay GroupSenior Principal and US Director, Leadership & Talent in Life SciencesPhone: (914) 659 - 7781 Susan.Snyder@haygroup.com

Marc Wallace, Hay GroupVice President and US Director, Sales Force CompensationPhone: (312) 228 - 1816Marc.Wallace@haygroup.com# 2011 Hay Group. All rights reserved5656Thank you!

Susan M. Snyder, Hay GroupSenior Principal & US Director, Life Sciences Leadership & Talent Phone: (914) 659 - 7781 Susan.Snyder@haygroup.com

Marc Wallace, Hay GroupVice President & US Director, Sales Force CompensationPhone: (312) 228 - 1816Marc.Wallace@haygroup.com

# 2011 Hay Group. All rights reserved57