Aside from spending thousands on mileage reimbursement, large pharmaceutical employers are among the few to still offer company cars.
As if margin pressure wasn’t enough, new regulatory and competitive challenges are adding more stress to pharmaceutical business leaders’ workloads.
Patent cliffs continue to threaten pharma revenue, amounting to a more than $14 billion reduction in brand spending after patent expirations in 2015. Considerable price increases on devices such as Mylan’s EpiPen and within treatment categories like TNF inhibitors and biopharmaceuticals have brought tremendous backlash against the medical community, calling for efforts to rein in manufacturing prices.
Now more than ever, organizations need to explore innovative ways to protect margins. While not always the obvious answer, a company’s business vehicle program presents an opportunity to control a facet of runaway costs.
Pushing Back on Traditional Approaches to Business Vehicles
The pharmaceutical sector is heavily reliant on networks of sales representatives to travel by vehicle from hospital to hospital and beyond.
Today, sales workers at Fortune 500 pharmaceutical companies drive an average of 1,300 miles and are reimbursed $630 per month, according to Runzheimer — which is 20 percent above the average monthly reimbursement for a Fortune 500 employer. Business vehicle reimbursements are a significant ongoing cost for pharmaceutical companies. The good news is that this cost is controllable.
Aside from spending thousands on mileage reimbursement, large pharmaceutical employers are among the few to still offer company cars as a way to strengthen the benefits package.
Business vehicle fleets can be a realistic choice to entice sales talent, albeit a risky one. Employers have to prepare to take on liability costs from fleet vehicle accidents with exposure 24 hours a day, 7 days a week and manufacturer risks like model recalls can result in disruptive and pricey repairs or replacements.
The traditional allure of a company car as a benefit is diminishing for reasons beyond risk exposure. Seventy-one percent of HR managers say Millennials, a group taking over the workforce with a set of new professional expectations, are less likely to ask for an employer-provided vehicle than Gen X and Baby Boomers, forcing companies to rethink fleet programs altogether.
How to Better Manage Vehicle Programs
Driving needs vary by organization, which should be reflected in the business vehicle program created. A customized reimbursement program can eliminate wasteful administrative expenses and can support profitability. To choose the optimal program, finance, sales, and operations leaders must first decide which route to pursue: Company cars or a reimbursement plan.
Corporate fleets offer a bit of control, ensuring that the vehicles out on the road are on-brand. Organizations that want to keep managing fleet vehicles can still save money by evaluating personal use charges.
Using mileage capture tools, employers can more precisely quantify the cost of personal versus business use. However, since fleet vehicle leases and ownership agreements are in the company’s name, such programs subject organizations to risk all day, every day.
To skirt excess vehicle liability and to give employees greater choice in the type of vehicle driven, companies can opt for a reimbursement program instead. There are three widely used approaches:
- Flat Allowance: For organizations looking for the simplest option, a flat allowance may be a fit. Employees who drive personal vehicles receive a flat fee, all typically receiving the same amount, to cover vehicle-related expenses like gas, insurance, taxes and repairs. Allowances are part of compensation and treated as taxable income. While allowance programs are easy to implement, companies must recognize that certain drivers will be over-compensated and others under-reimbursed, a consequence of an inflexible rate that doesn’t account for the variation in a driver’s vehicle costs by region or mileage driven. Allowances are also subject to payroll taxes, making them an inefficient form of reimbursement and causing many employers to inflate the amount paid to offset tax withholdings.
- Cents-per-mile (CPM) reimbursement: This commonly used program reimburses drivers based directly on the IRS Safe Harbor rate (set at 53.5 cents for 2017) or a custom rate dictated by the company. A CPM approach caters to drivers who log less than 5,000 work miles per year, falling within the IRS’ definition of “business driving.”
Companies running CPM programs can cut reimbursement costs by 10 to 30 percent and ensure accuracy by adopting solutions that automate mileage logs — which in turn alleviates manual administrative work for employees. IRS rules require drivers to document each trip’s start and end points, and reason for travel, all activities that can be automated. With this data, operations leaders can also learn more about their team’s driving patterns, better manage sales territories and find areas to save more in the future.
- Fixed and variable rate (FAVR): Pharmaceutical companies with drivers spread across different regions and logging over 5,000 miles each year need a professional reimbursement approach to maintain fairness and accuracy. With FAVR plans, employers select vehicle models as a starting point to base the program around. Drivers with personal vehicles that align with these base requirements qualify to receive a monthly fixed payment to compensate for insurance, taxes and depreciation, in addition to a variable amount to cover gas and other maintenance costs. All costs are calibrated to the employee’s actual location and driving territory. FAVR plans come tax-free and grant employees the freedom to choose their own vehicle, within certain parameters. This approach, along with mileage log automation, lessens the risk of incorrectly reimbursing employees — making it possible for employers to save as much as $3,000 per driver.
Choosing a vehicle program, or combination of programs, depends on an organization’s unique needs and can be an ongoing effort. And while pharmaceutical leaders continue to combat challenges like patent cliffs and regulatory changes, they can rule out stress and exert control over one facet of excessive spending by updating their vehicle policies and selecting a range of options that include implementing mileage log automation and/or rethinking how programs are structured.
Thoughtful change can result in significant risk reduction and profit improvement at a time when pharmaceutical companies need it most.
(Runzheimer provides a variety of business vehicle programs, relocation information services, business expense options, mobile workforce software, and mobile workforce solutions.)