Why a fixed and variable rate car reimbursement plan can help even small or start-up companies contain cost and retain talent in the highly competitive pharmaceutical sector.
(Editor’s Note: The following is an edited and shortened version of an article prepared exclusively for Pharmaceutical Processing.)
For both Big Pharma companies and pharma startups, having high performers on the sales team is a key step on the road to success. But this also means every company is courting the top dogs, and it’s important to be able to stand out from the crowd to attract and retain top sales talent.
A traditional method pharmaceutical and medical device companies have used to attract star employees is by offering company cars — but that isn’t always the right approach.
With a fleet, organizations are exposed to risk 24/7, thus incurring additional liability and expenses. The business is on the hook for all accidents that occur during business hours — and even outside them: An employee might get into a fender-bender on Saturday at soccer practice, but wait until Monday morning to report it, so the company can foot the bill.
Additionally, if a manufacturer issues a recall, it’s entirely on the company to handle the repairs or replacements. And it can be tough to manage a fleet program for a mobile sales team that might be constantly fluctuating.
A company may think it needs a salesforce of 150 to sell a certain new drug or device, but after a year, realizes 75 people can get the same results, leaving it stuck with dozens of extra cars that are depreciating by the minute and taking up space.
Smaller or start-up companies may not even have the means to implement any kind of fleet program, as that involves shelling out a massive amount of money upfront for vehicle purchases — even before the extra liability expenses that are par for the course with a fleet.
Instead of resorting to a company fleet, pharma and medical device companies can take advantage of another kind of vehicle program: A fixed and variable rate reimbursement (FAVR).
‘Best of Breed’ Program
Especially for pharmaceutical companies with employees dispersed across different regions driving 5,000 or more miles per year, FAVR programs offer some of the fairest, most accurate, and defensible vehicle payments. The program is widely considered a “best of breed” program that blends the fixed costs of operating a vehicle with geographically specific variable expenses (such as fuel) to produce highly accurate reimbursements.
FAVR programs can be custom-built to suit an individual company. Companies start by choosing a vehicle model (s) and setting insurance requirements that fit their organization’s objectives.
Employees receive a fixed sum designed to cover insurance, taxes, depreciation, and registration, allowing a company to pay an employee more net dollars than a company with a fleet program.
This also reduces the employees’ tax burden. In contrast to flat allowances, FAVR is a tax-advantaged program, ensuring employees are reimbursed for mileage tax-free. Employees are granted a variable cents-per-mile (CPM) reimbursement scaled to the price of gas locally, which accounts for the cost of fuel, maintenance, oil, tires, and other incidental expenses.
The employee also has the opportunity to keep any money in a given month that he or she doesn’t put toward fuel, a car payment or insurance; the FAVR money is theirs whether they use it all or not.
Reimbursements are fairer than under an allowance, too. Organizations with a large geographic footprint particularly reap the benefits of FAVR, since universal mileage reimbursements (whether through an allowance or CPM) tend to exacerbate cost of living differences, but FAVR offers more precise reimbursement in general, whether someone is driving to another time zone or just to another city.
Lower Costs, Increased Productivity
FAVR avoids the capital drain associated with fleet programs, freeing organizations from buying and maintaining company vehicles, and mitigating the risk of over- or under-reimbursing an employee.
This offers the same benefits as an allowance plan, but at a 30 to 40 percent lower expense ratio; many businesses can save $2,000 to $3,000 per participant.
Additionally, companies benefit from the same reduced tax burden as their employees because of the tax-free reimbursement, giving a company the opportunity to do more with less.
In an allowance program, if the company decides to allocate a specific amount to an employee, that amount is taxed, so the employee only receives a percentage.
Having a company fleet program means having one or more staff members to run it, adding to overall costs in both dollars and time. For a startup or smaller company, this may mean having someone run the program in addition to their normal responsibilities, which makes for less productive employees.
Because FAVR is an IRS-approved program and not a new idea, it can be easily outsourced to experienced third parties who know the ins and outs of FAVR compliance and reimbursement, allowing the pharma or medical device company to spend more time on commercialization.
Both big companies and startups that are considering a vehicle program should consult a business vehicle solution provider to develop a program that meets their specific requirements and strategic objectives. __________________________________________________________________
About the Authors
Arthur Tsakonas is a business development consultant for Runzheimer International. Jacob Ernest is general manager, West Coast, for Runzheimer International.
