As a manager of a pharmaceutical sales team, you know how vital your reps are to meeting your organization’s quarterly and annual goals and generating revenue.
According to this November 2022 article in Pharmaceutical Commerce’s trade publication, up to 94% of all purchases in pharmaceuticals industry-wide are made by healthcare distributors and their sales reps.
Because the pharmaceutical industry relies on in-person sales by distributors, pharmaceutical sales managers have a unique opportunity for savings by updating their company’s vehicle program. In an industry that can often be competitive—even cutthroat—small changes can result in big savings on the margins.
The need for cost-effective solutions: transitioning from company cars to personally-owned-vehicle programs
Pharmaceutical companies maintain some of the largest company fleets across all sectors of the economy. AstraZeneca alone manages 16,000 vehicles, and estimates for pharma company cars in North America range from 100,000 to 150,000 of the total 300,000 number of company-owned vehicles.
In this article, we’ll go over some of the reasons why your company could generate savings by switching to a structured vehicle reimbursement, such as a FAVR program.
Understanding Company Car Fleets
Fleets of company cars once represented prestige in the American sales landscape. In the 20th century, as industrial production took off on the continent, corporations mobilized their massive purchasing power and capital budgets to lease or own entire fleets of vehicles for sales, delivery, and distribution.
Many sales reps working in the industry today still rely on a company-owned car to make their quarterly rep visits.
And with perishable and temperature-sensitive products on board, it makes sense in some instances to rely on a company-owned fleet when delivering medical supplies.
However, in this industry, competition is extreme, and every dollar spent could be redirected toward research and development or marketing instead. Here’s why we think that company fleets are ineffective from a cost standpoint.
The high costs of fleet management
- Vehicle acquisition and depreciation expenses
While bulk volume purchasing power still manages to lower costs for pharmaceutical companies as compared to, say, individual private consumers on the new vehicle market, the fact remains that every vehicle owned by the parent company begins depreciating the moment it drives off the lot.
One article by Braden Pastaleniec for Pharmaceutical Commerce suggests that depreciation can amount to as much as 62% of fixed costs for fleet managers.
Even worse? Fuel costs. Everyone knows how taxing on the wallet a trip to the gas station can feel, but with up to 60% of total fleet operating costs going to fuel in the pharmaceutical sales industry, small differences in regional pricing can add up to hundreds of thousands of dollars per year.
- Maintenance and repairs
In addition to the value of the vehicle depreciation over time, there is also the gradual wear-and-tear of regular use that ensures a portion of the fleet must be inactive for repair and maintenance at all times.
- Insurance premiums
Individual vehicle insurance premiums tend to be lower than premiums for a fleet of vehicles, as insurance companies know that institutional customers can marshal more resources than individuals.
Read more: What Does Commercial Fleet Insurance Cost?
The Drawbacks of Company Car Fleets in the Pharmaceutical Industry
- Increased insurance risk
With fleets of company-owned vehicles, your organization is responsible for any accidents that occur, even when those vehicles are not ‘on the clock.’ Your company may be found liable and required to pay insurance costs for accidents that occur as a result of unsafe driving or negligent behavior even if the employee is found to be at fault, as you are the insurance holder.
FAVR and other Vehicle Reimbursement Programs let your employee’s vehicles be charged at their regular (lower) rates, and your organization is only responsible for accidents and damage incurred while being driven for business purposes.
- Lack of flexibility for employees
A major drawback of fleet vehicles is that they deny your employees flexibility and freedom of choice. The car one drives is as important a component of personal self-expression as clothing is.
The freedom of choice that individual Vehicle Reimbursement Programs offer also allows your employees to choose electric or carbon-constrained vehicles if they so desire. Vehicle Reimbursement Programs let employees bring their personal vehicles to work, meaning they can drive whatever they like as long as it adhered to the company policy.
Furthermore, if your employees must cover a large number of miles in a less-populated area or an area with uneven terrain or roadways, the two-door sedan that is suited for short drives in urban areas may be inappropriate for your drivers’ needs.
If your competitors offer a vehicle allowance or reimbursement program rather than the use of a company car, their job offers may be viewed as more desirable to top-tier sales associates.
The advantages of Vehicle Reimbursement Programs
- Cost savings
First and foremost, the greatest advantage that a structured Vehicle Reimbursement Program offers to pharmaceutical team managers is the raw cost savings. In a field as competitive as pharmaceutical sales, cost control ensures your organization’s long-term ability to meet profit and development goals.
By investing in a Vehicle Reimbursement Program rather than a fleet, fixed costs can decrease as much as 30% in the first year, with more savings to come as the program becomes more tailored to your business’s needs with additional data.
Read more: Fleet Vehicles: What Do They Really Cost?
- Lowered insurance risk and premiums
As mentioned above, using a Vehicle Reimbursement Program removes your company from the round-the-clock insurance liability that company cars do not.
Individual premiums also reward good driving, and your organization can reap those rewards by tapping into a reimbursement program.
- Flexibility and employee satisfaction
A FAVR program allows your employees to choose whatever vehicle they desire (as long as the purchase value remains within the average permitted by the Internal Revenue Service).
Tax-free designated programs like FAVR also lower your drivers’ individual tax burdens, as the compensation payments they receive are not designated as income and not taxed at the end of the fiscal reporting period.
Transitioning from company car fleets to a vehicle-reimbursement program
Any manager knows that employees tend to resist change to their operational procedures, especially when it is perceived as adding additional burden to their duties. It is crucial to ensure that employees are well-educated on Vehicle Reimbursement Programs, and understand how these policies can benefit them as well as their employers.
How can I design a program that meets my employees’ needs?
The latitude that the Internal Revenue Service provides employers ensures that Vehicle Reimbursement Programs can be designed with drivers in mind.
Schedule a meeting to discuss the potential changes and incorporate feedback into the design and management of the program.
Dispelling common myths and misconceptions about Vehicle Reimbursement Programs
Higher costs for employees
While on paper, it can seem as though employees are losing benefits, they are reimbursed for costs appropriate to their living area.
FAVR programs take into account the regional variability of fuel costs, and ensure fair repayment to employees. Previous systems unfairly made the same payments to drivers living in areas where fuel cost is less expensive, potentially causing resentment.
Higher taxes and end-of-year payments
This myth is easiest to dispel, as a majority of the benefits of a Vehicle Reimbursement Program are appreciated at tax time. Because reimbursements are provided via a tax-free structure, your drivers save money each year on their personal income tax payments.
Administrative headaches and complexity
While the Internal Revenue Service does have stringent requirements for logging and tracking expenses and mileage, Cardata Mobile automates this system, and places logs, reimbursement forms and mileage data all in one convenient place.
Your employees will spend less time tracking expenses and routes than before, and be reimbursed more quickly. That’s a win-win scenario for them and you.
While fleets do make sense for some corporations, switching to a Vehicle Reimbursement Program lowers costs for the majority of our customers.
In an industry where thousands and thousands of miles are logged daily and sales reps are so vital to the business, a Vehicle Reimbursement Program offers pharmaceutical companies the following benefits:
- Lower insurance premiums and liability for your organization
- Freedom to choose their own vehicles, additional upgrades, and lower tax burden on your employees
- Greater employee satisfaction and reduced administrative headache
If you want to explore the benefits of switching from a fleet of company cars to a structured tax-free Vehicle Reimbursement Program, schedule a call or with a Cardata expert today.
Disclaimer: Cardata makes every effort to ensure our content is accurate and reliable. However, this article has not been reviewed by a tax professional or lawyer, and should not be considered legal or financial advice.