Medical device companies are known for experiencing explosive growth. Once their product is approved, it’s all about selling. But even a top sales team wouldn’t get far without a vehicle program that gets them to and from meetings. There are three typical business vehicle programs in the industry: car allowance, cents-per-mile rate reimbursement and fixed and variable rate. Of those, one is a clear favorite.
Car allowance programs: Simple but inaccurate
Overwhelmingly, medical device companies choose car allowance programs. They’re simple and easy programs that pay their mobile workers a certain amount every month. If the simplicity wasn’t enough, the predictable costs sweeten the deal. But the car allowance program has two major drawbacks.
The first is uneven distribution. How can that be if every mobile worker is paid the same? Some sales reps drive greater distances within their regions. Do they deserve to be underpaid for the region they’re assigned to? Not to mention, the price of owning and operating a car varies by geographical location. This simple and easy allowance is not the best morale booster and can lead to incomplete territory coverage.
The second drawback is tax waste: Employees lose an average of 30% of a vehicle allowance in tax waste. That’s a hard number to swallow, no matter how great a company you’re working for. Mobile workers aren’t the only ones paying tax waste. The company will shoulder a matching payroll tax expense. That expense will only grow with the company.
Cents-per-mile rate programs: Based on actual mileage but risky
Another popular option is mileage reimbursement or the cents-per-mile (CPM) program. Instead of receiving a fixed amount every month, mobile workers are reimbursed at a cents-per-mile rate for business travel in their personal vehicles. Let’s say sales rep John drives 2,000 miles in a month and the reimbursement rate is 54.5 cents per mile. The company would pay him $1,090 for his business travel.
One major advantage CPM programs have over car allowance programs is IRS compliance. As the program functions based on captured business mileage, mileage records are mandatory. To be IRS compliant, every employee reimbursed per mile for business travel is required to keep a mileage log detailing:
- start and end locations
- time and date
- reason for travel
- total distance
Check those boxes, and there’s no more worrying over an audit. Sounds pretty good, right? Well, CPM isn’t without its issues.
The first of these is under/overspending. When mobile workers drive less than 8,000 miles for business travel, CPM programs generally under-reimburse mobile workers. If they’re driving over 12,000 miles, the cents-per-mile rate generally over reimburses. That might not be an issue at a company’s beginning, but the problem will grow with your company. Will your mobile workers spend 80% of their days on the road? Plan for that possibility now so you don’t have to later.
The second is geography. A small medical device company isn’t likely to have issues with gas prices. However, as the company expands and hires mobile workers located in regions all over the country with wildly different gas prices, the static cents-per-mile rate reimbursement will be too high for some and not enough for others.
The third is compliance. Yes, mileage receipts are a requirement of the CPM program. But having a compliant CPM program is not as easy as it sounds. Many mobile workers fail to keep up-to-date mileage logs. Writing every piece of information down before, during and after the drive takes time away from schedules that are busy with other tasks.
Fixed and Variable Rate (FAVR) programs: Fair and accurate for everyone
Finally, there’s the Fixed and Variable Rate (FAVR) reimbursement program. As the title suggests, this business vehicle program reimburses for fixed costs associated with ownership (insurance, taxes, depreciation registration) and variable costs associated with driving (fuel, maintenance and tires). What separates FAVR from the other options?
First, it’s scalable. This program grows with your company, which is nice for a medical device company at any stage, but especially at its beginning. Whether you have five mobile workers or 500, the FAVR program will make sure they’re reimbursed properly.
Second, it’s fair. Unlike car allowance and cents-per-mile programs, the Fixed and Variable Rate program ensures that mobile workers are reimbursed for the distance they drive and the additional costs of ownership.
Third, it’s non-taxable. As long as the program adheres to compliance standards (mileage receipts with the right information included) it is also tax-free. Additionally, a majority of FAVR programs use mobile apps to automate the process.
Fourth, it’s customizable. Companies can establish FAVR reimbursement rates based on their own specific business travel needs. Reimbursements are always based on vehicle costs specific to the type of car, for example, a small sedan, an SUV or even a pick-up truck. FAVR reimbursements always reflect the exact ownership and operating costs where employees live and drive rather than receiving the same reimbursement everywhere.
We can’t tell you how to sell your product, but we can help you make the right choice when it comes to business vehicle programs. The simplicity of car allowance programs may be of interest in the hectic time frame between starting up and explosive growth. Cents-per-mile reimbursements draw similar appeal. But FAVR is the reimbursement program that will see your company into the future, growing with your successes every step of the way.