SOX and it’s equivalents (EFPIA code) require companies to establish, document and adhere to internal financial controls and proactively report on any gaps. The primary objective of compliance is to increase financial transparency and accountability by assigning responsibility to executive leadership and board members.
One of the major concerns that we have heard in our recent discussions with many pharmaceutical companies is around managing the risk of being non-compliant to process and financial audits. The Sarbanes-Oxley Act (SOX) in the US requires companies to establish and adhere to internal financial controls resulting in improved accuracy of financial reporting. The equivalent in Europe is the EFPIA code which states that qualifying Transfers of Value (ToV) are recorded and reported upon from 2016 in respect of transactions made in 2015. SOX and it’s equivalents also require companies to document these internal controls and proactively report on any gaps. The primary objective of compliance is to increase financial transparency and accountability by assigning responsibility to executive leadership and board members. Despite many challenges, pharma companies still largely follow the sales representative based selling model resulting in cost of sales (primarily due to FTE and incentive compensation costs) being one of the most important line items during both data collection and reporting. This also requires a significant amount of planning and effort being dedicated to ongoing IC process monitoring, audit reviews, and reporting these costs. When you consider that the majority of “transfer of value” takes place at the sales representative to healthcare professional (HCP) interface, it is key to ensure the integrity of all associated financial processes for compliance and audit purposes. Specific messaging is required during the plan design communication to the salesforce, and the organization needs to ensure that these elements are also a part of sales alignment and crediting processes for them to have an impact on the final sales incentive calculation. This specific 2-step process can result in ethical and transparent messaging, and improve the overall motivation and quality of the interface between sales representative and the healthcare professional.
For IC program management, a large number of pharmaceutical companies still use excel spreadsheets or home-grown script based solutions. These solutions are generally preferred because of existing analysts’ familiarity with these applications and perception of control without giving enough consideration to data collection, data quality and compliance requirements. These processes are generally prone to significant non-compliance risks due to lack of audit control, inability to control access to key components and versioning complexities. As a result such systems can expose an organization to financial and IT process non-compliance resulting in fines/penalties etc. Various studies have shown that more than 85% of spreadsheets contain errors which results in significant errors in the output. In case of Incentive Compensation, errors can either result in overpayment or underpayment of incentives. Overpayment of incentives generally go unreported while underpayments are reported using various field dispute reporting mechanisms. In addition to financial loss, they also result in creating an environment where plan participants distrust the set processes and spend significant time in self-tracking or shadow accounting.
There are specific features which are desired in any incentive compensation management solution to mitigate compliance risks in addition to controlling budget by accurate calculations and avoiding overpayments.
All the above features will help pharma companies to address key aspects of relevant compliance guidelines and will allow them to develop an approach to control any payment leakages because of processing errors. This broader discipline will also help the company in building the overall environment of trust with their customers, peers and investors as well as the salesforce. This will result in the salesforce spending more time on high value commercial activities rather than tracking financial metrics inconsistently and exposing the organisation to compliance risks.
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