PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation or for the purpose of providing legal advice. This memorandum is not to be distributed beyond the named addressees and Solstice Biomedical's in-house legal team (specifically Declan Harrington, General Counsel & Company Secretary) without the prior written approval of Calderwood & Harkness LLP. Unauthorized disclosure of this memorandum may result in a waiver of the attorney-client privilege and/or work product protection. If you have received this memorandum in error, please notify Calderwood & Harkness LLP immediately and destroy all copies.
MEMORANDUM
FROM: Sean Morrissey, Associate, Healthcare & Life Sciences Practice Group, Calderwood & Harkness LLP
TO: Marcus Reilly, Vice President, US Commercial Operations, Solstice Biomedical Inc. Siobhán Mulcahy, Head of Global Compliance (Interim US Compliance Officer), Solstice Biomedical Devices Ltd.
REVIEWED AND APPROVED BY: Joel Strauss, Partner, Healthcare & Life Sciences Practice Group, Calderwood & Harkness LLP
DATE: July 18, 2024
RE: Compliance Analysis of Proposed US Sales Compensation Plan — Anti-Kickback Statute Employee Safe Harbor and Related Considerations
MATTER NO.: 1037-00003
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I. Executive Summary
The purpose of this memorandum is to analyze the proposed sales compensation structure for Solstice Biomedical Inc.'s United States commercial organization in connection with the planned October 1, 2024 launch of the Pulsar™ CRM System (FDA 510(k) No. K232847, Class II, Product Code MHX). Solstice has engaged Calderwood & Harkness LLP to evaluate the proposed compensation plan against the requirements of the federal Anti-Kickback Statute ("AKS"), 42 U.S.C. § 1320a-7b(b), and to assess whether the plan qualifies for protection under the AKS employee safe harbor, 42 C.F.R. § 1001.952(i), while identifying any compliance risks warranting mitigation.
The compensation plan under review encompasses several components applicable to Solstice Biomedical Inc.'s planned US commercial workforce of fifty-three (53) employees: base salary, variable (incentive) compensation tied to sales quotas, accelerator multipliers applicable to above-quota performance, and management-tier bonus structures. The fifty-three employees consist of forty-two (42) territory managers (field sales representatives), eight (8) regional directors (first-line sales management), three (3) area vice presidents (second-line sales management), and Marcus Reilly as Vice President, US Commercial Operations.
Our overarching conclusion is as follows: The proposed compensation plan is structurally eligible for the AKS employee safe harbor at 42 C.F.R. § 1001.952(i). All fifty-three US commercial employees will be W-2 employees of Solstice Biomedical Inc. with bona fide employment relationships, and all payments under the plan will flow from the employer to its own employees. Accordingly, the plan satisfies the threshold requirements of the safe harbor as a matter of regulatory text.
However, safe harbor eligibility does not insulate the compensation plan from all compliance risk. Certain design features of the proposed plan — particularly the 2.0x accelerator multiplier triggered at 120% of quarterly quota and the ratio of variable-to-total compensation at approximately 42–43% of total at-plan compensation for territory managers — warrant the implementation of affirmative guardrails to mitigate inducement risk and align the plan with the expectations articulated by the Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") and industry best practices reflected in the AdvaMed Code of Ethics.
Specifically, we recommend the following measures, each of which is discussed in detail in Section VII of this memorandum:
1. Compliance-Based Clawback Provisions. The plan should include provisions permitting Solstice Biomedical Inc. to recoup variable compensation (including accelerator earnings) paid during any period in which the employee engaged in material compliance violations.
2. Compliance Scorecard Weighting in Incentive Calculations. A defined percentage of each employee's variable compensation should be contingent on achievement of compliance-related performance metrics, scaled by seniority level (10% for territory managers, 15–20% for regional directors, 20% for area VPs, and 25% for the VP, US Commercial Operations).
3. Guardrails on Accelerator Earnings. Solstice should implement mechanisms to prevent the accelerator from creating excessive financial incentives that could drive non-compliant sales behavior, including automatic compliance audit triggers and compliance record prerequisites for accelerator eligibility.
4. Documentation of Fair Market Value Benchmarking. The compensation benchmarking analysis prepared by Meridian Consulting Group LLC should be preserved as part of the compliance program record and refreshed annually to support the ongoing reasonableness of the plan.
5. Training Requirements. All US commercial employees must complete comprehensive AKS and compliance training prior to the October 1, 2024 launch date, with annual refresher training required as a precondition for continued variable compensation eligibility.
If these recommendations are implemented, the proposed plan will reflect compliance best practices consistent with the OIG's General Compliance Program Guidance (November 2023) and the AdvaMed Code of Ethics on Interactions with U.S. Health Care Professionals (2020 Revision).
II. Background
A. Solstice Biomedical Inc. — US Commercial Launch
Solstice Biomedical Devices Ltd. is an Irish-headquartered medical device company with its principal offices at Unit 14, Clarion Business Park, Sandyford, Dublin D18 X4F2, Ireland. In preparation for its entry into the United States market, Solstice Biomedical Devices Ltd. formed a wholly owned US subsidiary, Solstice Biomedical Inc., which was incorporated in the State of Delaware on January 22, 2024 (Delaware Secretary of State File No. 7924813; Employer Identification Number 93-4718206). Solstice Biomedical Inc. has established its principal US offices at 200 Harborview Drive, Suite 1100, Boston, Massachusetts 02210.
The commercial launch centers on the Pulsar™ CRM System, a subcutaneous implantable cardiac monitor integrated with a proprietary cloud-based remote telemetry platform. The Pulsar™ system is designed for continuous cardiac rhythm monitoring in adult patients with suspected or documented cardiac arrhythmias. The system consists of two primary components: (i) a subcutaneous implantable monitor device, and (ii) a remote telemetry transmitter that wirelessly communicates patient data to the cloud-based platform for physician review.
The Pulsar™ CRM System received FDA 510(k) clearance on February 9, 2024, under 510(k) submission number K232847. The predicate device identified in the submission was the CardioStar™ SC-200 subcutaneous cardiac monitor manufactured by Vantage Medical Technologies Inc. (510(k) No. K201156). The Pulsar™ system is classified as a Class II medical device under Product Code MHX.
Solstice has established the following US pricing for the Pulsar™ system components:
• Implantable cardiac monitor: $4,950 per unit (US list price)
• Remote telemetry transmitter: $1,200 per unit (US list price)
The planned US launch date is October 1, 2024. Solstice's financial projections anticipate US Year-1 revenue of approximately $26 million for the fiscal year ending December 31, 2025. These revenue projections are based on market penetration models developed by Solstice's commercial planning team in conjunction with Meridian Consulting Group LLC.
US distribution of the Pulsar™ system will be handled through an exclusive distribution arrangement with Ascendant Distribution Solutions LLC ("ADS"). The ADS Distribution Agreement was executed on March 15, 2024 (Reference No. SBD-ADS-2024-0315) and provides for an 18% commission on net US sales payable to ADS. Based on the projected $26 million in Year-1 US revenue, the projected Year-1 ADS commission is approximately $4.68 million. The compliance implications of the ADS commission structure are addressed in a separate distributor compliance review memorandum prepared by this firm and are not analyzed in detail herein.
The significance of these commercial and financial details for purposes of this memorandum is that the Pulsar™ CRM System — both the implantable monitor and the associated remote telemetry services — is reimbursable under Medicare Part B (as a durable medical equipment and/or implantable device) and under state Medicaid programs. Accordingly, the AKS is directly implicated by compensation arrangements that relate to the sale or promotion of the Pulsar™ system, including the sales compensation plan under review.
B. US Commercial Organization Structure
Solstice Biomedical Inc. plans to have a total US commercial headcount of fifty-three (53) employees at the time of the October 1, 2024 launch. The organizational structure is as follows:
• Forty-two (42) territory managers serving as field sales representatives responsible for promoting and selling the Pulsar™ CRM System to healthcare providers, hospitals, and electrophysiology practices within defined geographic territories across the United States.
• Eight (8) regional directors serving as first-line sales management, each overseeing approximately five to six territory managers within a designated geographic region.
• Three (3) area vice presidents serving as second-line sales management, each overseeing approximately two to three regional directors and bearing responsibility for sales and compliance performance across a broader geographic area.
• One (1) Vice President, US Commercial Operations — Marcus Reilly, who was hired in March 2024 and is based at the Boston headquarters. Mr. Reilly serves as the senior-most commercial leader for the US market and reports directly to CEO Dr. Ciarán Nolan and COO Fiona Gallagher.
The reporting structure follows a conventional hierarchical model: territory managers report to regional directors, regional directors report to area vice presidents, and area vice presidents report to Marcus Reilly. This structure is relevant to the compensation analysis because it establishes distinct tiers of responsibility and accountability — and, as discussed below, the compliance guardrails recommended in this memorandum are calibrated to reflect the increasing seniority and oversight responsibilities at each tier.
Critically, all fifty-three commercial employees will be W-2 employees of Solstice Biomedical Inc., not independent contractors. Each employee will have an executed employment agreement with Solstice Biomedical Inc., will receive W-2 wages with appropriate tax withholding, and will be eligible for employee benefits. This employment classification is a foundational prerequisite for the applicability of the AKS employee safe harbor, as discussed in detail in Section V below.
C. Scope of This Memorandum
This memorandum is limited to the analysis of the proposed sales compensation structure for W-2 employees of Solstice Biomedical Inc. as it relates to federal AKS compliance and the employee safe harbor at 42 C.F.R. § 1001.952(i). The analysis also addresses related compliance considerations arising under the False Claims Act, OIG guidance, and the AdvaMed Code of Ethics.
Several related but distinct compliance topics are addressed in separate memoranda and deliverables being prepared by Calderwood & Harkness LLP in the course of this engagement:
(i) Distributor Compliance Review Memorandum: Analysis of the ADS Distribution Agreement (Ref. SBD-ADS-2024-0315) commission structure, including the 18% commission on net US sales, under the personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)) and related AKS considerations;
(ii) Physician Consulting and Speaker Program Compliance Memorandum: Analysis of template consulting agreements and speaker program compensation arrangements, including AKS and False Claims Act implications of honoraria, travel reimbursement, and meal payments to healthcare professionals;
(iii) FDA Promotional Compliance Memorandum: Review of proposed promotional materials, detailing practices, and marketing claims for the Pulsar™ CRM System for compliance with FDA advertising and promotion regulations and the prohibition on off-label promotion; and
(iv) 12-State Marketing Compliance Survey: A comprehensive survey of applicable state laws governing pharmaceutical and medical device marketing practices, physician payment disclosure, and related requirements in the twelve states and jurisdictions identified as initial Pulsar™ launch markets (California, Colorado, Connecticut, Louisiana, Maine, Massachusetts, Minnesota, Nevada, New Jersey, Oregon, Vermont, and Washington, D.C.).
While this memorandum focuses primarily on federal AKS compliance, we note interactions with applicable state marketing compliance laws where relevant. A detailed treatment of state-level requirements is contained in the 12-state survey referenced above.
III. Legal Framework
A. Federal Anti-Kickback Statute — Overview
The federal Anti-Kickback Statute, codified at 42 U.S.C. § 1320a-7b(b), establishes a criminal prohibition on the knowing and willful offering, paying, soliciting, or receiving of any remuneration (whether in cash or in kind, directly or indirectly, overtly or covertly) to induce or reward the referral of an individual for the furnishing of, or the ordering, purchasing, leasing, or arranging for the furnishing of, any item or service for which payment may be made in whole or in part under a federal healthcare program, including Medicare and Medicaid.
The statute is broad in its reach and is intended to prevent financial incentives from corrupting medical decision-making. Courts have construed the AKS to apply under the "one purpose" test: even if a compensation arrangement serves multiple legitimate purposes, if one purpose of the remuneration is to induce or reward referrals of items or services reimbursable under federal healthcare programs, the AKS is implicated. See, e.g., United States v. Greber, 760 F.2d 68 (3d Cir. 1985); United States v. McClatchey, 217 F.3d 823 (10th Cir. 2000). This expansive interpretation underscores the importance of designing compensation structures that are carefully calibrated to avoid even the appearance of inducement.
Violations of the AKS carry substantial penalties:
• Criminal penalties: Classification as a federal felony, punishable by up to five (5) years of imprisonment and fines of up to $100,000 per violation.
• Civil monetary penalties: The OIG may impose civil monetary penalties of up to $100,000 per violation, plus treble damages, under the Civil Monetary Penalties Law, 42 U.S.C. § 1320a-7a.
• Exclusion: Mandatory or permissive exclusion from participation in federal healthcare programs under 42 U.S.C. § 1320a-7.
• False Claims Act nexus: A claim submitted to a federal healthcare program that results from a kickback arrangement constitutes a false or fraudulent claim under the False Claims Act, 31 U.S.C. §§ 3729–3733 (as amended by the Affordable Care Act, Section 6402(f), codified at 42 U.S.C. § 1320a-7b(g)). This AKS-FCA nexus substantially increases the financial exposure because the FCA authorizes treble damages, per-claim penalties, and qui tam (whistleblower) actions.
The relevance of the AKS to the Pulsar™ CRM System is direct and unambiguous. Subcutaneous implantable cardiac monitors and associated remote cardiac telemetry services are items and services reimbursable under Medicare Part B and state Medicaid programs. Accordingly, any compensation arrangement that involves the sale or promotion of Pulsar™ devices — including the sales compensation plan under review — must be evaluated for AKS compliance.
B. Employee Safe Harbor — 42 C.F.R. § 1001.952(i)
Recognizing that the AKS is broad enough to potentially encompass ordinary business arrangements, the OIG has promulgated a series of safe harbor regulations at 42 C.F.R. § 1001.952 that define categories of arrangements that will not be treated as violations of the AKS. One of these safe harbors — the employee safe harbor at 42 C.F.R. § 1001.952(i) — is directly applicable to the compensation plan under review.
The employee safe harbor provides, in relevant part, that the AKS shall not apply to:
"any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the furnishing of any item or service for which payment may be made in whole or in part under [a federal healthcare program]."
The safe harbor's key elements are:
(1) Bona fide employment relationship. The individual receiving compensation must be a bona fide employee of the entity making the payment, as established by the common-law test of employment under the Internal Revenue Code (i.e., W-2 employee status, with the employer exercising direction and control over the manner and means of the employee's work).
(2) Payment by the employer to its own employee. The remuneration must flow from the employer to its own employee — not to a third party, not to an independent contractor, and not through an intermediary in a manner that disguises the true nature of the payment.
(3) Employment in the furnishing of covered items or services. The employee must be engaged in employment that involves the furnishing of items or services for which payment may be made under a federal healthcare program.
A critical — and frequently underappreciated — feature of the employee safe harbor is its breadth. Unlike many other AKS safe harbors, which impose detailed requirements regarding the structure, amount, and documentation of payments (e.g., the personal services safe harbor at 42 C.F.R. § 1001.952(d) requires, among other things, that aggregate compensation be set in advance and be consistent with fair market value), the employee safe harbor does not impose caps on compensation levels, restrict the proportion of variable versus fixed pay, or prohibit commission-based or bonus-based incentive structures. The regulatory text is, by its terms, protective of all payments from an employer to its W-2 employee for employment related to federally reimbursable items or services.
This breadth is significant for the analysis of Solstice's proposed plan, because it means that the specific design features under review — including the ~42% variable compensation ratio and the 2.0x accelerator multiplier — do not, as a matter of safe harbor text, disqualify the plan from safe harbor protection.
However, and this is an equally critical point, safe harbor eligibility is not the end of the compliance analysis. As discussed in the following subsection, the OIG has consistently emphasized that the structure and magnitude of employee incentive compensation can create compliance risks warranting careful oversight, even where the safe harbor technically applies. The safe harbor protects the employer-employee compensation arrangement from AKS criminal prosecution; it does not immunize the company from the downstream consequences that may arise if an aggressive compensation structure incentivizes employees to engage in conduct that independently violates the AKS (e.g., offering kickbacks to physicians), the FCA (e.g., promoting off-label uses that result in false Medicare claims), or other applicable law.
C. OIG Guidance on Sales Compensation
The OIG has issued a series of compliance program guidance documents and advisory opinions that, while not carrying the force of law, reflect the government's enforcement posture and expectations regarding sales compensation in the healthcare industry.
OIG General Compliance Program Guidance (November 2023). The OIG's most recent general compliance guidance, issued in November 2023 and applicable across the healthcare industry, emphasizes that effective compliance programs should include robust oversight of sales and marketing compensation practices. The guidance states that companies should implement controls to prevent compensation arrangements from creating "improper incentives to over-utilize items or services, provide medically unnecessary items, or make misleading claims to healthcare providers or patients." The guidance further recommends that compliance officers be given meaningful authority to review and approve compensation plan designs before implementation and to monitor compensation payouts for anomalies that may signal compliance concerns.
OIG Compliance Program Guidance for Pharmaceutical Manufacturers (April 2003). Although directed primarily at pharmaceutical manufacturers, this guidance has been widely adopted as a reference framework by medical device companies and has been cited by the OIG in enforcement actions involving the device industry. The guidance identified several categories of "problematic" compensation arrangements, including:
• Arrangements in which variable compensation constitutes a very high percentage of total pay, thereby creating intense financial pressure on sales representatives to maximize revenue at all costs — including potentially through prohibited conduct such as off-label promotion or inappropriate inducements to prescribers;
• Uncapped commission structures that permit sales representatives to earn compensation substantially above market rates, which the OIG views as potentially indicative of an intent to reward volume irrespective of the compliance quality of the underlying sales activities;
• Accelerator provisions that disproportionately increase compensation for incremental sales above quota, which the OIG has flagged as creating a "hockey stick" incentive effect that may drive aggressive end-of-quarter sales behavior including high-pressure tactics, sample abuse, or inappropriate interactions with healthcare professionals; and
• Sales contests, trips, and other non-monetary incentives tied exclusively to volume metrics, which the OIG views as exacerbating the inducement risks associated with financial incentive structures.
The OIG's overarching concern, articulated across multiple guidance documents, is that compensation structures should incentivize not merely the quantity of sales but also the quality and compliance of sales activities. Structures that create overwhelming financial pressure on field sales personnel — such that compliance considerations become secondary to revenue generation — are viewed by the OIG as fundamentally inconsistent with an effective compliance program, even if they technically qualify for safe harbor protection.
OIG Advisory Opinions and Corporate Integrity Agreements. The OIG's enforcement posture regarding sales compensation is also reflected in the compliance requirements imposed through Corporate Integrity Agreements ("CIAs") entered into by medical device companies in resolution of AKS and FCA enforcement actions. CIAs imposed on companies in the medical device sector have frequently included provisions requiring:
• Compliance-weighted compensation, with a specified percentage of variable pay tied to compliance metrics;
• Clawback provisions permitting recoupment of incentive compensation in cases of compliance violations;
• Caps on variable compensation or, alternatively, enhanced compliance monitoring of high earners; and
• Annual review of compensation plans by the compliance function and an independent review organization.
While CIAs are not generally applicable law, they provide a practical benchmark for the compliance features that the government considers appropriate for sales compensation in the medical device industry.
D. AdvaMed Code of Ethics (2020 Revision)
The Advanced Medical Technology Association ("AdvaMed") Code of Ethics on Interactions with U.S. Health Care Professionals (2020 Revision) establishes a voluntary code of conduct for medical device companies governing their interactions with healthcare professionals. Solstice Biomedical Devices Ltd. has adopted the AdvaMed Code of Ethics (2020 Revision) as the baseline standard for its US interactions with healthcare professionals, a commitment that applies to Solstice Biomedical Inc. as the US operating subsidiary.
The AdvaMed Code does not directly regulate employer-employee compensation structures. However, Section 5 of the Code, which addresses Sales and Marketing Practices, encourages member companies to "adopt compensation programs that do not create undue financial incentives" for sales personnel to "engage in off-label promotion, provide inappropriate items of value to healthcare professionals, or otherwise act in a manner inconsistent with this Code." While this provision is hortatory rather than mandatory, Solstice's adoption of the AdvaMed Code as its baseline standard creates a reasonable expectation — both internally and in the view of regulators — that the company's compensation practices will be consistent with the Code's principles.
Accordingly, the design of Solstice's sales compensation plan should reflect the AdvaMed Code's emphasis on maintaining a balance between appropriate sales incentives and compliance integrity. The recommendations set forth in Section VII of this memorandum are designed, in part, to ensure alignment with this commitment.
E. False Claims Act Implications
The False Claims Act, 31 U.S.C. §§ 3729–3733, imposes civil liability on any person who knowingly submits, or causes the submission of, a false or fraudulent claim for payment to the United States government. In the healthcare context, the FCA is frequently invoked in connection with off-label promotion, which occurs when a manufacturer promotes a medical device for uses not approved or cleared by the FDA, and such promotion leads to the submission of claims to federal healthcare programs for the unapproved use.
The intersection between sales compensation structures and FCA liability arises when incentive compensation creates financial pressure on sales representatives to engage in conduct — such as off-label promotion, misrepresentation of device capabilities, or provision of misleading clinical information to healthcare providers — that results in the submission of false or fraudulent claims to Medicare or Medicaid. Under the AKS-FCA nexus established by the Affordable Care Act, a claim resulting from a kickback violation is, by statutory definition, a false or fraudulent claim for purposes of the FCA.
The FCA's qui tam (whistleblower) provisions are of particular significance in the sales compensation context. Current or former sales employees who observe or experience compliance-impairing compensation pressures may file qui tam actions alleging that the company's incentive structure led to false claims. Such actions can result in damages of up to three times the amount of the false claims, plus civil penalties of $13,946 to $27,894 per false claim (as adjusted for inflation under 28 C.F.R. § 85.5). The qui tam relator is entitled to a share of the government's recovery, which creates a financial incentive for whistleblowers to report compensation-related compliance concerns.
For these reasons, the design of the Solstice sales compensation plan must account for FCA exposure and ensure that the plan does not create financial pressures that could foreseeably lead to promotional activities resulting in the submission of false claims.
IV. Detailed Analysis of Proposed Compensation Plan
A. Territory Manager Compensation
The territory manager level represents the largest component of the US commercial organization (42 of 53 employees) and is the level at which the proposed compensation structure presents the most significant compliance considerations. Territory managers are the field-facing personnel who will interact directly with healthcare professionals, hospital systems, and electrophysiology practices to promote and sell the Pulsar™ CRM System. Their compensation structure is therefore the primary focus of this analysis.
1. Base Salary
The proposed base salary range for territory managers is $95,000 to $115,000 per year. Placement within this range will be determined based on each candidate's experience level, geographic market, and competitive considerations at the time of hire.
Solstice has benchmarked this base salary range against industry data provided by Meridian Consulting Group LLC, a management consulting firm specializing in healthcare commercial operations. The benchmarking analysis, conducted by Dr. Lena Voss (Principal) and James Cho (Senior Consultant) of Meridian Consulting Group LLC, reviewed compensation data for comparable territory manager roles in the cardiac rhythm management ("CRM") device subsegment and identified a typical base salary range of $90,000 to $120,000 for entry-to-mid-level CRM device territory managers at companies of comparable size and stage.
Assessment: The proposed base salary range of $95,000 to $115,000 is reasonable and consistent with industry norms for the CRM device subsegment. The base salary range does not itself raise AKS concerns. Importantly, the base salary levels are sufficiently substantial that territory managers will not be wholly dependent on variable compensation for their livelihood — a factor that mitigates the risk that financial desperation or excessive variable compensation dependency will drive non-compliant sales behavior. A territory manager earning at the low end of the base salary range ($95,000) will still receive a meaningful fixed income independent of sales performance, which reduces — though does not eliminate — the compliance risk associated with the variable compensation component.
2. Variable Compensation (At-Plan Incentive)
The proposed at-plan variable compensation for territory managers is $72,000 per year, payable quarterly based on achievement of sales quotas. This represents the variable compensation that a territory manager would earn if the territory manager achieves 100% of quota in each quarter.
The variable-to-total compensation ratio is calculated as follows:
• Using low-end base salary ($95,000): Total at-plan compensation = $95,000 + $72,000 = $167,000. Variable as a percentage of total = $72,000 ÷ $167,000 = 43.1%.
• Using high-end base salary ($115,000): Total at-plan compensation = $115,000 + $72,000 = $187,000. Variable as a percentage of total = $72,000 ÷ $187,000 = 38.5%.
• Approximate range: Variable compensation constitutes approximately 38.5% to 43.1% of total at-plan compensation, or roughly 42% on average.
OIG Benchmarking Considerations. The OIG has not established a bright-line threshold or safe harbor percentage for the ratio of variable-to-total compensation. No regulation, advisory opinion, or guidance document specifies that a particular percentage is per se compliant or per se non-compliant. The absence of a bright-line standard, however, does not mean that the ratio is irrelevant to the compliance analysis.
Industry compliance best practices, informed by the OIG's enforcement posture and the compensation-related provisions of CIAs, suggest that variable-to-total compensation ratios exceeding approximately 50% warrant heightened compliance scrutiny. Conversely, ratios below approximately 30% are generally viewed as presenting minimal inducement risk from a compensation-structure perspective. Ratios in the 35% to 50% range — which is where Solstice's proposed plan falls — are commonly seen in the medical device industry and are generally considered defensible, provided that appropriate compliance guardrails are in place.
Solstice's proposed ratio of approximately 42% is within the range commonly observed in the CRM device subsegment, where the high value of implantable devices and the competitive intensity of the electrophysiology market support relatively robust variable compensation structures. However, the ratio is at the higher end for a company entering the US market for the first time, without an established compliance track record or a mature compliance infrastructure.
Recommendation: While the approximately 42% variable-to-total compensation ratio is defensible, Solstice should document the business justification supporting this structure and preserve the Meridian Consulting Group LLC fair market value benchmarking analysis as part of the compliance program record. The documentation should articulate the competitive and commercial rationale for the proposed ratio and demonstrate that the ratio is consistent with fair market value for comparable roles in the CRM device subsegment.
3. Quarterly Quota Structure
Variable compensation for territory managers is tied to achievement of quarterly sales quotas. The proposed median quarterly quota per territory manager is:
• 18 implantable monitor units at $4,950 per unit = $89,100
• 18 remote telemetry transmitters at $1,200 per unit = $21,600
• Total median quarterly quota: $89,100 + $21,600 = $110,700 per quarter per territory manager
• Annualized median quota: $110,700 × 4 = $442,800 per territory manager
The quota structure ties variable compensation directly to unit and dollar sales volume, which is standard practice in the medical device industry. The quota reflects the expected commercial opportunity for the Pulsar™ system at launch and is calibrated to the projected US Year-1 revenue of $26 million across the 42-territory sales force.
Observation: Volume-based quotas are inherently performance-driven and are the industry-standard mechanism for aligning sales force incentives with commercial objectives. However, quota structures that are tied exclusively to volume metrics — without countervailing compliance-based adjustments — can create misaligned incentives if quotas are set at levels that are difficult to achieve through compliant sales practices alone. Territory managers who perceive their quotas as unattainable through legitimate means may be more likely to resort to non-compliant tactics, including off-label promotion, inappropriate physician inducements, or misrepresentation of device capabilities.
Recommendation: Quotas should be reviewed quarterly by compliance leadership — specifically Siobhán Mulcahy (or the successor permanent US Compliance Officer, whose hire is anticipated by Q4 2024) and the Compliance Committee — to ensure that they remain reasonable and attainable without resorting to non-compliant sales tactics. If market conditions, competitive dynamics, or launch trajectory data indicate that initial quotas are unrealistically aggressive, they should be adjusted promptly. The compliance function should have a formal role in the quota-setting process, with the authority to raise concerns and require modifications if quota levels are deemed to create undue compliance risk.
4. Accelerator Multiplier
The proposed compensation plan includes a 2.0x accelerator multiplier applicable to quarterly sales exceeding 120% of quota. Under this structure, a territory manager who exceeds 120% of the quarterly quota earns commission at twice the standard commission rate on all incremental sales above the 120% threshold.
The accelerator threshold is calculated as follows:
• 120% of median quarterly quota: 120% × $110,700 = $132,840 in quarterly sales per territory manager to trigger the accelerator.
To illustrate the financial impact, consider a territory manager who achieves 140% of the quarterly quota:
• Total quarterly sales: 140% × $110,700 = $155,080
• Standard commission earned on first 120% of quota: Commission calculated at the standard rate on $132,840 in sales
• Accelerator commission earned on incremental sales above 120%: Commission calculated at 2.0x the standard rate on the incremental $22,240 ($155,080 − $132,840)
• Net effect: The territory manager's variable compensation for the quarter would substantially exceed the pro rata quarterly allocation of the $72,000 at-plan target ($18,000 per quarter)
In a scenario where a territory manager consistently exceeds the 120% threshold, the annualized variable compensation could significantly exceed the $72,000 at-plan target, potentially pushing the variable-to-total compensation ratio well above 50% — a level that, as discussed above, warrants heightened compliance scrutiny.
Risk Assessment. The 2.0x accelerator multiplier is a common feature in medical device sales compensation plans and is not, by itself, unusual or per se problematic. Accelerators are widely used across the device industry to incentivize above-quota performance and are a standard tool for aligning sales force effort with commercial growth objectives. However, the compliance risk associated with accelerators depends on the interplay between the accelerator design and the overall compensation structure.
In Solstice's case, the combination of the approximately 42% variable compensation ratio at plan with a 2.0x upside accelerator creates the potential for variable compensation to constitute a significantly larger share of total compensation for high-performing territory managers. This heightened upside financial incentive can create conditions in which territory managers may be tempted to engage in aggressive sales tactics, including:
• Promoting the Pulsar™ CRM System for off-label uses (e.g., patient populations or clinical indications not within the FDA-cleared intended use statement) to expand the addressable market and increase sales volume;
• Offering inappropriate inducements to physicians or hospital decision-makers to secure device orders, such as arranging improper consulting agreements, providing excessive meals or entertainment, or making undisclosed payments or transfers of value;
• Misrepresenting the device's capabilities, clinical evidence, or comparative effectiveness to healthcare providers in order to accelerate purchasing decisions; or
• Engaging in high-pressure end-of-quarter sales tactics, including "channel stuffing" or encouraging healthcare providers to order devices in advance of clinical need to meet quarterly quota thresholds.
The OIG's 2003 Pharmaceutical Manufacturer Guidance specifically identified "accelerated" and "uncapped" commission structures as areas warranting enhanced compliance oversight, noting that such structures can "create financial pressures on sales representatives to engage in marketing activities that violate federal healthcare program requirements."
Recommendations. We recommend that Solstice implement one or more of the following guardrails to mitigate the compliance risk associated with the 2.0x accelerator:
• Option 1: Hard Cap on Annual Variable Compensation. Solstice could implement a hard cap on total annual variable compensation at a defined multiple of the at-plan incentive. For example, a cap at 200% of the at-plan variable target would limit total annual variable compensation to $144,000 per territory manager, regardless of sales performance. This approach provides a ceiling that prevents extreme outlier earnings while still permitting meaningful above-quota rewards.
• Option 2: Automatic Compliance Audit Trigger. Any quarter in which a territory manager earns accelerator-level compensation (i.e., exceeds 120% of quota) should trigger a retrospective compliance audit of that representative's activities during the quarter. The audit should review promotional interactions with healthcare providers, expense reports, sample distribution records, and physician interaction logs for compliance with applicable policies and legal requirements.
• Option 3: Clean Compliance Record Prerequisite. Eligibility for accelerator-level compensation in any given quarter should be contingent on the territory manager maintaining a clean compliance record during the measurement period. Specifically, any territory manager who has received a compliance warning, is the subject of an open compliance investigation, or has a substantiated compliance violation during the quarter should be ineligible for accelerator earnings for that quarter.
We recommend implementing Options 2 and 3 at a minimum. Option 1 (the hard cap) is at Solstice's discretion based on competitive positioning needs and may be advisable if Solstice determines that the competitive market for CRM territory managers permits a capped structure without impairing recruitment and retention.
B. Regional Director Compensation
The proposed US commercial organization includes eight (8) regional directors, each of whom will oversee approximately five to six territory managers within a designated geographic region. Regional directors serve as first-line sales management and bear direct supervisory responsibility for the field sales activities and compliance conduct of the territory managers in their regions.
The compensation structure for regional directors consists of a base salary plus an annual bonus tied to regional performance metrics. While the specific base salary range and bonus target for regional directors have not yet been finalized in the materials provided to Calderwood & Harkness, we offer the following guidance regarding the structure of the bonus component.
Regional director bonuses should be tied to a blend of performance metrics that includes not only revenue and volume targets for the region but also compliance-related criteria. Specifically, we recommend that the regional director bonus structure include the following compliance-weighted components:
• Compliance scorecard results for the region, reflecting the aggregate compliance performance of the territory managers under the regional director's supervision;
• Completion of mandatory compliance training by all direct reports within required timeframes;
• Timely and accurate reporting of physician interactions for Sunshine Act (Open Payments) compliance, as required under 42 U.S.C. § 1320a-7h; and
• Absence of substantiated compliance violations within the region during the measurement period.
Recommendation: At least 15% to 20% of the regional director's annual bonus should be tied to compliance metrics, not solely to revenue achievement. This weighting ensures that regional directors have a financial stake in the compliance conduct of their teams and are motivated to enforce compliance policies, report concerns, and proactively address compliance risks within their regions.
C. Area Vice President Compensation
The three (3) area vice presidents in the proposed organizational structure serve as second-line sales management, each overseeing approximately two to three regional directors and bearing responsibility for the commercial and compliance performance of a broader geographic area. Area VPs are senior leaders who set the tone for sales culture within their areas and are expected to model and enforce compliance expectations.
The compensation structure for area VPs consists of a base salary plus an annual bonus tied to area-wide performance. As with regional directors, the specific base salary range and bonus target have not yet been finalized in the materials provided. However, the same principle of compliance-weighted compensation applies with even greater force at this level of seniority.
Recommendation: At least 20% of the area VP's annual bonus should be tied to compliance performance metrics, reflecting the area VP's enhanced accountability for aggregate compliance outcomes across their area. The compliance metrics should parallel those described for regional directors but should be measured at the area level, capturing the compliance health of all territory managers and regional directors within the area VP's span of control.
D. VP, US Commercial Operations (Marcus Reilly)
Marcus Reilly, as Vice President of US Commercial Operations, is the senior-most commercial leader in Solstice Biomedical Inc.'s US organization. Mr. Reilly reports to CEO Dr. Ciarán Nolan and COO Fiona Gallagher and bears ultimate responsibility for the performance and conduct of the entire US sales organization. Mr. Reilly was hired in March 2024 and is based at Solstice Biomedical Inc.'s Boston headquarters.
The specific details of Mr. Reilly's compensation structure — including base salary, variable compensation targets, and bonus metrics — have not been fully specified in the materials provided to Calderwood & Harkness. We understand that these terms are governed by Mr. Reilly's employment agreement with Solstice Biomedical Inc. and are subject to review by the parent company's Compensation Committee.
Recommendation: Regardless of the specific financial terms, we recommend that Mr. Reilly's incentive compensation include a compliance component weighted at no less than 25% of total variable compensation. As the senior-most US commercial leader, Mr. Reilly's personal financial incentives should be visibly aligned with the compliance health of the organization he leads. Additionally, Mr. Reilly should serve as a member of the Compliance Committee (as currently planned) and should be formally evaluated on the overall compliance posture of the US sales organization as part of his annual performance review.
The 25% compliance weighting for Mr. Reilly's compensation reflects the principle of graduated accountability: the more senior the commercial leader, the greater the proportion of incentive compensation that should be tied to compliance outcomes. This principle is consistent with the OIG's emphasis on "tone at the top" and with the compliance-weighted compensation requirements commonly found in CIAs.
V. Employee Safe Harbor Eligibility Confirmation
Having described the legal framework and analyzed the specific components of the proposed compensation plan, we now turn to the threshold question of whether the plan qualifies for protection under the AKS employee safe harbor at 42 C.F.R. § 1001.952(i).
Employment Classification. All fifty-three (53) planned US commercial employees — including the forty-two territory managers, eight regional directors, three area vice presidents, and Marcus Reilly — will be W-2 employees of Solstice Biomedical Inc. Each employee will have an executed employment agreement with Solstice Biomedical Inc. as the employer, will receive wages subject to federal income tax withholding, FICA taxes, and applicable state and local tax withholding, and will be eligible for employee benefits including health insurance, retirement plan participation, and paid time off. The employment relationship will satisfy the common-law test of employment under the Internal Revenue Code, with Solstice Biomedical Inc. exercising direction and control over the manner and means of each employee's work.
Bona Fide Employment Relationship. Based on the foregoing, each employee's relationship with Solstice Biomedical Inc. constitutes a bona fide employment relationship within the meaning of 42 C.F.R. § 1001.952(i). The employees will be compensated by their employer — Solstice Biomedical Inc. — for employment in the furnishing of items and services (the Pulsar™ CRM System) for which payment may be made under federal healthcare programs (Medicare Part B and Medicaid).
Conclusion. The employer-employee relationship satisfies the threshold requirements of the employee safe harbor at 42 C.F.R. § 1001.952(i). Accordingly, compensation paid by Solstice Biomedical Inc. to its W-2 employees under the proposed sales compensation plan — including base salary, variable compensation, accelerator multiplier payments, and management-tier bonuses — falls within the scope of the safe harbor and is not subject to criminal prosecution under the AKS on that basis.
Important Limitations. Two important limitations on the scope of the safe harbor must be noted:
First, the employee safe harbor does not apply to independent contractor sales representatives. Solstice must ensure that no territory managers or other sales personnel are classified as 1099 independent contractors. If any sales personnel are engaged as independent contractors rather than W-2 employees, their compensation arrangements would need to satisfy a different safe harbor (such as the personal services and management contracts safe harbor at 42 C.F.R. § 1001.952(d)), which imposes substantially more detailed structural requirements. Accordingly, Solstice should maintain rigorous employment classification practices and should not reclassify any sales personnel as independent contractors without prior review by legal counsel.
Second, the employee safe harbor protects only the employer-to-employee payment itself. It does not shield downstream conduct by employees that independently violates the AKS or other applicable law. For example, if a territory manager — motivated in part by the financial incentives created by the compensation plan — were to offer kickbacks to physicians (e.g., in the form of improper consulting payments, excessive meals, or other transfers of value) in exchange for ordering the Pulsar™ CRM System, that conduct would not be protected by the employee safe harbor. The safe harbor insulates the compensation payment from AKS liability; it does not insulate the employee's subsequent conduct or the company's potential vicarious liability for that conduct. This distinction underscores the importance of the compliance guardrails recommended in this memorandum, which are designed to minimize the risk that compensation incentives will motivate non-compliant behavior.
VI. Risk Assessment and Benchmarking
A. Variable Compensation Ratio Benchmarking
To assess the compliance risk profile of the proposed compensation plan in context, we reviewed industry benchmarking data sourced via the Meridian Consulting Group LLC analysis prepared by Dr. Lena Voss and James Cho. The benchmarking data surveyed compensation structures across the medical device industry, with specific focus on the CRM device subsegment.
The benchmarking data reveals the following industry norms:
• Large medical device companies (broad category): The typical variable-to-total compensation ratio for field sales representatives ranges from approximately 35% to 45%, depending on the product category, competitive intensity, and stage of product lifecycle.
• Cardiac rhythm management (CRM) subsegment: The typical variable-to-total compensation ratio for CRM device territory managers ranges from approximately 40% to 50%, reflecting the higher value of implantable cardiac devices, the specialized clinical knowledge required, and the intense competition among CRM device manufacturers for top sales talent.
• Solstice's proposed ratio (~42%): Falls within the central tendency for the CRM subsegment. The ratio is not an outlier in either direction — it is neither so low as to be uncompetitive nor so high as to be exceptional.
OIG Enforcement Trends. Our research has not identified any OIG enforcement action specifically targeting employer-employee compensation ratios within the scope of the employee safe harbor. The absence of such enforcement activity is consistent with the broad protective scope of the safe harbor and suggests that the OIG has not, to date, adopted a position that a particular variable-to-total compensation ratio is, by itself, an AKS violation where the safe harbor applies.
However, Corporate Integrity Agreements imposed on medical device companies in resolution of AKS and FCA enforcement actions have frequently included provisions requiring compliance-weighted compensation. These CIA provisions suggest that the OIG views compliance-weighted compensation as a best practice, even where the employee safe harbor applies, and that companies that fail to incorporate compliance metrics into their compensation structures may face enhanced compliance requirements in the event of a future enforcement action.
B. Accelerator Multiplier Benchmarking
Accelerator multipliers are a common feature of medical device sales compensation plans. Industry benchmarking data indicates the following norms:
• Typical accelerator range: 1.5x to 3.0x multiplier on incremental sales above a defined threshold
• Typical accelerator threshold: 110% to 130% of quarterly or annual quota
• Solstice's proposed structure (2.0x at 120% of quota): Falls within the normal range for the medical device industry and is at the midpoint of typical accelerator multiplier levels
A critical design question is whether the accelerator is capped or uncapped. If the accelerator is uncapped — meaning that the 2.0x multiplier applies to all sales above 120% of quota without limit — the theoretical maximum variable compensation for a territory manager in an exceptional quarter could be very high. For example, a territory manager who achieves 200% of quota in a single quarter would earn:
• Standard commission on the first 120% of quota ($132,840 in sales)
• 2.0x commission on the remaining 80% of quota ($88,560 in sales)
• The resulting quarterly variable compensation could be multiples of the $18,000 quarterly at-plan allocation
An uncapped accelerator in this context — combined with the approximately 42% variable compensation ratio at plan — could result in total compensation packages where variable compensation exceeds 60% or more of total pay in high-performance periods. While this outcome would still be within the technical scope of the employee safe harbor, it would represent the type of structure that the OIG has identified as warranting enhanced compliance oversight.
Recommendation: If the accelerator is currently uncapped, Solstice should consider implementing either a hard cap on total annual variable compensation or, at minimum, a compliance review trigger above a specified accelerator earnings threshold, as detailed in Section VII.C below.
C. Overall Risk Rating
Based on the foregoing analysis, we assign the proposed compensation plan an overall compliance risk rating of Moderate.
This rating reflects the following assessment:
Factors supporting a lower risk rating:
• The plan is technically within the AKS employee safe harbor (42 C.F.R. § 1001.952(i))
• All commercial employees are W-2 employees of Solstice Biomedical Inc.
• The variable-to-total compensation ratio (~42%) and accelerator multiplier (2.0x at 120%) are consistent with industry benchmarks for the CRM device subsegment
• Solstice is building its compliance program from the ground up, which permits compliance features to be embedded in the compensation plan from inception rather than retrofitted after the fact
Factors supporting a higher risk rating:
• Solstice is entering the US market for the first time and has no established compliance track record or institutional compliance culture in the United States
• The compliance infrastructure is still under development (permanent US Compliance Officer not yet hired; compliance training not yet completed; Code of Conduct not yet finalized)
• The combination of the ~42% variable ratio and 2.0x accelerator places the plan at the higher end of the risk spectrum for a company at this stage of US market entry