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Business Fleet – Market Trends

More Salespeople on the Street Pitching Reimbursement

March 16, 2010

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By Mike Antich

Reimbursement has re-emerged as a fleet issue. One reason is that Runzheimer has a rival, which means two competitive sales forces are aggressively selling vehicle reimbursement programs. Founded in 2004 by former Runzheimer employees, Corporate Reimbursement Services (CRS) sells a customizable vehicle reimbursement program, which calculates geographic cost variances to determine reimbursement rates for business use of personal vehicles. The program is very similar to Runzheimer.

Also, the recession, corporate downsizing, funding/credit constraints, OEM viability, and economic uncertainty have renewed senior management's desire to re-examine reimbursement. Runzheimer and CRS are targeting these senior managers and selling reimbursement as an economic benefit. But is it?  First, the math doesn't support this contention. According to Greg Corrigan of PHH Arval, the average managed sales fleet operates at 25-29 cents per mile, while some fleet managers say a Runzheimer/CRS-style reimbursement program costs an average 40 cents per mile. Plus, there is also the hidden expense of many employees exaggerating business miles to increase reimbursement. One fleet management company study showed when switching from a reimbursement program to a company-provided program, reported business mileage decreases 30 percent. It's not that employees drive less; it's because business miles no longer generate reimbursement monies, so employees report actual mileage.

Looking Beyond CPM

When considering reimbursement, it is important to look beyond cents-per-mile (CPM) considerations. The company vehicle is the corporate image presented to customers. When an employee drives a personal vehicle, the company surrenders this control. The same is true with corporate green fleet initiatives. It is a non sequitur when employees are reimbursed to drive large SUVs or other models that don't conform to the green corporate image a company wishes to convey to customers and the public.

Sometimes employees will buy a cheaper or used vehicle to pocket money from the company allowance. Fleet driving doesn't lend itself to the use of personal vehicles. It is difficult to afford a retail lease when an employee drives 24,000 miles per year. Most retail leases are structured for drivers who drive 12,000-15,000 miles per year. Invariably, high-mileage drivers are upside down at end-of-lease with a balloon payment for excess mileage.

Employees view reimbursement as extra income, and when hired, this impression is sometimes reinforced by their supervisors as a way to buttress a lower starting salary. In these cases, will reimbursement be used for a vehicle (as intended) or will the monies be used to repay a college loan or make a mortgage payment? With an employee-provided vehicle, how do you know when an employee postpones a safety-related repair? Maintenance is an out-of-pocket expense, and there may even be a temptation (or financial necessity) to postpone repairs. If an accident is caused by deferred maintenance, what is the corporate liability exposure?

Also, if driving a personal vehicle, an employee must buy "business insurance," which costs twice as much as personal auto insurance. If the employee is involved in an accident and does not have business insurance, the personal insurance carrier can deny the claim and incurred loss because it was not advised the personal vehicle is used for business. Invariably, drivers do not carry adequate personal liability insurance, increasing corporate liability.

If not handled correctly, reimbursement can be considered taxable income by the federal government and some states. As such, car allowances are taxable to the employee, and the company is subject to its portion of the FICA tax. The employee's combined state and federal tax burden increases, the equivalent of a salary reduction. Also , employees may be subject to an IRS audit since mileage and vehicle expense deductions are auditable.

A Competitive Advantage

Providing a company vehicle is a competitive edge in hiring top-caliber salespeople, technicians, and managers. Industry surveys reveal prospective employees view a company vehicle as an equivalent benefit to healthcare coverage and pension benefits. Trying to hire prospective employees who already have a company vehicle by offering a reimbursement program puts a company at a hiring disadvantage. While a reimbursement allowance may have the initial appeal of enabling employees to drive the vehicle of their choice, employees ultimately realizes it is not the best economic choice for them. In addition, employee turnover increases when a company eliminates a company-provided vehicle program. Fleet management companies have found when companies shift to driver reimbursement from a company-provided vehicle, about a 10-percent loss in work force occurs because employees do not like the loss of their company vehicle.

Let me know what you think.

[email protected]

 

Comments

  1. 1. John Brewington [ March 16, 2010 @ 01:27PM ]

    Mike,

    Thank you for pointing out the many pitfalls of most personal vehicle reimbursement plans. An organization that uses this as a cost-saving approach to business travel either doesn't understand its true costs or has image and liability exposure that likely outweighs any short-term savings.

  2. 2. Pam [ March 22, 2010 @ 01:59PM ]

    Great article and one that goes into my file for reuse the next time management is looking to reduce expenses.

  3. 3. Al Cavalli [ March 22, 2010 @ 03:44PM ]

    The April issue Market Trends entitled “More Salespeople on the Street Pitching Reimbursement” was an excellent editorial, which tells it like it is! However, to “give the devil his due,” there is a place for reimbursement, which can co-exist in a company-provided fleet.

    When employees require vehicle use to perform their job responsibilities, but do not accumulate sufficient mileage to warrant a company-provided vehicle, a reimbursement program is applicable, whether it’s an internal program or a provided service.

  4. 4. Brian [ March 24, 2010 @ 10:07AM ]

    There seems to be a mentality that company owned versus reimbursement is an either/or decision and not something that can be blended. The truth is, there are times where using a reimbursement program is a viable cost savings over remotely operated company cars.

    In cases where a fuel card is provided with a company car, employees are tempted to use the company car on personal business, driving up the cost to operate that vehicle. If placed on a reimbursement plan that is well managed, the mileage can be tracked using GPS enabled devices or mileage logs and personal use eliminated or discouraged.

    Your claims regarding insurance also appear to be somewhat exagerated. Business use coverage has never doubled the cost of insuring any vehicle for employees we have used a reimbursement plan for. It typically ads around 30% to the cost. Additionally, the statement that "Invariably, drivers do not carry adequate liability insurance" is a gross overstatement of the facts and can be negated by enforcing insurance compliance in order to receive the reimbursement.

    Is reimbursement an easy fix to vehicle needs? No. It is a useful tool in some instances where capital investment for new or additional vehicles is not possible or distance management makes fleet vehicles impractical. I have found that by using it intelligently, reimbursement can be a valuable fleet management tool and can help create a vested partner in drivers that may otherwise abuse the company car.

  5. 5. Michelle [ February 24, 2011 @ 01:12PM ]

    I find your article interesting. I'm trying to set policy regarding was the Auto Allowance is meant to cover. Generally it can be for payment, registration and insurance. In instances such as this, what are reasonable guidelines for allowable vehicle maintenance, car wash, etc.?

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AUTHOR BIO

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

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