Reimbursement Trends Among Commercial Fleets
Many companies are under enormous and ongoing pressures to reduce costs. A corporate fleet consumes a very large percentage of a company’s operating budget and it is a tempting target for cost-cutting programs. A corporate fleet is always open to scrutiny and it is sometimes called upon to justify its existence. The pressures to reduce costs and increase productivity are not going away. As a result, the question of whether to switch from a company-provided vehicle fleet to employee reimbursement will not be a one-time challenge. Rather, it will continue to be an ongoing challenge. Some companies have opted to transition to driver reimbursement programs. For instance, on March 1, 2002, FCCI Group in Sarasota, FL, began to gradually transition drivers from their closed-end lease company vehicles to a Runzheimer allowance program. The primary reason was to limit company liability. Lear Corp. also recently decided to switch to allowances and driver reimbursements. The company is currently transitioning its fleet as vehicles reach either three years in service or accumulate 55,000 miles.
Additional fleets that have signed up for a Runzheimer driver allowance program or have switched to driver reimbursement are: Arkansas Best, Danka Office Imaging Systems, Delphi Automotive, DIMON Inc., Moore N.A., and SaraLee Coffee. Also, some utility companies are investigating driver reimbursement for their automobile fleets in order to avoid the federal mandate to acquire alternative-fuel vehicles as required by the Energy Policy Act of 1992.
Companies Found that Driver Reimbursement Didn’t Work
“Many in senior corporate management believe that a company-provided vehicle is less costly than driver reimbursement,” said Charles Bowen, fleet director for Rollins, Inc. in Atlanta. The majority of industry studies reach the same conclusion: reimbursement programs that compensate the employee fairly for all expenses will cost the company significantly more than company-provided vehicles.
One company that reached this conclusion was AMP. The company initially decided to switch to a driver reimbursement but reversed its decision before fully implementing the program because it found:
A 15 percent increase in mileage submitted for reimbursement.
A significant increase in car rental expenses.
Higher turnover, including the loss of some top performers to competitors.
A cumbersome administrative process.
Another company that switched from reimbursement to a companyprovided vehicle fleet was Kmart Corp. in Troy, MI, which discovered that it was having difficulty attracting pharmacists and store managers without offering a company vehicle.
“As a large, high-mileage fleet with national distribution and with excellent financing programs in place, it is more advantageous for us to lease than offer a reimbursement program,” said Bill Amundsen, manager fleet administration for PerkinElmer LLC in Shelton, CT.
By actively demonstrating the ongoing savings achieved through professional in-house fleet management, the fleet department can validate its importance to senior management.
Below are 10 case studies of commercial fleets that have examined driver reimbursement.
DRIVER REIMBURSEMENT STUDY BY SMURFIT STONE CONTAINER CORP.
Several years ago, Smurfit Stone Container Corp. in Alton, IL, did a survey on lease versus driver allowance using the Runzheimer Plan.
“When finished, the results clearly showed that although a lease program costs the company more, the employee will benefit. Although we have made several changes to our policy and administrative functions, we continue to use this survey as a solid foundation for our lease vehicle program,” said Suzie Hedger, program manager/ Shared Services for Smurfit Stone Container Corp. Among the advantages found in the Smurfit Stone Container Corp. study were:
The company could control the size, make, and model of vehicles ensuring that they were properly spec’ed. Also, the company has control over the safety equipment that is found in employee vehicles. A company-provided program ensures that employees have new equipment every three to four years. Plus, since this equipment would be well-maintained, it meant that there would be higher productivity among employees, said Hedger.
Another important finding of the study was that a company-provided vehicle ensured that it would be properly insured, added Hedger.
On the financial side, the study discovered that lease costs were not significantly higher than allowance. Leases are budgeted off-balance sheet, requiring no up-front cash.
Another cost savings is that fleet administration is centralized, said Hedger. Also, there is no out-of-pocket expense by drivers as with a reimbursement program. This eliminates the issue of affordability by cash-strapped employees.
“We do provide a driver allowance for those drivers who do not want to take a company-provided vehicle, but find that many who try this program come back to the leased car within two to three years,” added Hedger.
TRIED REIMBURSEMENT BUT RETURNED TO COMPANY-PROVIDED
Quest Diagnostics in Teterboro, NJ, at one time used driver reimbursement.
“When we did offer reimbursement, the drivers thought it would be to their advantage, but this wasn’t the case because the monies they received were not enough to lease a vehicle, pay the insurance, and maintain the vehicle,” said Arleen Molnar, fleet administrator for Quest Diagnostics. “Reimbursement ended up costing the drivers a lot of money, so the program was canceled after the first year.”
U.S. FILTER OFFERS A CHOICE TO DRIVERS
U.S. Filter in South Bend, IN, offers driver allowances as an option to company vehicles for most of its business groups, said Brett Quigley, corporate director of transportation for U.S. Filter.
“However, one of our executives has chosen not to offer the allowance option in order to create standardization within his business among sales and management,” said Quigley.
“We have found that while the option of an allowance may have an initial appeal, enabling employees to choose the vehicle of their choice; employees quickly realize that it is not the best economic choice for them, and typically not for the company. It is no surprise that companies of any reasonable size can acquire vehicles at substantially lower prices than individuals. In our analysis, we determined that in order to make the employee ‘whole’ for their business use, our costs would increase across all models, with the increase being greater as the cap cost increased,” said Quigley.
To address the concerns of rising insurance costs associated with company vehicles, a major factor in the emphasis to shift to allowances, U.S. Filter took a different approach by implementing a program to allocate the financial responsibility to those drivers with assigned vehicles for accidents that occur during personal use, including commute.
“We charge back a portion of our deductible to the employee for accidents that occur during personal use, while increasing this amount 150 percent when a spouse or authorized child (over 19 years old and living with the employee) is driving the vehicle,” said Quigley. With this arrangement, the employee maintains the ability to allow other family members to operate the company vehicle, but forces them to be more judicious in their decision, knowing that they will be financially liable if an accident occurs. If an employee feels that this change is unreasonable, then he or she has the option of choosing an allowance. “We have seen very few choose the allowance over the company vehicle,” said Quigley.
One of the main factors favoring the company-provided vehicle is that by eliminating these vehicles from its acquisition package, it would reduce U.S. Filter’s fleet buying volume and subsequently the competitive pricing allowances that it receives from the manufacturers. “Our managers have come to expect these savings in their quest to reduce their overall costs to their customers, and do not want to see them reduced,” said Quigley.
Other factors favoring company-provided vehicles are:
1. There is a standard vehicle appearance within the fleet.
2. There is a reduced chance of down time for the sales force.
3. It eliminates the obstacles for those employees with compromised credit ratings in acquiring and operating a reliable vehicle on behalf of the company.
DANA CORP. FOUND NO SUCCESS WITH DRIVER REIMBURSEMENT
Dana Corp. in Toledo, OH, has casually used driver reimbursement programs throughout the years, but with limited to no success, said Tom Wittel, vice president, fleet services.
One Dana division used reimbursement as an alternative for its entry-level sales drivers because the employee turnover rate was too frequent.
Within the same division, entry-level company car drivers, just out of college, were responsible for their own vehicle acquisition. “Our drivers had little to no credit history, no cash for down payments, no experience buying or leasing cars, and no understanding of matching their company car financing with mileage and use applications,” said Wittel. Often, drivers were seeking the lowest payment possible through longer terms because they thought they could ‘make some extra money.’
“Some drivers needed the company as loan and lease co-signers. Frequently, replacement cars were needed too soon because they accumulated too much mileage, but negative equity prevented them from doing so unless the company intervened with special compensation assistance,” said Wittel.
The division ended up with an inconsistent mix of fleet vehicles (and policies) with mileage and financing terms that made it impossible to manage for cost effectiveness.
According to Wittel, reimbursement programs do not relieve a company from its asset management responsibility relative to company cars.
“Most reimbursement programs cost more because companies lose vehicle acquisition benefits from purchase controls to lost fleet incentives and other discounts. Many companies additionally bail out drivers due to poor credit, lack of down payments, and negative equity,” said Wittel. “Company car reimbursement programs are just another form of compensation.”
LIMITED REIMBURSEMENT AVAILABLE AT VALSPAR
Valspar offers driver reimbursement to its employees on a limited scale. “Currently, our policy is that employees who drive more than 15,000 business miles a year are provided with a company automobile. If they drive under 15,000 miles annually, we pay the employee the current government rate of reimbursement,” said Jackie Barrett, fleet/administrative services manager for Valspar in Minneapolis. “There are several reasons we decided to have a mileage threshold. We had quite a few people on the program who didn’t need to have a company car. We weeded those people out of the program and, in the long run, saved the company substantial dollars. When we instituted this policy around four years ago, we saved the company more than $650,000 annually,” said Barrett.
INTEL HAS EXAMINED REIMBURSEMENT SEVERAL TIMES
Intel has looked at moving to an allowance program a couple of times in the past five years but each time for very different reasons, said Jan Preble, sales administration manager for Intel Corp. in Santa Clara, CA. For Intel, the answer to both investigations was the same: the leasing program provides better overall value to both Intel and its employees.
Some of the reasons Intel is not currently considering reimbursement:
Reimbursement would result in the loss of image that Intel wants for its company cars. With a lease program, Intel limits its vehicle selection each year to only a few models it considers appropriate for the image it wants to present to customers. Intel does not provide vehicles as a perk, but rather as a job-related tool with sales being the only U.S. positions available for the car plan.
Personal vehicle plans have higher risk exposure for accidents to the company.
Driver record checks and insurance compliance are not easy to mandate and enforce.
By limiting vehicle choice and consolidating services, Intel is able to acquire vehicles and provide services at a much lower rate than the individual employee can obtain for the same dollars.
“Today’s leasing companies provide exceptional fleet administrative services and online tools that allow fleet managers to manage their fleets with far less internal resources. We have found that through continued partnering with our leasing vendor, information and services continue to improve and provide us with the highest ability to cut costs without minimizing value,” said Preble.
REIMBURSEMENT A TOUGH SELL IN THE PHARMACEUTICAL INDUSTRY
There are five key reasons why driver reimbursement is not prevalent in the pharmaceutical industry, said Joe LaRosa, manager of fleet administration and treasury accounting for Bristol-Myers Squibb in Princeton, NJ.
1. Company image must be upheld. For example, a driver may purchase a vehicle that doesn’t set the professional image, such as a sports car versus one that is more practical. The vehicle must also be a business tool and be properly equipped to ensure the driver’s safety. It must also have the necessary cargo space to safeguard company assets, such as having the proper dimensions to carry samples in an enclosed cargo area or trunk.
2. In a reimbursement program, drivers may not properly maintain their vehicles, which results in downtime and lost sales.
3. Drivers may not have their vehicles repaired after an accident. Also, they could let their property insurance lapse. However, liability is a moot issue, since companies are liable for torts in the ‘course of employment’ doctrine.
4. Cents-per-mile reimbursement is more expensive in the long run due to being able to control a fleet’s running expenses through proper maintenance intervals.
5. Driver’s safety and security may be impeded, such as if a driver purchases a vehicle without anti-lock brakes, OnStar, and keyless entry.
REIMBURSEMENT EXAMINED EVERY THREE TO FOUR YEARS AT ALCON
The subject of driver reimbursement comes up every three to four years, said Pat Turner, fleet manager for Alcon Labs in Fort Worth, TX.
“Usually this occurs when someone starts looking at budgets. It’s a legitimate question, and deserves a complete answer. A lot depends on the company priorities,” said Turner.
Some companies feel that the ease of budgeting and absence of a fleet department expense is most important. Others acknowledge that the $500- $600-per-month allowance is only the tip of the iceberg.
“Driver downtime can really be a killer to a company. Some don’t realize how much time a salesperson can spend buying and taking care of a car,” said Turner. Alcon management has placed a premium on the salesperson’s “up-time.”
“When we considered the amount of ‘sales time’ that would be spent doing car things, it became a no-brainer,” said Turner.
By providing company vehicles, Turner said Alcon Labs can be assured of the following:
1. The drivers are always in a vehicle no more than three years old.
2. Routine preventive maintenance program ensures the cars are safe and reliable.
3. When problems do occur, drivers are put in alternate transportation, such as a rental car, minimizing downtime.
REIMBURSEMENT USED FOR LOW-MILEAGE DRIVERS
Travelers Property Casualty offers driver reimbursement to those employees driving below its ‘break-even point,’ said Susan Fensky, fleet manager for Travelers Property Casualty in Hartford, CT.
“We determine financially at what mileage level it is cheaper to have someone in a fleet car, rather than a personal car. We recently raised this level from 1,400 business miles per month to 1,600 business miles per month,” said Fensky. “We really try to only have employees in company cars if they average more than 1,600 business miles per month. Any drivers who average under that are in personal cars and are reimbursed mileage,” said Fensky.
If drivers do not want to have a company car and drive more than 1,600 business miles per month, Travelers will only reimburse them up to a maximum of 1,600 miles per month. For anything over that, the employee has to absorb the cost.
JOHNSON CONTROLS OFFERS REIMBURSEMENT TO EMPLOYEES
Johnson Controls (JCI) has a driver reimbursement program throughout its organization. The following information pertains to JCI executive vehicles.
The Automotive Group, whose customers are the OEMs, provides company vehicles at a certain salary grade level. In addition, JCI provides an allowance program for lower-level positions. “We provide vehicles to be competitive in the market and use them for study and testing purposes,” said Christy Coyte, fleet manager for Johnson Controls in Plymouth, MI.
The Controls Group, whose area of business is building and facilities management, provides the Runzheimer reimbursement program to hundreds of employees, with only the very top executives having company vehicles. Corporate executives and officers are provided company vehicles.
“It is Johnson Controls’ belief that a company-provided vehicle provides top management with a more valuable fringe benefit than an allowance,” said Coyte. “With our company vehicle program, we provide a service that allows executives the flexibility and convenience to be as little or as much involved in their vehicle decisions as they choose.”
For the commercial service portion of the fleet, Johnson Controls has a standardized spec vehicle program. “Our selector has four different vehicles, with already spec’ed and approved interior shelving, ladder racks, and safety equipment, to meet the service requirements of the systems and service reps, front liners, and mechanics,” said Coyte. “A vehicle allowance program is not an option, as we need to provide employees the tools to do their job.”