In today’s economic environment, push-back is emerging at some companies about company-provided executive vehicle fleets. As the economy worsens and ever-increasing amounts of taxpayer monies are used to prop up financially distressed companies, a negative perception is growing about executive compensation and the different perks tied into these compensation packages.
“We have already seen some companies announce no bonuses as business gets tougher. I suspect you will also see other compensation items, such as cars, put on hold or eliminated,” said Frank Memolo, fleet manager for Panasonic Corp. of North America.
Joe LaRosa, director of global business services for Merck & Co., shares this assessment. “In the U.S., many perks are being reconsidered under pressure from the current financial climate, as well as out of a general sense of accountability.”
Anecdotally, growing evidence indicates this review of perks and compensation is occurring. One example is AstraZeneca, which recently eliminated its executive vehicle program. Likewise, Bristol-Myers Squibb and Textron also discontinued their executive vehicle programs in 2008.
“For top executives in publicly traded companies, the annual proxy statement reports items, such as use of company vehicles, as additional compensation. The appearance to the public and shareholders is not positive for already highly compensated individuals,” said Joe Winarski, director, real estate and corporate services for Textron. “For this reason, I believe cars as part of executive compensation packages will continue to decline.”
Although still representing only a small number of fleets nationwide over the past five years, a growing trend has been for companies to transition executives to car allowances and/or reimbursement programs.
“The current credit crunch affects all of us, execs too,” said Mick Morris, department manager, Fleet Operations for Mercedes-Benz. What was once a “no-brainer” is now scrutinized. Customized vehicle options for execs will become more important than ever before. More questions and support regarding vehicle lease/finance/purchase are inevitable, whether company-owned or employee-owned. Not everyone agrees this is a good move, especially in the long term.
“It will take a while for the upper level of management who make these decisions to realize there are no savings in shifting executive fleets from a company-provided and controlled fleet to another method where a third party is involved, such as Runzheimer. Currently, this is a knee-jerk reaction to unfavorable conditions in the marketplace,” said Phil Schreiber, fleet manager, North America for OTIS Service Center “It will take a few years until the companies that resort to these methods accumulate enough data to realize it was not a cost-effective decision. I predict, at that point, there will be a shift back to a company fleet method.”[PAGEBREAK]
Why the Trend to Reimbursement?
The current economic malaise will challenge fleet managers who provide services to executives to select or balance between providing company cars, allowance programs, and/or reimbursement, according to Morris. Key reasons cited for eliminating company-provided executive fleets include high administrative costs, a response to cost-cutting initiatives, a curb to growing negative perceptions by the public and shareholders, and eliminating noncompliance with corporate green fleet programs.
1. High Administrative Cost. The administrative time commitment is cited as one reason to discontinue an executive car program.
“Because of the need to micromanage every area of fleet spend and to continuously work to drive cost out and push productivity up, we found spending an inordinate amount of time on a very small percentage of our fleet was just not very prudent,” said one fleet manager who wished to remain anonymous.
For instance, the decision to eliminate the Bristol-Myers Squibb (BMS) executive fleet was based on a desire to reduce administrative cost in executive HR and the fleet department. In lieu of a company-provided vehicle, BMS execs receive a one-time cash stipend.
2. Cost-Cutting Measure. Another factor exerting pressure on executive fleets, especially at public companies, is the need to implement corporate-wide cost-cutting measures. One target is executive vehicle fleets. Proponents of this cost-cutting measure argue executive fleets are inappropriate in today’s financial climate, and should be eliminated, which will achieve a quick reduction in spend.
3. Negative Perception by Public and Shareholders. A third factor is the perceived inequity of providing executive fleet vehicles. “Personally, I do not see the validity in offering an all-expense paid company car to a highly compensated position like an executive or officer,” said Joe Niszczak, fleet manager for Endo Pharmaceuticals. “With all of the media attention on the issue of ‘golden parachutes,’ companies are beginning to take a look internally and make changes accordingly. The thought of offering a car allowance seems ridiculous as these individuals are already highly compensated.”
Another concern is found at financially distressed high-profile companies. “I think there could be a negative perception, especially for those on the list of companies looking for a federal bailout,” said Sheri Bonsall, assistant vice president – manager, travel, meetings & fleet services of Chubb & Son. Chubb eliminated its executive fleet program five years ago.
4. Noncompliance with Green Fleet Initiatives. Executive fleets often conflict with corporate green fleet initiatives, especially when senior management drives low fuel-economy vehicles, such as upscale full-size SUVs. When executives drive vehicles not considered “environmentally responsible,” it sends a “greenwashing” message to the public and shareholders about the company’s sustainability initiative. “There is a trend to pressure executives to drive ‘green’ vehicles as a show of support for corporate green initiatives,” confirmed Memolo.
The same concern arises when companies implement corporate-wide mpg reduction programs. “We have seen more companies mandate a mpg threshold across the board, which includes top management, so many of the big SUVs are on the way out,” said Ross Friedmann, senior commercial accounts manager for Audi of America. “We have also seen exec fleets go with smaller, not too small, vehicles, which are still considered luxury models, yet are not as ostentatious in their appearance.”
The “executive vehicle perk” does not have to conflict with environmental responsibility, said Morris. “More now than ever, it will require striking a balance between stunning design, sheer driving enjoyment, high safety design, and environmental compatibility.”[PAGEBREAK]
Factors Favoring Exec Fleets
Companies that provide executive vehicles — or provide for vehicles — do so in four ways:
Selector: A company provides a selection of luxury or high-end vehicles from which eligible executives can choose a model.
Dollar Limits: A dollar value is established and executives are allowed to choose any vehicle he or she wants, provided the cost remains within a stipulated limit. The vehicle is acquired and provided by the company.
Monthly Dollar Limit: Provides a monthly dollar limit for the lease of the vehicle. The executive can choose any vehicle desired, as long as the monthly cost remains within the limits.
Reimbursement/Allowance: A company reimburses the executive for the cost of a vehicle he or she personally acquires. The dollar amount provided is governed by fleet policy.
The fundamental question is whether it is better to provide executive vehicles or to reimburse. As with any complex issue, there are no black-and-white answers as circumstances vary by company and all companies are different.
However, it is important to keep in mind that providing vehicles to senior executives is as much an HR and recruiting tool as anything else. The more restrictions placed on a vehicle program, the less competitive the company is in recruiting top executive talent.
“Let’s not forget that many executives want to continue to drive premium segment vehicles and experience the latest technologies,” said Rich Maksym, lead national account manager, Fleet Operations for Mercedes-Benz. “Most know what they like and what they want to drive. It is clear the fascination of driving or being chauffeured will continue to be an important ‘perk’ for execs.”
New technologies, such as the networked vehicle, called “Car-to-X Communication” will enable a continuous exchange of data between vehicles and the road infrastructure, thereby enhancing road safety and traffic flow. According to Maksym, it’s not only a timesaver for the exec, but good for the environment too.
“There is still a significant number of companies that offer upper-level management a luxury or near-luxury vehicle as part of a compensation package. Based on comments made by fleet managers, a company vehicle is a very economical way to attract and retain top-talent, and many execs expect a vehicle as part of their compensation package,” said Friedmann.
Executive fleets remain popular at large, privately held companies with a fleet vehicle typically included in an executive’s compensation package.
“We don’t have stock options like our larger competitors, so the vehicle remains an important tool in attracting and retaining top talent. Have we kicked around the idea of reimbursement? Yes. However, when senior leadership asks new hires if the vehicle was an important part of the package, the answer was yes,” said one fleet manager at a privately held company who wished to remain anonymous.[PAGEBREAK]
The trend is to have less expensive and flashy executive vehicles that also have a reduced carbon footprint and good fuel economy, according to Doreen Paris, fleet sales manager, West, Volvo Cars North America. “If a company already has a fleet program for non-executive drivers, this is a way to include a select few in a program who can take advantage of fleet incentives from a corporate buy,” said Paris. She noted fleet managers need to be looking for manufacturers that offer a broad range of products for the sales level to CEO, thus taking advantage of volume discounts.
“Including executives in the program allows them to buy more vehicle than possible with a reimbursement program,” said Paris. “One way to distinguish the upper levels, but not be ostentatious to the outside world, is to allow executives to order from the same selector but ‘load’ their vehicles with all the bells and whistles.”
According to one fleet manager who wanted to be anonymous, “It is an incredible perk for an executive to have a company-leased vehicle. Think of the services that come with the program. For example, the fleet manager and leasing company handle the vehicle acquisition and payment, the driver is provided with a fuel card, all maintenance is charged through the fleet management company, as well as registration renewals and state transfers and management of personal use tax reporting.”
At the most senior management level, vehicles are generally purely compensatory. For that reason, it doesn’t make much sense to have a standard fleet selector. This leaves two reimbursement options: setting dollar limits on a company-provided vehicle or providing a flat stipend with which the executive purchases or leases a vehicle directly. Of the two, the former has advantages:
- The fleet has greater control over how the vehicle is maintained and can provide personalized service.
- Executives won’t need to worry about mundane vehicle matters, such as registration renewal, insurance coverage, and repair services.
- Time is money. The stark fact is the more an employee is paid, the more expensive that employee’s time becomes to the company. It is not cost-effective to have a highly compensated senior executive preoccupied with day-to-day vehicle matters.
Has the Pendulum Swung Too Far?
In adverse times, such as today, there is a tendency to over-correct and allow the pendulum to swing too far in the other direction.
“I hope that the industry will continue to see that TCO (true cost of ownership) is a big part of any vehicle consideration, and that a company-provided executive vehicle is an excellent way to offer a cash alternative,” said Friedmann. “A company can get more value from providing a very nice vehicle versus just an increase in salary. We have also seen astute fleet managers steer execs toward manufacturers that offer a bona fide fleet program, which includes everything from a competitive incentive to a comprehensive courtesy delivery program.”
Despite everything currently being said in the marketplace, executive vehicles remain the most sought-after noncash perquisite for talented managers. In the final analysis, companies that offer a company-provided vehicle as part of their executive compensation program have a distinct advantage in recruiting, hiring, and retaining talent.