What's an industry standard car allowance? Turns out, most companies ignore their employee car allowance when they could instead turn it into a business tool to attract and retain talent.
Is your car allowance policy competitive?
Competition lies at the heart of the American economy. In an economy dominated by inflation, employers need to rethink their car allowances if they want to be competitive. As employees face higher costs of living, it’s imperative to retain top talent with benefits that keep up with costs. Offering the same car allowance you've offered in the past will not cut it.
The employee car allowance is the weak link in many organizations' benefits packages. You have to protect your employees’ compensation from the high and often volatile costs of operating a personal vehicle for business. But as our annual surveys reveal, the "industry standard" car allowance tends to be the most unreviewed part of companies' compensation plans – perhaps including your competitors' plans.
Over the past two years, vehicle-related costs have skyrocketed. New and used car prices are at record highs. Gas prices hit record highs over the summer and remain relatively high. Insurance premiums are increasing. And all of this is on top of the expenses of daily life increasing for everyone. Organizations that respond to the need for more robust car allowances will gain a competitive edge.
Disguised compensation or competitive business tool?
Car allowances were originally used as a way to deliver additional compensation to employees. Instead of viewing it as a dynamic business tool to help retain current employees, many businesses let years pass without reviewing their actual allowance amount.
But now is not the time to settle for the "standard" car allowance. Instead, you need to turn it into a business tool that covers all mobile employees’ costs. An allowance that is directly responsive to employees’ vehicle costs is an invaluable tool for retaining top employees.
A key weakness of a standard monthly car allowance is taxes. A huge chunk of the monthly payment – often 30 to 40 percent – goes to the government, instead of to the employee. By reviewing your policy and comparing it with non-taxable car reimbursement policies, such as the fixed and variable rate car allowance (FAVR), you may be able to leverage your current tax waste into a better benefit for employees while saving the company money.
4 signs your car allowance policy can't compete
So how do you know if your car allowance is a competitive business tool? If any one of the following statements is true, it’s time to review your policy and make it more robust.
You have not compared your car allowance with your employees’ actual vehicle costs
Your allowance amount was not based on expense data in the first place
Your allowance has not increased in the last two years
Calculating a competitive car allowance for 2023
Before making any adjustments to your policy, it’s important to understand the challenge the standard car allowance faces: All mobile employees do not experience the same costs or territory sizes.
Unless all employees work in the same geographical location, drive similar distances, and drive similar vehicles, you will see a wide variety of expenses associated with driving personal vehicles for work. While some employees may find the allowance adequate or even generous, others may find it insufficient. This disparity will affect morale, dampen productivity, and ultimately drive some employees out the door.
These challenges are not insurmountable. But you do need to recalculate your employees' car allowances on at least an annual basis. With a willingness to think outside the current car allowance paradigm and a willingness to do a bit of research, you will find that a robust, competitive plan lies within your grasp.
5 car allowance tools to sharpen your competitive edge:
3. Factor regional car insurance costs into the new amount as well.
4. Provide a fixed and variable rate car allowance (FAVR) instead of a traditional allowance to address unequal territory sizes and costs and remove tax waste. (See our FAVR comparison calculator below.)
It is imperative to go beyond the "industry standard" car allowance to remain competitive in the marketplace. You want to incentivize employees while covering their costs. This keeps top talent in your organization and sets you up to attract new employees.
Contact mBurse today for a free benchmarking report comparing your car allowance policy to industry-leading policies.