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?
In an economy dominated by inflation, employers need to rethink their car allowances if they want to be competitive. As employees face higher costs, it’s imperative to retain top talent with benefits that keep up with costs.
The employee car allowance is the weak link in many organizations' benefits packages. Vehicle-related costs have skyrocketed. New and used car prices are at historic highs. Gas prices 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 tool?
Car allowances were originally used to deliver additional compensation to employees. Instead of viewing it as a tool to help retain current employees, many businesses let years pass without reviewing the allowance. Now is not the time to settle for the "standard" car allowance. An allowance that is directly responsive to vehicle costs is an invaluable tool for retaining top employees.
A 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. By reviewing your policy and comparing it with non-taxable car reimbursement policies, such as a FAVR allowance, you may leverage your tax waste into a better benefit while saving company money.
4 Signs Your Car Allowance Isn't Competitive
If any one of the following statements is true, it’s time to review your policy and make it more robust.
1. You have not benchmarked your car allowance to competitors’ allowances.
The quickest way to determine a competitive rate is to find out what companies in your industry are paying. It is also helpful to find out what similarly-sized organizations in other industries are paying.
2. You have not compared your car allowance with your employees’ actual vehicle costs.
If your employees are accruing work-related vehicle expenses that exceed their monthly allowance, then the allowance is insufficient. Don't forget to use the after-tax amount. One way to provide an immediate boost to a car allowance is to remove tax waste and follow IRS rules for tax-free payments.
3. Your allowance amount was not based on expense data in the first place.
Gas prices vary from state to state, as do insurance premiums and the costs of maintenance and repair. Even within a state different counties can experience vastly different expenses. You need localized data to help you figure out the range of costs your employees face.
4. Your allowance has not increased in the last two years.
In the past year, auto insurance premiums have increased by 26%. This is on top of an increase of 19% from 2022 to 2023. The costs of maintenance and repair have increased as well, and gas prices remain stuck in the $3–$4/gallon range. Driver are facing higher costs than ever, and your allowance should reflect that.
Calculating a competitive car allowance for 2024
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.
You need to recalculate your employees' car allowances on at least an annual basis. But you also need to be willing to think outside the current car allowance paradigm. With 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:
1. Read our ultimate guide: Everything You Need to Know about Car Allowances.
2. Use regional gas prices to help establish a new allowance amount.
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.)
5. Contact mBurse – fair and flexible car reimbursements are our specialty, ranging from our FAVR car allowance to our pinpoint mileage rate.
Going beyond industry car allowance standards
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.
