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. Heading into a post-pandemic economy, employers need to rethink their car allowances if they want to be competitive. As demand for employees rises, it’s imperative to attract top talent and retain top talent. But offering the same car allowance you've offered in the past isn't going to cut it.
The employee car allowance is actually the weak link in a lot of organizations' benefits package, including many of your competitors'. You have to protect your employees’ compensation from the high and often volatile costs of operating a personal vehicle for business. But as one of our surveys revealed, the "industry standard" car allowance tends to be the most ignored and unreviewed part of most companies' compensation plans.
On top of that, the reduction in vehicle travel during the pandemic in 2020 caused many employers to reduce their car allowance, leaving many workers wondering whether their post-pandemic benefits will sufficiently offset their vehicle costs. Organizations that respond to this heightened sensitivity around 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 ever reviewing their actual allowance amount, focusing instead on the compensation package as a whole.
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.
5 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 benchmarked your car allowance to competitors’ allowances
- 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 changed in years
- You reduced your car allowance due to COVID-19
Calculating a competitive car allowance for 2021
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:
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.)
Going beyond industry 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.