In a report last year, LinkedIn estimated that the cost of losing an employee often equals 1.5 to 2 times that employee's salary. Here are some ways to calculate that cost – and to determine whether your car allowance or reimbursement policy is adding to turnover.

What's a car allowance, and how does it affect employee turnover?

A car allowance is typically paid as a monthly stipend to offset the costs of an employee operating a personal vehicle for work. As part of the paycheck, this is a form of compensation that is treated as taxable by the IRS. As a result, the negotiated car allowance amount is often significantly higher than the take-home amount.

Most car allowances fall within the range of $500 to $700 per month. Because of taxes, a $600 allowance may be reduced to $400 per month or less, which may not be enough to offset vehicle costs. As a result, an employee may apply at organizations that offer a higher allowance or that pay a non-taxable reimbursement such as the IRS mileage rate.

This tendency of taxable car allowances to contribute to turnover should be factored in when choosing the type of car allowance or reimbursement an organization offers. The fairest car allowance is called a FAVR allowance. This IRS-sanctioned method ensures that payments fully offset the business portion of using a vehicle for work. And all payments are tax-free.

How to calculate turnover rates within an organization

According to the LinkedIn report, the more technical or advanced the skills of the employee, the more costly it is to lose that employee. The more talented the employee, the more difficult it is to replace all that the employee brought to the organization.

When calculating the costs of turnover, start by grouping employees by office, department, or role. This can tell you quickly whether the factors pushing people out the door are tied to a particular location, management style, or job responsibility. If turnover is concentrated around workers who drive a lot for the organization, it might be related to the car allowance. 

To calculate a turnover rate, first determine the average number of employees within the company, within the department, within the location, etc., during a specified period of time. Then divide the number of departures during that same period by that average number you calculated. (Average = # of employees at beginning + # at end, divided by 2.) Multiply the result by 100 to get a percent rate.

Whether your turnover rate is cause for concern will depend on your industry, since some industries experience higher rates than others. However, even an average turnover rate can be extremely costly when you consider all of the hidden expenses.

Adding up the costs of employee turnover

Consider all of the following ways that attrition can add to your organization's costs:

• Loss of productivity leading up to and after a departure
• Loss of quality to your product or customer relations
• Cost of advertising for the open position
• Expense of time and energy spent recruiting and interviewing candidates (and paying for travel expenses if needed!)
• Costs of background checks, verifications, and other services required by your HR department
• Time and energy spent during the onboarding and training process

If a particular department, location, or role consistently experiences high turnover, then that becomes a compounding cost as that entire sector of your business experiences the strain that results. Once you consider all of these costs, it is easy to see why one departure can cost you 1.5 to 2 times that employee's annual salary.

Turnover related to employee benefits and business reimbursements

One specific role to check for high turnover would be any employee that receives travel reimbursements or a car allowance. If, for instance, you notice significant turnover among your sales reps that receive a car allowance, your business vehicle allowance policy may be a factor.

With inflation soaring, the high costs of vehicle ownership and operation are not being met by many standard car allowances. After tax withholding many drivers are not able to cover business-related vehicle costs and still maintain sufficient productivity for their job. Either they will cost the company in reduced productivity or by finding a different employer with a fairer vehicle reimbursement policy.

Employees who receive a mileage reimbursement can also get shortchanged if they do not drive enough miles each month to cover their actual costs, or if they work in a particularly expensive part of the country where a mileage rate based on average costs is not sufficient.

Using your car allowance or reimbursement to reduce turnover costs

Adopting a cost-effective and accurate vehicle reimbursement plan can pay dividends by reducing turnover. If an employee's departure can cost more than that employee's annual salary, then the math is pretty compelling.

By increasing one small portion of that employee's benefits, you save a much higher amount in turnover costs. The good news is that you can often increase your employees' car allowance take-home amount or reimbursement without significantly increasing your overall payroll or reimbursement costs.

If you are paying a taxable car allowance, by switching to a non-taxable allowance, you can offer a more robust benefit by repurposing the money that was going to the government. If you are paying a mileage reimbursement, you can often redistribute reimbursement amounts more fairly by adopting a more data-driven reimbursement model. 

To review your current allowance or reimbursement, get benchmarking data, and obtain a recommended rate, select the blue image below. To explore rate optimization tools for your business, contact mBurse.