The True Cost of a Car Allowance

Written by mBurse Team Member Jun 1, 2017 9:58:48 AM

The car allowance is one of the most overlooked business tools within most organizations. It seems simple on the surface. Mobile employees—anyone who uses a vehicle to complete their job—receive a certain amount of money each month to cover gas and other car-related expenses. But car allowances and business vehicle policies often create unnoticed problems that add up over time. As a result, the true costs of auto reimbursement tend to go overlooked. 

Whether a company provides a flat amount to all mobile employees or reimburses a certain amount per mile, it’s usually considered a minor expense in the grand scheme of things, and not given much scrutiny. But there are fundamental and costly problems associated with both of these common approaches.

How much is a fair vehicle reimbursement

The Hidden Costs of Flat Allowances and Mileage Rates
Employees who receive a flat, taxable auto allowance often take steps to maximize their benefits to the detriment of the company. They may forgo face-to-face meetings that require travel and replace them whenever possible with phone calls, webinars, and other sales tactics that simply aren’t as effective as an in-person meeting. As a result, they pocket a larger portion of their auto allowance, but their reduced effort with clients costs the company.

Some companies try to remedy this problem by reimbursing employees per mile driven instead. But this still often doesn’t provide a cost-effective solution. When employees are asked to record and report their mileage, most find it tedious to keep track of the exact figures and provide estimates instead. And with these estimates, let's be honest—most people are going to round the figures up. The result? Your company pays for miles not actually driven.

The discrepancies in these figures can cost a company millions of dollars over time. But most businesses don’t notice these costs, failing to see the importance of accurate compensation for travel expenses.

The Importance of a Data-Driven Car Allowance
We live in the age of data. And data exists that can allow a company to reimburse mobile employees accurately and fairly. The best part is, it's not as difficult as it might sound. With the right tools, your organization can offer a data-driven car allowance that increases productivity and cuts costs.

Best Practices

The True Cost of a Car Allowance
It’s easy to overlook the hidden costs of an auto allowance. Mobile employees receiving a flat allowance may drive less to save money, costing the company in sales. Or they may round up their mileage estimates. These costs add up over time. But let's look at it from the employee's perspective.

What if the auto allowance simply doesn't cover the true costs of using a personal vehicle for company purposes? These allowances were originally intended to compensate employees; providing more of a perk: a bit of extra money on top of a regular salary, an incentive when recruiting new employees. However, in recent years, the car allowance has changed in an attempt to provide adequate reimbursement for what they spent out of pocket getting from point A to point B.

Because of this, auto allowances are often implemented subjectively, rather than using hard data. And the amount then remains the same, regardless of real world factors such as territory size and current fuel prices. Does this truly cover the costs of all employees?

Equal Does Not Mean Equitable
Many employers think the way to ensure fairness is to make all employees’ auto allowances equal. However, equal is not necessarily equitable. Consider companies that span large portions of the country. Gas prices are much higher in California and Washington than in Texas and Oklahoma. So to give employees in Los Angeles the same allowance or mileage rate as employees in Houston is equal, but unfair. And what about the difference in fuel efficiency between individual vehicles? To make up for inadequate compensation, employees with higher costs will try to drive less, ultimately cutting into their productivity.

What's worse, it’s common to find organizations that have not changed the allowance amount in years. Their employees are expected to make do with 2000-era auto allowances while paying 2017 prices. Subjectively based allowances can even have the opposite effect. When companies finally do attempt to update their allowance, some end up overcompensating, cutting into their bottom line.

Responsible Reimbursement in a Mobile Age
Whether you're overpaying or underpaying, it’s clear that not paying enough attention to your company’s auto allowance is detrimental to your business. Today's workforce is increasingly mobile. This shift means that misguided approaches to auto reimbursement will only grow more costly—both to employer and employee.

It’s time to find a better way. It's time to base reimbursement on hard data that accurately and equitably compensates mobile employees. This data exists, and with the right tools, your company can offer fair and cost-effective car allowances.

How strong is your car allowance or mileage reimbursement?

icon of envelope

Subscribe by Email