Does Data Drive Your Auto Allowance/Reimbursement Policy? Or Are You Settling for “Good Enough”?
Data and analytics drive most aspects of our lives. We base most decisions on either historical or current data, especially when it comes to costs. Making decisions without data can create costly results.
Can you imagine if NASA tried to make it to the moon based on guesstimated calculations? We might have never made it to out of the atmosphere, much less to the moon or outer space. The whole space program would have been a colossal waste of money!
We use data in the business world to estimate margins, costs of services, and sales cycles. This data helps determine the best course of action. Data also helps us measure results and ensure that our policies and actions are delivering optimal value.
However, when it comes to your business vehicle program which are your car allowance amounts and mileage reimbursement rates, few organizations use data to inform their decisions. They tend to go with the most readily available solution without taking any time to determine whether their approach is cost-effective. In the age of data, they settle for the easiest solution and call it “good enough.”
Let’s examine why “good enough” typically results in “costlier than you think.” We’ll look at two of the most common forms of travel reimbursement: the IRS mileage rate and the flat, taxable car allowance.
- What the Data Says about the IRS Mileage Rate
When organizations use the IRS mileage rate, they are trusting in the rate without understanding how the rate is calculated. The mileage rate is a tax tool, created as a receipt exchange for expenses during tax time. The rate was not designed to be an accurate reimbursement tool.
Here’s how the IRS calculates the rate:
- Last year’s average fuel prices across the entire United States
- Depreciation and operating costs based on 14,000 annual driving miles, averaged using a blend of vehicle and their associated costs
In other words, the IRS takes the wide range of gas prices, fuel efficiencies, maintenance costs, and depreciation rates and blends them together into an average cents-per-mile amount. It’s a catch-all rate to make sure that anyone using the rate will not be “shorted” on their taxes. But it’s not meant to be accurate for all cars driven in all localities. A Prius driven in Wisconsin does not cost the same amount per mile as a Yukon driven in Washington state.
But here’s the real reason the IRS rate gets costly: the IRS rate puts your costs into the hands of your employees. The more they drive, the more they make. You also run the risk of employees estimating and over-reporting their mileage, which further increases your costs.
Here are some tell-tale signs that your mileage rate is costing you too much:
- Reimbursements regularly exceed $600/month
- Mileage is always rounded to the full mile
- Activity does not match productivity (i.e. employees are driving for dollars)
If any of this sounds familiar, you need
to find an accurate, data-driven rate that will properly reimburse employees without incentivizing empty miles.
- What the Data Says about the Flat, Taxable Car Allowance
Many organizations pay compensation as a substitute for reimbursement. A flat, taxable allowance is easy to administer but rarely matches actual employee expenses. In fact, the data says that mobile employees within the same company often experience quite a variety of expense levels, often based on territory sizes, territory costs, and levels of activity. What’s more, employees experience a 28%+ disadvantage from the burden of taxes compared to employees at companies that pay a mileage rate.
The real mystery, however, is how ma
ny companies arrive at the final allowance amount. Some companies mirror what their competitors are providing while others just settle into $500/month—the same amount they were paying 15 years ago! But costs have changed quite a bit over the past 15 years.
How do you know whether you are covering your employees’ costs? How do you know whether your allowance equitably compensates your drivers, given that they likely experience different levels of expense? The best barometers for flat, taxable car allowances are:
- Your attrition rates – people will leave if their costs are not being covered
- Your productivity vs. activity – if employees are driving less, they are probably trying to protect their income from the high costs of business travel
Here’s what we do know:
- Each employee has a different territory size
- Each employee has different costs to operate their vehicle
- Each employee drives a completely different vehicle based on their personal choice and lifestyle
Given this reality, how can you rationalize providing every employee the same amount?
The Solution: Leverage data to provide an allowance or reimbursement that fits ACTUAL driving costs
The best approach to solve this problem is not providing an equal business vehicle program or car allowance amounts or the IRS mileage rate. The best solution is to address each employee on a fair and consistent basis and incorporate their territory costs and size into their mileage reimbursement rate or allowance.
The data exists to help you make this a reality. You just have to use it. Contact us if you would like a free assessment.