FACING RISING REIMBURSEMENT COSTS:HOW COMPANY VEHICLE PROGRAMS HELP

BUSINESSES RUN ON ALL CYLINDERS

automotive fleet & leasing association white paper series • volume 9

Today’s business is faced with many challenges, including maintaining return on investment, achieving regulatory and

corporate compliance, minimizing risk, maximizing efficiencies, and hiring and retaining valuable employee resources. How a company approaches business travel, especially, business driving, impacts all of these areas. There are two options when it comes to business driving: first, provide a reimbursement / car allowance program for employees to drive their personal vehicles, or second, offer a company-provided vehicle to employees who drive on business. Two myths which persist, despite having been disproved by many successful businesses, are that reimbursement / car allowance programs reduce risk and costs for an organization, and that company-provided vehicles are cumbersome to administer and offer less cost control.

These concepts date back decades ago, well before this age of global sourcing, Sarbanes-Oxley compliance, and environmental “green” initiatives. They precede, and, therefore, didn’t take into account technological advances such as email, websites, webcasts, electronic data interchange, electronic imaging, and e-commerce. Back then, a “dashboard alert” meant only that a driver needed to check the engine, rather than providing an early-warning of a fleet operational issue for the fleet manager. Today, technology and service developments assure that corporate fleet management is a more effective alternative to reimbursement/car allowance programs. Corporate America has taken notice. In a survey of Fortune 500 companies, over 75% offer company-provided vehicles to eligible employees. This white paper will examine both business driving options, and evaluate the impact each has on today’s business challenges. REIMBURSEMENT / CAR ALLOWANCE PROGRAM

Of course, reimbursement and car allowance programs are actually different methodologies:• Reimbursement is where the company pays employees for

business mileage and/or related expenses that are reported to the company on a scheduled basis, usually monthly, and tracked internally.• Car allowance is where the company gives employees a fixedamount each month to cover expenses related to business driving.• Some companies utilize a combination of the two, providing both a fixed monthly amount, and a cents-per-mile reimburse-ment of business driving. There is a tax-free version of this com-bined program, known as FAVR (Fixed and Variable Reimburse-ment), which will be discussed further on in this paper.

COMPANY VEHICLE PROGRAM

Today, most large company vehicle programs (a.k.a. fleet programs) involve professional fleet management companies. By utilizing fleet professionals, such as Automotive Resources International (ARI), companies can leverage the management company’s investment in fleet systems and fleet expertise at a cost far less than creating a like-structure within their own organization. Companies that manage a fleet program in-house do so for various reasons, including the organic evolution of their business, and size of their fleet. Company vehicle programs typically involve the following activities:• Vehicle acquisition• Vehicle disposition• Licensing & violations management• Fuel management• Vehicle maintenance• Accident management• Driver safety training• Personal use tracking• Driver administration (driver inquiries)• Insurance card distribution & renewal

These functions, and more, can be provided by a professional fleet management company, minimizing involvement by corporate stakeholders.

FACING RISING REIMBURSEMENT COSTS: HOW COMPANY VEHICLE PROGRAMS HELP BUSINESSES FIRE ON ALL CYLINDERS

BETWEEN 2003AND 2006, THE IRS BUSINESS STANDARD MILEAGE RATE HAS EXCEEDED FLEET COSTS BY AN AVERAGE OF:≠ 10.8¢ PER MILE FOR INTERMEDIATE CARS,≠ 7.5 PER MILE FOR MINIVANS, AND≠ 8¢ PER MILE FORSUVS.

75% OF FORTUNE 500 COMPANIES OFFER A COMPANY VEHICLE PROGRAM.

RETURN ON INVESTMENT To identify which option is best for your bottom line, we will examine key cost factors. Over the past several years, there has been a significant gap between the IRS business standard mileage rate and fleet vehicle cost per mile rates. Figures 1.1, 1.2, and 1.3 il-lustrate this trend over time for three different vehicle classifications. Much of the difference in costs can be explained by the fact that the IRS rate is based on the retail environment of an individual buyer, and fleet costs are based on discounted rates resulting from a company’s centralized purchasing power. Fur-ther analysis shows divergent trends in costs between reimbursement and fleet.

COST TRENDS

Since 2003, the business standard mile-age rate for reimbursement set by the IRS has risen over 40%. The rate for calendar year 2008 has been set at 50.5¢ per mile, which is a 14.5¢ per mile increase over 2003’s rate. Some of the factors contributing to this reimbursement increase also affect a compa-ny provided fleet, for example, increased fuel prices. However, some factors actually trend in the opposite direction for corporate fleets, which will further increase the gap between

fleet costs and IRS reimbursement rates. We will examine the top five cost factors. DEPRECIATION:Simply put, depreciation for vehicles is equal to the acquisition price of the vehicle less the residual, or resale value. Consider that 21¢ of the IRS rate covers deprecia-tion of a vehicle, up from 16¢ for deprecia-tion in the 2003 standard business mileage rate. This is an increase of over 31% for depreciation. While acquisition pricing for import vehicles has followed this upward trend, domestic manufacturers show a drop in

Figure 1.1 (Reference Table 1.1)

Figure 1.2 (Reference Table 1.2)

Figure 1.3 (Reference Table 1.3)

pricing during the same time period, 2003 to 2008. Figure 2 il-lustrates the difference in factory invoice prices for three popular domestic models, the Chevrolet Impala LS midsize sedan, the Ford Explorer XLT 4x4 SUV, the Dodge Grand Caravan SE mini-van, as well as two popular import models, the Honda Accord EX midsize sedan, and the Toyota Camry LE midsize sedan. Because of their retail success, Toyota and Honda have not made fleet as high a priority as the domestic manufacturers. Toyota is making strides in developing a fleet program, but they, and other foreign manufacturers, have yet to match domestic manufacturers’ fleet organizations. They remain focused mainly on retail business. Another factor to consider is volume purchasing contracts that fleet managers can negotiate with manufacturers to drive further cost savings to the bottom line. Economic woes felt by domestic manufacturers have translated into deep discounts for fleet buy-ers over the past few years. Though this inventory clearance cannot be sustained in the long run, reimbursement rates will go up when prices trend up-ward. The other side of depreciation is residuals or vehicle resale values. As a percentage of original vehicle cost, resale values in the fleet industry have remained strong. As Figure 2.2 illustrates, since 2003, three year old fleet vehicles have consistently retained over 45% of their initial value.Taken together, favorable acquisition pricing and steady resale values for fleet vehicles provide an advantage to company vehicle fleets through lower depreciation costs. FUEL COSTS: Rising fuel costs affect both reimbursement rate increases, and fleet cost increases equally. For drivers in either scenario,

fuel is being purchased at retail fueling stations. Reimburse-ment rates calculations do not discount fuel prices. One advantage that companies have in the fleet environment is fuel rebates. If your fleet’s annual fuel purchases are large enough collectively, you can negotiate a percentage rebate of all fueling purchases. Many fleet and fuel management companies will offer this benefit to eligible customers.

MAINTENANCE:Maintenance costs have been trending downward for fleet vehicles. There are many causative factors, and it is difficult to pin down the exact impact each has on the cost

trends. Figure 3 illustrates the collective effect they have on fleet maintenance costs. Even with the upward move for minivan main-tenance costs in 2006, maintenance costs across all categories in 2006 are down an average of 0.47¢ per mile over 2003 costs. Causative factors include:• Increased durability of vehicles,• Increased adherence to manufacturer’s recommended preven-tive maintenance (PM) schedules,• Extended warranty periods,• Proper repair negotiation with vendors,• Post-warranty credits for repairs negotiated with the manufac-turer, and• Increased usage of discounted national vendor networks. While durability of vehicles, adherence to PM schedules, and extended warranties can impact the retail/reimbursement world, the other causative factors that drive maintenance costs down-ward are only available through professional fleet management companies.

FIGURE 2.2 (Reference Table 2.2)

Figure 2.1 (Reference Table 2.1)

INSURANCE:Often fleet liability coverage is accomplished by an incremental in-crease in general liability insurance, but can be arranged through a separate auto policy. When proper liability coverage of a vehicle driven for company business is secured by the employee, insur-ance rates are much higher and, for some employees, unattain-able. This impacts new college graduates the most, given their age and short driving record. For some, a policy can cost $5,000 annually, and this factor alone would result in a higher salary demand, or a declined job offer. Reimbursement rates, properly calculated will factor in a much higher cost for insurance premiums than would be incurred by a corporate fleet.

ACCIDENT REPAIRS:Accident repairs are an expense that is trending upwards. There are several causes for this, including an increase in the number of airbags in a vehicle, in-creased use of electronics, (think navigation systems and Bluetooth technology), part price increases, an OEM shift to selling “assemblies” rather than individ-ual parts, and increased use of plastic components to lighten vehicles, but that are more easily damaged in an accident. As illustrated in Figure 4, the aver-age cost of a fleet claim in 2006 was up 4.4% over 2003 averages. This trend will continue as causative

fators mentioned above will continue to contribute to rising costs. Accident-related costs such as health fringe benefits, and worker’s comp, will be discussed in the Regulatory & Corporate Compliance section.

COST MODEL VARIATIONS

When evaluating a company provided vehicle program as an alternative to reimbursement, many variables come into play. Reimbursement amounts and methods can vary, vehicle offerings can vary, and vehicle usage can vary, among other factors.

REIMBURSEMENT AMOUNTS & METHODS:If a company reimburses employees through cents-per-mile, the most com-

monly used amount is the IRS standard business mileage rate. This rate is set each calendar year, (and sometimes changed during the year)*, by the IRS. Companies can choose a differ-ent cents-per-mile reimbursement, but this may have a negative effect on employees who are aware of the IRS rate and may view a reimbursement amount less than this standard as a drain on their wallet. Also, low mileage drivers may not be able to cover the additional fixed costs incurred over time, such as liability premiums. Provided that the employee is required to report busi-ness mileage on a regular basis, reimbursement at or below the IRS standard rate is not taxable. Companies may also choose to provide a car allowance, (a fixed monthly payment not tied to mileage). Some companies

FIGURE 3 (Reference Table 3)

choose this method as a way to limit their reim-bursement costs, because it is a fixed amount and does not fluctuate with miles driven. There are downsides to this method as well. First, it treats all employees equally, though employee costs will fluctuate with vehicle usage. Therefore, drivers with larger territories to cover are in essence penal-ized, while drivers with low mileage may receive allowances in excess of their actual costs. To make mattersworse, fixed allowance payments are considered taxable income, so drivers would not be receiv-ing the full benefit of the payment, and companies would incur a matching FICA obligation of 7.65% of the allowance payments. The third method is a combination of a cents-per-mile reimbursement for business mileage and a fixed monthly allowance. The benefit to this method is that it is the fairest way to pay employees for use of their vehicles. This method, however, is consid-ered taxable income, resulting in FICA obligation for companies, unless it meets numerous obligations set forth by the IRS for FAVR (Fixed and Variable Reimbursement) plans. There are over 45 IRS rules that apply to a FAVR plan, and without proper tracking and verification of these requirements for each employee, businesses can open themselves up to tax liabilities, penalties and interest. For this reason, most companies do not attempt to institute a FAVR reimbursement plan without third-party man-agement of the program.

VEHICLE USAGE:Total life of vehicle costs will vary based on usage of the vehicle. Higher mileage drivers will need vehicle replacements on a more frequent basis, and will incur greater operating costs in the same period of time as a lower mileage driver. At certain mileage ranges, it may make sense to reimburse mileage because it is the cheaper alternative to providing a company vehicle. The question is, at what point does it make sense to provide a company vehicle in lieu of reimbursement? By examining different annual mileage groupings,

*The standard business mileage rate was raised another 16% to $0.585 per mile since the original writing of this white paper. All figures within this paper

concerning reimbursement at the IRS mileage rate were calculated using the $0.505 per mile rate in effect as of Jan. 1, 2008.

as seen in Figure 5.1, we see that for a 2008 Ford Taurus SEL Sedan, the breakeven point is around 13,000 miles per year when compared to the IRS standard business mileage rate. When comparing fleet costs to a car allowance program, the breakeven point is actually reversed, where car allowance is more expensive in lower mileages, and less expensive in upper mileages. Figure 5.2 illustrates a comparison of typical fleet costs for a 2008 Ford Taurus SEL sedan and a car allowance of $700 per month*. However, because higher mileage drivers would bear significant out-of-pocket expenses to supplement their car allow-ance, the negative productivity and morale this would produce makes car allowances for high mileage drivers inadvisable. The third method, a combination of a cost-per-mile reim-

bursement and fixed monthly allowance, shows that only at the upper mileage range do companies realize any monetary benefit. Figure 5.3 illustrates the comparison of typical fleet costs for a 2008 Ford Taurus SEL sedan and a monthly allowance of $450 and reimbursement of $0.20 per mile.

VEHICLE VARIATION:The types of vehicles a company chooses to provide to employ-ees also impacts the amount of cost savings a company vehicle program will provide. Adding in two additional vehicles to Figure 5.1, we see in Figure 6.1 that different vehicles will have different breakeven points when compared to the IRS standard business mileage rate. As Figure 6.1 illustrates, companies will get the most benefit from structuring company vehicle offerings accord-

ing to mileage driven. For instance, it would be more economical to place lower mileage drivers in a vehicle such as the Ford Fusion, and reserve the Ford Taurus level for mid-range mileage drivers who may be more comfort-conscious given the amount of time spent in their vehicle. Finally, utilizing a vehicle such as the Toyota Camry Hybrid for drivers in the highest annual mileage groupings may be desirable. This class of vehicle would still provide the comfort room for high mileage drivers, while savings on fuel costs in these mileage ranges would re-coup a higher acquisition cost. Figures 5.1, 5.2, 5.3 and 6.1 may be difficult to analyze from one annual mileage group to the next because they have varying months in service. For instance, at 10,000 miles per year, we’ve chosen a

five year replacement term, where at 25,000 miles per year, we chose a three year replacement term. This will affect the associated fixed costs. To more clearly illus-trate the comparison between the IRS standard mileage rate and typical fleet costs, we’ve added Figure 6.2, which shows costs averaged over each year in service. The point is clear, for most business drivers, a company provided vehicle will be more economical for the employer.

ACHIEVING REGULATORY AND CORPORATE COMPLIANCE Ask someone at your company what “compliance” means to them, and you may get a different answer for every person you ask. This is because compliance has grown beyond traditional compliance with government

regulations. It concerns all forms of corporate compliance as well, including health, safety, security and environmental (HSSE). REGULATORY COMPLIANCE

Government regulations affect all areas of an organization, including fleet and reimbursement programs. This paper does not intend to cover all affected areas, but to examine a few

of these issues as it relates to vehicle types most often relegated to reimbursement programs. For

example, there are a number of regulatory issues involving larger trucks, (DOT), but these will not be discussed since these types of vehicles are usually not under reimbursement programs.

SARBANES OXLEY: With passage of the Sarbanes-Oxley Act (SOX), businesses faced yet another regulatory chore, additional rules for financial disclosures, including accounting for tax liabilities. Because of the numerous requirements to meet the IRS rules for FAVR reimbursement plans, the possibility for error increases and can lead to non-compliance with SOX. As mentioned previously, companies who utilize a FAVR program generally utilize a third-party management company. However, this does not remove the SOX obligation or risk if the management company does not comply. If a company wishes to pursue a FAVR program, it is recommended that the management company be required to provide a guarantee of compliance with Sarbanes Oxley.

VIOLATIONS: Of course, drivers of company vehicles do incur violations from time to time. These can include red-light camera violations, toll violations, and parking violations. Failure to pay these violations can result in the suspension of licensing for all vehicles owned by or leased to your company. For this reason, if a company chooses to institute a fleet program, it is recommended that they utilize a management company who can centralize payment for past-due violations, and track any obligations before licensing suspension can occur. It is also recommended that the company policy state that drivers

will not be reimbursed for the cost of any violations, and will be responsible for any administrative fees associated with processing unpaid violations. The fleet management company can also pursue payment from drivers for violations paid on their behalf. PERSONAL USE REPORTING: Employees who drive a company vehicle for personal use are subject to taxation for that “fringe benefit”. There are a number of ways to handle this obligation, but the most common method, and also preferred by the IRS, is based on the Annual Lease Value of a vehicle. Simply stated, an annual value for a leased vehicle is assessed based on the initial cost of the vehicle, and the vehicle age, and multiplied by the percentage of personal use of the vehicle. The product is considered taxable “imputedincome”. Fleet management companies can manage this mileagetracking process, and reconcile any discrepancies with the driver. Another practice that is growing in popularity is to utilize the Annual Lease Value method for calculating tax obligations, but to also collect a monthly payment from drivers in the form of a payroll deduction to cover personal use. These payments, if equal to or in excess of imputed income, will eliminate tax payments required from the employee, or by the company asin the case of matching FICA payments. Consider the following example:

ENVIRONMENTAL

Becoming “green” is on everyone’s minds these days. More news reports, trade magazine articles, and business seminars either touch on or focus on this topic. Corporate America is getting on board. Business drivers are a focus for boardrooms who want to reduce their company’s impact on the environment. Consider that consumption of 1 gallon of gas emits approximately 20 pounds of carbon output. If you have 100 drivers on the road, burning 1,000 gallons of gas each per

THE FLEET MANAGEMENT COMPANY CAN ALSO PURSUE PAYMENT FROM DRIVERS FOR VIOLATIONS PAID ON THEIR BEHALF.

year, your company is responsible for 2 million pounds of carbon output. If your company is looking for ways to be more “green”, thenreimbursement programs are problematic since drivers on reimbursement are uncontrollable. There is no control over the types of vehicles they drive, how well their vehicles are maintained, or the type of fuel they are utilizing. Fleet programs, on the other hand, deliver these controls. A well run fleet program will provide consultation on implementing “green”fleet initiatives. These can include:• Vehicle selection and power-train configuration• Reducing idling• Proper upfitting• Monitoring fuel choice (premium fuel contributes 30% more greenhouse gas than regular unleaded gasoline)• Avoid overloading vehicles• Maintaining vehicles (dirty air filters reduce fuel economy by 10%)• Route planning• Addressing driving behaviors (such as jack-rabbit starts)• Tire care• Timely vehicle replacements

SAFETY & SECURITY

Whether an employee drives a company vehicle or their own vehicle on business, safety of the employee is of concern to their company. Whatever steps a company takes for employees driving company vehicles should also be taken for those driving under reimbursement. FITNESS TO DRIVE: Ensuing an employee is fit to drive can include running motor vehicle record checks, providing driver safety training, and driver awareness testing. This is an area where professional fleet management companies can lend expertise to both company fleets as well as reimbursement programs. Since all of these activities are driver-based, leasing or management of company vehicles is not required to obtain these services.

SECURE VEHICLES: Many employees who drive on business carry valuable samples or equipment in their vehicle. Ensuring that these valuables are securely stored can save the company losses from theft. Centralizing control of vehicle specifications through a fleet program enables companies to ensure, for instance, that drivers have proper cargo covers or tinted windows to obscure view of cargo. When drivers use their personal vehicle, companies lose this control.

FRAUD: Where there are expenditures, there is an opportunity for fraud. This can be true of either reimbursement or fleet programs. Under reimbursement, employees will pursue maximum reimbursement for mileage and expenses, and the temptation of exaggerating business mileage increases when employees feel they are not being adequately reimbursed. According to Automotive Fleet, “when a company switches to a driver reimbursement program it can expect a 30% exaggeration of business miles driven”. Even if you experience half of this, it is still a significant increase in cost. One of the cost elements closely monitored by fleet managers for potential fraud is fuel expense. Since the company is on the hook if a fleet fuelcard falls into the “wrong hands”, or is misappropriated by an employee, identifying these incidents quickly is of upmost concern. Fleet management companies, like ARI, can deliver immediate alerts to your email, and/or online fleet “dashboard” when any fueling parameter you establish is violated. Fleet fuel cards require a driver personal identification number (PIN) in order to utilize the card electronically. This provides another safeguard in the event of a lost or stolen card. Fleet management systems also have the ability to immediately shut off cards and driver PINs.

MINIMIZING RISKSThere is no doubt that there are differences between having company vehicles and utilizing reimbursement when it comes to corporate liability, but the amount of difference between the two is subject to debate. There are three liability arguments often associated with motor vehicles: respondeat superior, vicarious liability, and negligent entrustment.

IF YOUR COMPANY IS LOOKING FOR WAYS TO BE MORE “GREEN”, THEN REIMBURSEMENT PROGRAMS ARE PROBLEMATIC SINCE DRIVERS ON REIMBURSEMENT ARE UNCONTROL-LABLE.

RESPONDEAT SUPERIOR: Latin for “let the master answer,” a key doctrine in the law of agency, which provides that a principal (employer) is responsible for the actions of his/her/its agent (employee) in the “course of employment.” Thus, an agent who signs an agreement to purchase goods for his employer in the name of the employer can create a binding contract between the seller and the employer. This principle would apply to employees driving under a reimbursement plan, or those driving company vehicles.

VICARIOUS LIABILITY: “Vicarious Liability, sometimes called “imputed liability,” attachment of responsibility to a person for harm or damages caused by another person in either a negligence lawsuit or criminal prosecution. Thus, an employer of an employee who injures someone through negligence while in the scope of employment (doing work for the employer) is vicariously liable for damages to the injured person.” This principle would also apply to employees driving under a reimbursement plan, or those driving company vehicles.

NEGLIGENT ENTRUSTMENT: Negligent entrustment is a concept in tort law that arises where one party (the entrustor) is found responsible for negligently providing another party (the entrustee) with a dangerous instrumentality, and the entrusted party caused injury to a third party with that instrumentality. The issue typically arises in the context of a person allowing another to drive their automobile. Negligent entrustment often refers to entrusting a vehicle to an individual without ensuring that the individual has a valid driver’s license or allowing the person to drive a vehicle despite the individual’s past driving history, known or unknown.This applies to employees driving company vehicles, mainly. The dangerous instrumentality is the automobile, and the entrustee is the employee. Companies can minimize their exposure by ensuring they perform proper, and regular, motor

vehicle license checks, provide driver training, and perform driver awareness testing. Fleet management companies can provide these services, and maintain complete records on all drivers.

CONTROLLING RISK DEFERRED MAINTENANCE: A driver has a tire blow out on the highway while on a sales call in their personal vehicle, and collides with a 3rd party who sustains injuries. The ensuing accident investigation showed that the employee’s tires were too worn and should have been replaced long ago. The 3rd party sues the employee, and your company based on the respondeat superior argument. The employee’s decision to defer the expense of new tires ended up costing them, and your company, much more in the end.Unfortunately, deferred maintenance is a risk that drivers run when they are unable to pay out-of-pocket for expensive repairs.Properly maintaining vehicles is a crucial step in safe driving. Employees in fleet vehicles will not avoid getting maintenance performed because of budgetary concerns. Fleet programs also provide control through monitoring vehicles for compliance with recommended preventive maintenance schedules, and advising drivers and interested managers of overdue maintenance.

VEHICLE SPECIFICATIONS:When drivers are acquiring a personal vehicle, they will get the vehicle they can best afford. Sometimes this means forgoing options such as side airbags and anti-lock brakes. Without proper safety equipment, drivers can sustain more severe injuries in the event of a crash. This will result in higher costs related to health insurance and worker’s compensation should the accident occur on the job.

COMPANIES CAN SET STANDARDS FOR FLEET VEHICLES THAT REQUIRE SPECIFIC SAFETY EQUIPMENT, ENSURING ALL EMPLOYEES ARE PROTECTED PROPERLY.

Companies can set standards for fleet vehicles that require specific safety equipment, ensuring all employees are properly protected. PROPER LIABILITY COVERAGE:As mentioned in the Return on Investment section earlier, insurance polices for drivers that provide proper insurance for business driving can cost $5,000 per year or more. The high cost of insurance that an individual has to bear can lead to employees taking out policies without notifying their carrier that the vehicle will be used on company business. This presents an increased risk to the company, as many insurers will void coverage in the event of an accident that occurs during business use if this was not disclosed when the policy was issued. Another risk to employ-ers is when employees on reimbursement allow their insurance coverage to lapse. Even though employees may be required to provide proof of insurance at the beginning of the year this does not guarantee they will remain covered throughout the rest of the year. Fleet vehicles are covered under corporate policies, and the risk of these policies lapsing is slim to none.

ACCIDENTS ON PERSONAL TIME: It is often thought that a company will have less liability exposure under reimbursement because any accidents that oc-cur on the employee’s personal time cannot be tied back to the company. This point, as any point, can still be argued by a lawyer, but the thought we’d like to raise is, at what cost? As Figure 7.1 will show, according to statistics by the National Traffic Safety Administration, 66% of all accidents occur during likely work hours, Monday through Friday. NHTSA statistics are based on all drivers. If you look at when accidents occur for fleet drivers, the numbers are even more significant. Based on over 60,000 accidents reported to ARI between 2005 and 2007, 78% of all fleet accidents occurred during “likely” working hours, see Figure 7.2 below. As these charts illustrate, a great majority of accidents occur when your employees may be acting as agents of your company, and thus, exposing you to risk, regard-less of whether they are driving a company vehicle or their personal vehicle on company business. You need to examine which approach is better:• Utilizing reimbursement/allowance programs to “eliminate” the small portion of risk from personal use

of vehicles, or• Utilizing a company vehicle program to gain control over the great majority of risk arising from business driving

MAXIMIZING EFFICIENCIESCar allowance / reimbursement programs and company fleet programs affect many individuals throughout an organization. The most affected are drivers, but there are other corporate stakeholders impacted as well. Drivers must perform certain tasks related to their business use of any vehicle. Documentation of business use, maintain-ing receipts, searching for and acquiring new vehicles, manag-ing maintenance repairs, and managing accident repairs are some activities for which drivers may be responsible. Managing a personal vehicle requires more driver time, than managing a company provided vehicle, because the company, (or fleet management provider), assumes the administrative and manage-ment burdens for many fleet functions. The table below compares administration duties for both scenarios.

Fleet management companies also bring other competencies to the table that can help your drivers become more efficient in their jobs. One example is route optimization available through telematics. If you have a sales force that makes numerous calls throughout the day, route optimization can help them make the same amount of calls in less time, or more calls in the same amount of time. It can also result in additional savings through reduced fuel consumption.

CORPORATE STAKEHOLDERSThe scope of a reimbursement / car allowance program stretch-es beyond payments made to drivers, and includes stakeholders throughout the organization:• HR is often the department responsible for administering the program,• Accounting keeps track of expense and mileage reporting, and issues variable payments,• Payroll keeps track of payments for taxable income• Risk deals with corporate liability exposure from employees acting as the company’s agent on the road,• Finance/Treasury must determine fair payment levels for each employee classification each fiscal year, and• Sales must deal with employee motivation and productivity.The effect of a company vehicle program on corporate stake-holders varies based on the extent to which a fleet management company is leveraged.For instance:• System integration with Enterprise Resource Planning (ERP)systems such as PeopleSoft can automate HR activities regardingdriver database maintenance.• System integration with ERPs such as SAP, or other accountingsystems, automates loading of all fleet expenses and assigning of general ledger coding• Fringe benefit taxation is calculated by the fleet managementcompany and reported to Payroll• Finance/Treasury must determine whether they want to lease or purchase vehicles, and• Fleet Manager oversees fleet budget and operations

RECRUITING AND RETAINING EMPLOYEES Human Resources is definitely impacted by the method through which companies choose to handle business driving. This choice affects both recruitment and retention of employees.

RECRUITING

You’re at a job fair, and across from you is your major com-petitor. What do you think sounds more attractive to a potential candidate? Your company’s offer of mileage reimbursement or your competitor’s offer of a new vehicle every three years, all expenses paid? In today’s competitive world of recruiting good employees, Human Resources will use all the tools at their disposal, and a company vehicle benefit is a formidable arrow in their quiver. According to a recent article in Automotive Fleet, “Past industry surveys have shown prospective employees view a company vehicle as an equivalent benefit to health care coverage and pension benefits.” One argument for reimbursement is that employees are able to drive the vehicle of their choice. This may be initially appeal-ing, but based on issues raised throughout this paper, it may not be attractive in the long run. Increasing out-of-pocket costs and administration become a burden on employees. RETENTION

As with recruiting, the provision of a company vehicle is an influencer in employee retention. Companies have discovered the hard way just how important their company vehicle program was, after they decided to switch to reimbursement. It results in a noticeable uptick in employee turnover. According to a recent article in Automotive Fleet, “Employee turnover increases when a company eliminates a company pro-vided vehicle program. There is about a 10% loss in workforce because employees do not like a reimbursement program.”It is advisable that prior to making a move away from a company vehicle program, a statistical survey of driver preferences be performed so you can ascertain the level of importance this employee benefit has to your workforce.

PUSHING COSTS ONTO EMPLOYEES: Some businesses eye the fleet budget as an easy target for cost savings by switching to a reimbursement or car allowance program. As shown above, a reasonable reimbursement or car allowance program will be more expensive than a fleet program. However, companies can achieve significant savings by eliminat-

SOME BUSINESSES EYE THE FLEET BUD-GET AS AN EASY TARGET FOR COST SAVING BY SWITCHING TO A REIMBURSEMENT OR CAR ALLOWANCE PROGRAM.

ing a fleet program if they underfund employees’ business driving. Figure 8 shows the impact on employees if a company eliminates a fleet program, and moves to an underfunded reimbursement or car allowance program. In this example, the driver is driving a 2008 Ford Taurus SEL sedan, running 20,000 miles per year, with replacement every four years. Personal mileage accounts for 20% of overall mileage. You’ll notice that when employees are providing the vehicle, in the two columns to the right, the total overall costs go up. This is because they lack volume purchasing power, and are purchasing in the retail environment for goods and services. In addition, the

$600 monthly allowance scenario adds additional taxes, since this is not a tax free program for driv-ers. The out-of-pocket cost burden on the driver is clear, and is the main reason why companies will see a high turnover in response to eliminating company vehicle programs. If a company is looking for significant savings, without financial impact to their drivers, they can consider downsizing, for example, from a Ford Taurus to a Ford Fusion as shown above.

CONCLUSION Clearly, business driving impacts many areas of corporate governance. The method a company chooses to handle business driving will impact each of these areas. Choosing the right option allows

your company to “run on all cylinders”. While this white paper presents the advantages and disadvantages of reimbursement / allowance programs and company fleet programs, the table below depicts a fleet program’s clear advantages (+) related to key business challenges. Your company’s business needs may differ from those we’ve analyzed, and your conclusions may be different from the ones in this paper. Or, you may have similar business needs and draw a different conclusion. However, the consideration of all the facts and influences is a prerequisite to choosing the right program for your organization. Should you desire a cost analysis specific to your company, please contact us. Our fleet management professionals are happy to work with you.