Give and Take

With pressure to reduce selling costs, some companies are thinking of taking company cars away from their reps and instead reimbursing them for sales driving. It’s natural to think this way. “In difficult economic times, everyone considers reimbursement, because they see fleet vehicles as a cost center they want to take another look at,” says Mark Conroy, VP sales at LeasePlan. “And reimbursement offers them an option.”

But almost always, reimbursement is the wrong option, even – or especially – to reduce costs. Fleet vehicles are simply less expensive. “We buy the vehicles wholesale and can get them cheaper than reps can,” says Scott Pattullo, marketing VP at Wheels. “And we can finance them for a couple hundred basis points less than a driver could.”

Significant fleet purchases are often eligible for discounts of $1,000 to $2,000 on acquisition. GE Fleet Services’ Steve Greenway says the number of vehicles necessary for a discount has been declining. “You used to have to order two hundred vehicles from one manufacturer before that manufacturer would discuss discounts,” he says. “Now, if you order 50 vehicles per year you can start to get decent rebates.”

Moreover, discounts for major purchases negotiated directly between the automaker and the buyer are in addition to the reduced price a GE client gets through its lease from GE. “We get manufacturer rebates through our normal buying power, and we pass a portion of that back to you,” Greenway emphasizes.

Financing costs are another fleet advantage. Consumer loans were going at near 5 percent in early 2003. Automakers were also offering zero-financing charges in a slow market, but not to all buyers, not for all cars, and often with stiff upfront payments required. GE’s financing costs start at the commercial-paper rate, 1.5 percent in early 2003, then a small margin is added according to the size of the fleet, credit position of the client and other factors.

Fleet firms can also get repairs done under discounts negotiated with major repair shops. And they have expert managers who oversee repairs to make sure they are done right and at reasonable cost. When a car breaks down just outside its warranty period, a lone individual is usually out of luck. “With our buying power, we can often go to the manufacturer and get a credit for our client,” Wheel’s Pattullo emphasizes.

Heavy sales driving means breakdowns or accidents can be common, and they often occur far from home. “The rep does not have the time or experience to go to a body shop and get the car back on the road quickly,” LeasePlan’s Conroy says. “The fleet company will track the repair, make follow-up calls, and find out what has been done and how soon it will be finished.”

Company-provided vehicles also give managers control over an important part of the image their reps present to clients. “With a reimbursement policy, especially, young reps living on tight budgets may not have pride of ownership in the car, and it can get a little dilapidated,” Conroy notes.

Fuel economy also suffers as personal cars are driven heavily for three or four years – or more if the rep brings an old car to his job. “You lose fuel economy and the benefits of warranties if your reps keep driving the same cars,” Conroy points out. That can boost operating cost significantly.

This danger of over-driving a sales car may actually increase in a slow economy. “A lot of companies are trying to cover the same markets with a smaller sales force, so their reps are driving more to cover larger territories,” Conroy notes. “You have got to be careful how fast you are depreciating that vehicle.”

Conroy acknowledges that the ordinary costs of fleet and reimbursement may be close in a few cases. “But the risk comparison is never close. Your company is exposed to much more risk, in safety, in downtime and in insurance liability, when you do not have professional fleet management.”

Employee retention and recruitment argue heavily in favor of company-provided vehicles. “You recruit with an entire compensation package, including the car,” Conroy emphasizes. “If a good rep is used to getting a car, he or she will expect it as part of the package.”

There is another risk if you reimburse drivers less than the full costs of sales driving. When reps figure they are getting short-changed, they may over-report business mileage to get back some of the money they lose on expense sheets. Fudging expense reports can become a habit that undercuts the trust that ties a sales team together.

Do the Math Right

The essential rule for comparing reimbursement with company-provided vehicles is always to look at the total expenditures of both company and employees, emphasizes Mike Mrosko, head of GE Fleet’s strategic consulting unit. “Your goal should be to reduce this total expenditure as much as possible, so both the company and employees benefit.”

Some firms do the math wrong, missing important costs, or they have the wrong policies in place.

“Showing that company-provided vehicles are better and more fair is usually easy,” says Pattullo. “Of course, some firms want to make their employees pay to work for them, in which case a reimbursement policy may look cheaper.”

Sometimes consultants estimate monthly stipends that, they say, fully compensate drivers. “They tell fleet managers they can also avoid insurance costs, with the drivers buying their own insurance,” Conroy notes. But companies are still liable for accidents and damages caused by their employees, even if they reimburse them fully.

Drivers may also be misled by the apparent advantages of acquiring their own vehicles. “They get a stipend of $400 per month and negotiate a lease for $300 per month on an SUV,” Conroy explains. “But they do not budget for all the other costs they will have to bear, especially for heavy sales driving.”

Some companies use a reimbursement rate that makes fleet policies look more expensive. They reimburse at or below the rate allowed by the Internal Revenue Service (IRS) for automatic deduction. But this IRS rate does not fully cover all driving costs.

Steve Greenway, senior commercial tax manager at GE, says many companies reimburse drivers at a rate below the current IRS standard of 36 cents per business mile. “It is more common to reimburse at less than the IRS rate,” Greenway says. “Yet even at 36 cents, you are transferring business costs to the employee.”

The full cost of driving and maintaining a new vehicle suitable for sales and purchased by an individual is typically 40 to 45 cents per mile, according to Greenway. So companies may be transferring 10 cents or more per mile in business costs to their reps. For sales reps driving 2,000 miles per month, that can work out to more than $2,000 per year.

Often companies reimburse at the same rate nationwide. “But driving costs differ significantly across the country and between big cities and smaller towns,” Pattullo says. “Most companies don’t go to the trouble to figure that out, so reps pay a penalty in the high-cost areas.”

Companies may be fooled by the apparent advantages of reimbursement. “Managers see a retail lease advertised for $249 per month, while our lease rate might be $400,” Pattullo says. “But read the fine print. First, you have to put a couple thousand down for the retail lease. Then, there are huge mileage penalties at the end of the lease if you drive the car heavily, like most sales cars are driven.” Pattullo demonstrated to one client that, taking down payments and mileage penalties into account, a Wheels fleet lease would save $3,300 versus a retail lease on a Grand Prix over 48 months. “Fleet leases are built for sales driving, 2,000 miles per month versus the 1,000 miles that a family drives on a retail lease.”

Some firms err by comparing reimbursement for business driving with the total costs of a company car given to a salesperson for all his driving, both business and personal. “They should be charging the driver for personal use,” Pattullo argues. “But lots of companies do not charge, or charge at too low a rate because they want to be nice to the driver.”

Managers should deduct the cost of personal driving from the costs of fleet vehicles, even if they continue paying for it. This is really an extra bonus to the driver, not a cost of sales driving. “I see people make that mistake over and over: they do not consider the personal-use benefit they give the driver when estimating fleet costs.”

Overall, a consistent comparison almost always shows that company-provided fleet cars are less expensive than reimbursement. The Boston Consulting Group studied one of GE’s clients that reimbursed 60 percent of its drivers, while leasing cars for the other 40 percent. Total costs – to both drivers and company – were 18 percent higher under the reimbursement plan. “One of their comments was that reimbursed drivers tended to overstate the number of miles they drove for business purposes,” notes Greenway.

Like Wheel’s Pattullo, GE advises clients to charge for personal use of company cars. If the discounts available on a large fleet result in a lower cost per mile, for example 32 cents, then the driver is still getting a benefit when measured against a personally acquired vehicle.

Moreover, failing to charge drivers for personal use does not avoid any administrative burdens. Regardless of whether reimbursed or given a company car, drivers must still record their business miles for tax purposes. “Companies still have to collect the mileage logs,” Greenway emphasizes. “Otherwise, the company will file incorrect W2 forms. This opens the company up to fines and penalties, and the drivers may owe additional taxes.”

Simple monthly stipends to cover driving costs appear attractive at first. They are simple for the company to administer, and the driver may think he is getting $400 or $500 per month. But payments under such nonaccountable plans are income, for tax purposes. The after-tax value will be substantially less than the face amount of the check. “The driver ends up with perhaps $250 to $300 a month, which is less than a vehicle costs,” Greenway says.

Of course, the driver may record his auto expenses to deduct from income. But keeping track of all those expense records can be a big hassle. And tax-expert Greenway points out that only the amount in excess of 2 percent of adjusted gross income is deductible from Federal Income Tax. So that $500 monthly check, plus hundreds of gas and oil receipts, may still add up to not much money in the driver’s pocket.