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September/October 2014

On the Right Road: Directions for Creating an Optimal Car Policy


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Car benefits continue to play a significant role in attracting and retaining key talent —  articularly as companies face skill shortages. When employers provide certain employees with a company car, a car allowance, and reimbursement of transportation expenses, they are indirectly helping achieve their overall business goals. After all, engaged and motivated employees who receive additional perquisites typically perform better and remain with the company.

But a car benefit is more than just a motivational tool. For employees involved in a function like sales, a company car — or comparable transportation benefits — may be necessary for them to perform their jobs. Car benefits for other employees, especially those in managerial and executive positions, indicate status — a perquisite not granted to lower-level staff. Finally, in many cases, the car benefit may simply reflect a way to maintain competitiveness with market practice.

Acknowledging that the provision of car benefits is a comprehensive and complex undertaking, proactive employers implement a formal car policy and communicate it clearly to employees. Following are the relevant decisions and typical elements involved in crafting and maintaining a car benefits program.

PUTTING A FRAMEWORK IN PLACE

Unless the workforce is small and the need for vehicles limited, implementation of a formal car policy is preferable. With eligibility criteria in place, the policy serves to set employee expectations as to whether the benefit applies to them — and, perhaps, what they can strive toward. A clear policy also supports equity by appropriately allocating cars and related benefits by position or other legitimate criteria. There will always be exceptions to policy, but detailed authorization and approval procedures can help limit exceptions to those that are genuinely necessary.

BUILDING A SOUND POLICY

A sound car policy should reflect the company’s benefits philosophy without exceeding its budget. It should be internally equitable for employees and externally competitive with the market. The policy should also be relatively easy for the company to administer and sufficiently clear for employees to understand. Developing a policy requires a variety of administrative decisions and consideration of diverse issues:

  • ADMINISTRATIVE PROCEDURES. Keeping track of car benefits — and their costs — is important for financial, compliance, and equity reasons. Documented procedures should establish clear steps for authorization responsibility, requisite approval levels, accounting requirements, expense reimbursement, individual employee record keeping, and related functions.
  • TAX AND LEGAL COMPLIANCE. Compliance with local government mandates associated with the car benefit helps avoid potential fines and penalties. For example, some governments require company cars to be eco-friendly, which might include the use of hybrid vehicles or cars that meet specific emission levels.

    In addition, professional counsel may be necessary (either in-house or external) to determine whether, to what extent, and which policy elements are taxable to the employee and/or deductible for the employer. Another consideration is whether social security contributions are payable on the benefit amount.
  • MARKET COMPETITIVENESS. The company should make an informed decision regarding its preferred market position (that is, whether to offer a competitive-level benefit or lag/lead the competition). For benchmarking purposes, the benefit comparison may be on a company-wide basis or focus on local practice. An additional factor is deciding where a car benefit fits within the overall total rewards program.
  • BENEFIT ELIGIBILITY. Eligibility criteria should be clear so that employees understand the rationale, whether based on business need, status, career level, seniority, or expatriate status. Establishing criteria helps support the employee’s perception of fair and reasonable benefits, thereby avoiding the potential that managerswill grant a car benefit due to “favoritism.”
  • POLICY OPTIONS. Whereas some plans offer only one benefit, such as a company car or car allowance, comprehensive policies allow other options. For example, the decision as to whether a car allowance is appropriate in addition to, or in lieu of, a company car should reflect the company budget, workforce needs, local market practice, and so on.
  • COST CONTROL. Cost-effective measures also play a key role in policy development. In Australia, for example, employers often use an arrangement — a novated lease — whereby the employer pays for the lease and deducts the payments from the employee’s pay. It provides employees access to vehicles at a relatively low cost to the company, and employees pay through post-tax contributions.

    Other cost-saving options depend on various factors. For example, carpooling may be common in remote work locations. A cash allowance for transportation rather than a vehicle may work best in cities where public transportation is the optimal way to get around.
  • POLICY FLEXIBILITY. Management needs to decide whether all company locations will follow headquarters policy (centralized) or allow regional or divisional differences (decentralized) within general guidelines.

CONSIDERING CAR OPTIONS

Car benefits represent a complex combination of vehicles, cash, and noncash components. Each element has a number of options that should align with the company’s benefits philosophy.

1.THE OVERALL BENEFIT. Will the company offer a company car, a car allowance to cover related costs, or a company car plus an allowance? Or can the employee receive cash in lieu of a vehicle? The company may also offer discounted car loans, an insurance program for family vehicles, and other benefits.

2. CAR USAGE. Is the car for business use only or personal use too? How will the company reimburse employees for business use of a personal car?

3. CAR REPLACEMENT. How long does a car remain in service before being replaced? Is this based on mileage or years? And can the employee buy the car for personal use at the end of the replacement period?

4. FINANCIAL AID. How else will the employer offer financial assistance to the employee? Options include:

  • Loans (sometimes discounted or interest-free) for purchase of a family car.
  • Transportation allowance for public commutation to and from the work site.
  • Payment for rental cars and associated costs for travel on company business.

5. CAR-RELATED EXPENSES. What other reimbursements are given for car-related expenses?

What about fuel, maintenance, tax, insurance, tolls, parking, registration, and depreciation?

6. PURCHASE AND LEASE COSTS. The price of cars that can be leased or purchased by the company for employee use differs (sometimes significantly) by job level. Each career level usually has a range of price limits.

7. TYPICAL MAKES AND MODELS. Similar to the restrictions on the costs of a car by career level,

employers generally set guidelines on the type of car the employee may drive — and the inclusion (or exclusion) of optional equipment.

8. RELOCATION ISSUES. These will occur when the company transfers an employee to another location. Particularly if the new destination is in a foreign country, a different set of concerns arises.

 

Learn more about and purchase Mercer’s Global Car Policies Report.

 

CONTACT

Samantha Polovina (New York)
Principal, Talent
+1 212 345 9835
E-mail

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