Market Trends

Why Certain High-Tech Firms Favor Reimbursement

June 6, 2012

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The total driver reimbursement market is estimated to include 1.5-2 million drivers. This includes drivers under the fixed and variable reimbursement (FAVR) program, along with those on a fixed payment monthly allowance program and a set cents-per-mile reimbursement plan. There are three types of payment plans utilized to reimburse employees driving personal vehicles for business. They are:

  1. Fixed payments (a monthly allowance).
  2. Variable payment (cents-per-mile).
  3. FAVR – IRS Revenue Procedure 2010-51.

The FAVR program was first established in 1991 by the IRS. It reimburses employees on a non-taxable basis through a combination of a monthly allowance and a per-mile reimbursement. The FAVR fixed payment includes projected fixed costs, such as depreciation, insurance registration, license fees, and personal property taxes. A FAVR plan also covers projected operating costs, such as gasoline, fuel taxes, oil, tires, routine maintenance, and repairs. Hence, the name fixed and variable rate.

Business Segments Receptive to Reimbursement

The business segments that are currently “hot” for reimbursement are manufacturing, medical/dental supply companies, and computer services companies. Another industry segment receptive to reimbursement is the retail consumer products industry, which includes companies such as clothing retailer The Gap Inc. and Bed Bath & Beyond, a chain of merchandise retail stores. High employee turnover in the retail consumer products industry makes reimbursement appealing because it is easier to adminstrate than a company-provided program.

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An additional business segment long identified with reimbursement is the high-tech industry. Historically, IBM was the largest company offering a reimbursement program. In its heyday, IBM had more than 25,000 drivers on reimbursement. However, since then, there have emerged major exceptions, such as Hewlett-Packard, Apple, Intel, etc., all operating company-provided fleets. Also, some high-tech companies may not have a major fleet presence in the U.S., but they have a significant fleet footprint overseas, particularly Europe, where vehicles are provided as part of the employee compensation package.

A classic example is Microsoft, which has a relatively insignificant U.S. fleet operation, but, globally, operates approximately 10,000 company-provided vehicles, mostly in Europe, with fleet management headquartered in Germany. In Europe, taxation laws, varying by country, are an important factor driving the decision to make a company vehicle part of an employee’s compensation program.

Nevertheless, why are certain high-tech companies more receptive to driver reimbursement programs in the U.S. versus company-provided vehicles?

“High-tech companies typically have a more progressive work force, where choice of vehicle matters. Also, the demographics of their work force tend to be younger, and a company-provided vehicle may not be as high on their want list as it is in other industries,” said Greg Harper, president of Runzheimer International. “But, perhaps, the biggest factor favoring reimbursement in the hi-tech industry is the tremendous swings in its workforce. When a tech company has a major product launch, it may double its field sales team and then scale back in six months. It is a highly volatile industry. A reimbursement program allows them to react very quickly to workforce changes.”

Another reason why some high-tech companies prefer reimbursement harkens back to the dot.com days. “Many high-tech companies may be looking to be acquired. They know the acquirer wants as clean a P&L as they can get, and one way to do so is by not providing company vehicles,” Harper added.

Currently, the market for driver reimbursement is growing, but not at the expense of company-provided programs. The growth is occurring due to the improvement in the economy, in particular, the manufacturing segment, which is rehiring and adding new employees into existing driver reimbursement programs. In addition, even if a business offers company vehicles to its sales and service organizations, most also have a sizeable number of employees who are reimbursed for the use of their personal vehicles to conduct company business.

Growth in Contract Labor

At many high-tech companies, a sizeable percentage of their work force is contract labor, who are typically not assigned a company-provided vehicle. The projected growth in contract labor promises to increase the frequency of reimbursement discussions at major corporations.

“The labor market seems to be going to short-term employees working at the project level. This is what we are hearing, and this is what we are seeing,” Harper said. “Five years from now, maybe 20 percent of a company’s employees might be contract employees. There also seems to be a generational preference toward this work style, especially among ‘millennials’ who like the idea of moving from project to project.”

In corporate America, reimbursement continues to be a perennial or semi-perennial issue that emerges, recedes, and re-emerges, especially during times of fuel price volatility, economic turmoil, and, in the future, by changes in work force demographics.

Let me know what you think.

mike.antich@bobit.com

Comments

  1. 1. Mike Slevin [ June 08, 2012 @ 05:25AM ]

    Mike-

    I love reading all your articles and find them valuable in my sales efforts. I have found that most retail companies provide company vehicles and they are progressive in their efforts to reduce their Total Cost of Ownership (TCO). While these companies are very sensitive to the "price" in their respective industry it seems they are focused on the "cost" issue when it comes to fleet management which is refreshing...

    Mike Slevin
    LeasePlan USA
    Columbus, OH

  2. 2. Bert Grayson [ June 08, 2012 @ 06:16AM ]

    Mike:; This is a scary trend. My experience is that most companies lose control of the basics when the driver provides the vehicle. The insurance questions are often overlooked and most drivers dont report the actual mileage they are driving to their respective insurers.. At the same time, many drivers arent listing the company as additional insured. Lastly the regular MVR function is often lost in the shuffle. Do we as an industry want the vehicle condition and safety left solely to the driver when they are the company's agent?

  3. 3. Fred Turco [ June 08, 2012 @ 06:42AM ]

    Mike--

    Great article, as usual. Pfizer provides both FAVR and fleet for our US sales force (~7,500 drivers). We are going on our third year of doing this and it has been an effective means of total demand management. In short, we have accelerated the use of smaller vehicles (and will likely go to a compact segment this year) and fewer categories by providing our colleagues a viable opt out. The programs are cost neutral (fleet has volume leverage but FAVR doesn't subsidize personal use) and FAVR provider monitors car type, insurance, etc to ensure image and liability are adequately managed. In total, approximately 15% of our drivers are on FAVR and 85% with fleet. Our fleet management co and FAVR provider work well together and as a result our total cost has gone down (even with fuel, etc escalation) and our drivers get a better product that meets their need.

  4. 4. George Kilroy [ June 12, 2012 @ 01:08PM ]

    Reminds me of the old saying at IBM who paid a fairly generous mileage allowance, " if you can't sell, drive".

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Author Bio

Mike Antich

Editor and Associate Publisher

Mike Antich has been covering the fleet management and vehicle remarketing markets for more than 20 years. During this period, Mike has written or edited more than 4,600 articles on the subjects of fleet management, manufacturer fleet activities, the fleet leasing industry, and vehicle remarketing. He was inducted in the Fleet Hall of Fame in 2010.

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