“There is a cost to provide personal use as an employee benefit. As the cost to provide this benefit increases, companies are deciding whether to share this increased cost with their employees,” said Susan Stiles, manager of customer services for PHH Arval, a fleet management company in Sparks, Md.
Many fleets have increased personal use charges. For example, the average personal charge to employees was between $70 and $90 per month in 2005. Today, it ranges from $80 to $130 per month, with the average being $100 per month. The question is whether it needs to go even higher in today’s cost environment.
Know Your Costs
More than 91 percent of commercial fleets allow employees personal use of company-provided vehicles. A company’s cost for personal use depends on the method used for charging the employee. If the value of personal use is imputed as income, the employer does not recover any of the cost for personal use. However, if the employer and employee share the cost of personal use under a payment program, a fleet can significantly reduce its incremental operating costs and vehicle depreciation expense. The latter is important because personal use has an adverse impact on residual values. Personal use of company vehicles accounts for approximately 15-18 percent of the overall miles accumulated during a vehicle’s service life. Each personal mile driven reduces the value of a vehicle since it shortens its service life by causing it to reach its optimal mileage replacement earlier and increases the “penalty” deduction taken for excess mileage when calculating the vehicle resale value. There is a direct cost relationship between the number of personal miles allowed and the vehicle’s resale value. In addition, personal use results in extra wear and tear on fleet vehicles, as well as increased liability exposure, all of which involve substantial company expenses. What is the appropriate personal use charge?
“The first step is knowing what it costs your company to provide personal use –not just the employee taxable benefit- but also the total cost to your company to offer this benefit. This includes vehicle acquisition cost, the cost of fuel, maintenance, insurance, risk, wear and tear that reduces resale, value and personal use administration,” said Stiles. It is important to consider all direct and indirect costs. For instance, a personal use taxable benefit program requires significant administration. Industry surveys show that, depending on how a company manages the process, internal costs can range from $32 to $70 a year per vehicle, added Stiles. As fleet manager, you need to quantify the cost of each of these variables and calculate the total cents-per-mile cost by each vehicle type in the fleet. An accurate estimate for the cost of personal use can be determined by multiplying this cents-per-mile cost by the average personal miles driven by employees.
Communication is Critical to Acceptance
Adjusting personal use charges will help offset some of the cost pressures impacting fleet budgets. Charging drivers a flat rate for personal use provides income to the company. For example, for a fleet of 300 vehicles charging $110 a month per vehicle, the annual income would be $396,000. Another consideration is the creation of a tiered schedule, said Stiles. Under a tiered program, employees who drive more expensive vehicles and/or have a greater percentage of personal use pay a higher contribution.
“If a decision is made to adjust the personal use charge, which I like to call the employee contribution, the drivers’ management needs to be involved in the decision making,” said Stiles. “Just as important, there needs to be advance communication with drivers as to the pending adjustment in the personal use charge. An effective communication strategy is crucial to achieve employee acceptance.” The adjusted personal use charge should be positioned as a fair way for the company to offset the cost of personal miles, including higher fuel costs, added wear and tear, liability exposure, and reduced vehicle resale value. “You should quantify the financial benefit of having personal use privileges to a company car. Even with an increase in the personal use charge, it is still a net benefit because it allows many employees to avoid the expense of owning a personal vehicle,” adds Stiles.
Let me know what you think.
Originally posted on Automotive Fleet