The confusion surrounding the ‘cashing-up’ of cars in employee remuneration packages is illustrated by the following scenario. And judging from the research, the scene is played out daily in nearly every organisation.
Joe is product manager with ABC Enterprises. His $75,000 total remuneration package is made up of:
* $50,000 base salary
* $25,000 company car – annual deemed value including running and maintenance costs, unlimited kilometres, FBT, parking and so on.
But Joe feels cheated, and grumbles to his partner and colleagues that the company is short-changing him. “The car isn’t worth anywhere near $25,000 – it’s only two-litre and it doesn’t even have air-conditioning.” The deemed value of the benefit is, he feels, too high and he believes that the company is trying to make his total remuneration appear more competitive than it really is. He sees it as way for his employer to avoid giving him an increase in his base salary.
Then the company announced that in keeping with the remuneration strategy of its international parent, company cars “are being phased out”. Joe’s base salary will increase to $75,000 and he will have to buy, run and maintain his own car.
Joe goes ballistic and demands meeting with the HR manager. “There is no way,” he fumes, “that an extra $25,000 on my salary is going to make up the cost of buying and running my own car. And I’ll have to pay tax on the cash amount.” Suddenly Joe perceives the deemed value to be too low. The company can’t win!
Multiply the episode by 15 additional staff, and management is suddenly facing significant remuneration issue, not to mention staff morale problems. And yet it’s all easily avoided if, at the outset, there is clear understanding of how company cars are valued.
Six key issues must be considered in the context of the company car debate:* Perk cars are being phased out. If your company still offers them, chances are it won’t for much longer – 25 percent of companies with company cars plan to cash them up over the next 12 months*.
* Research by Higbee-Schäffler shows that in 1994, 83 percent of organisations offered perk cars. That fell to less than 38 percent in 2003.
* Companies that still offer company cars are generally those where employees require them as ‘tool-of-trade’ vehicles.
* While each organisation has different car policy, most offer their employees full private usage.
* The benefit of the perk varies considerably from one company to the next. In some instances, there are restrictions on the personal use of the car in bid to cut the cost of FBT and administration.
* Employees want more choice and flexibility in their employment contracts. And employers are looking to simplify salary management.
Against this background, consider how company cars are factored into the employee’s total remuneration package.
Take this common scenario. The finance manager and the sales manager are effectively doing jobs of equal ‘size’ and value. Both receive base salary of $100,000. But the sales manager is provided with company car to fulfil her duties. The car has deemed value of $30,000 per annum – that’s what it costs the company to provide the benefit, including FBT at 64 percent.
What do you think? Should the sales manager drop her base salary to $70,000 to even things out? Should the deemed value of the benefit be less than the actual cost to the company because it is ‘tool-of-trade’ vehicle? Should the company change its policy and give the sales manager vehicle allowance to cover business mileage only, and have her drive her own car?
Individual companies will come up with different solutions to these questions, depending on their specific remuneration strategies. But the most important facet surrounding the issue is this: By valuing each remuneration component (and communicating the methodology), employers help staff to see the actual total value of their packages – and employers can identify where anomalies exist by comparing total remuneration. The method of valuing should be fair, logical and consistent. There are several standard methodologies for valuing of cars.
Rational, non-emotive decisions can then be made to avoid inequities and disgruntled employees.
Vehicle allowances are another option to help employees cover the cost of running business-related vehicle. Offering choice between the cash and the car – 34 percent of organisations do this* – is considered win-win situation by many. It’s cost-neutral to the company and provides flexibility to employees.
Many organisations have outlined specific criteria for determining the need for tool-of-trade car to minimise the risk of reverting back to status-related vehicles. These tend to relate to roles where significant travel, say more than 12,000 kilometres year, is required, and where the nature of the role dictates.
To reinforce the shift in mindset from perk to tool-of-trade, the trend is to brand vehicles with the company logo or provide generic make and model.
To reflect the car as part of the remuneration package, ‘personal use value’ is incorporated. This can range from 100 to 25 percent of the annualised cost of the car, depending on the nature of the work performed, the level of branding, the level of personal use, and how the organisation values cars.
Many organisations have abandoned benefits that create ‘status symbol’ mentality. This is important for companies wanting structures. Status-related perks don’t support flatter, team-based structures and send mixed messages. The elimination of status-related perks has resulted in more unified employees and greater transparency in company culture.
Typical car values*
The table below provides typical purchase-prices of vehicles offered to various staff categories.
Defining clear remuneration strategy helps avoid time-consuming, emotive debate and provides sound and consistent remuneration benefits practices. M
* From Higbee-Schäffler’s 2003 Corporate Services Remuneration Survey
Kira Schäffler is director of NZ remuneration consultancy Higbee-Schäffler. Email: [email protected]
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