Industrial distribution companies face a lengthy list of expensive challenges. Intense pricing and margin pressures, increased global competition and mounting labor costs have pushed organizations into an ongoing game of catch up. As distributors attempt to adapt to an e-commerce and omnichannel world, they can’t let these issues go unaddressed.
Crunched for resources, distribution leaders are taking a critical look across their organizations to identify new and different opportunities to cut excess spend. One area they often overlook? Their business vehicle expenses.
Today, the average industrial sales driver receives $551 for driving 1,260 miles per month, according to data from Runzheimer. Vehicle costs add up — even for distributors with a small or mid-size sales force — which reinforces the need to ensure drivers are reimbursed accurately and fairly.
Distribution sales drivers log thousands of miles each year, but without the right business vehicle program in place, reimbursement can prove costly for both employees and organizations. For employers to make mileage reimbursement more efficient and equitable, it’s important to understand what options exist and break down what you’re looking to get out of a plan:
Flat allowances, for predictability and administrative ease
An allowance is a standard, flat-fee amount given to each driver and generally intended to cover most vehicle-related costs for business travel. For industrial distributors with limited administrative support, a lack of mileage capture technology or not enough time to develop customized reimbursement plans, this is the simplest option and a rudimentary starting point. Since any driver can qualify for an allowance program, companies can position these funds as bonus compensation, treated as taxable income — a valuable way to retain staff and mitigate turnover costs.
But while a static allowance structure is easy to enforce, it’s not accurate or sustainable. Since an allowance is not tailored to any one driver’s location, vehicle type or associated costs, employees often end up over or under-compensated and business leaders generally foot a bigger bill than necessary. Another financial consideration: allowances are subject to FICA rates and local payroll taxes.
Cents-per-mile programs, for added visibility into business driving
Some companies have employees who aren’t on the road enough to warrant a business vehicle program. A cents-per-mile plan (CPM) can be a workable fit for infrequent drivers, those who travel only occasionally meaning under 5,000 business miles per year.
More importantly, individuals who are routinely on the road as part of their daily routine are generally either over-reimbursed if traveling high mileage, whereas those reporting low mileage lose money. CPM programs do require more administrative effort to be properly managed. Drivers must report specific details about each trip’s mileage, duration, timing and purpose to comply with IRS substantiation requirements.
The right mileage capture technology automatically gathers this information without risking the human error that comes with manual logging. The extremely simple process leaves complete control in the hands of the driver, and eliminates the nagging time spent hand entering mileage logs. CPM programs that use GPS technology can gather more accurate business mileage giving companies better visibility into business travel habits — insights that can be used to make smarter decisions about sales/service routes and territories.
Fixed and variable rate reimbursement, for flexibility and accuracy
Plenty of companies maintain a distributed sales force across regions and states (if not the entire country). As many of us have experienced, the cost of driving and maintaining a vehicle in Omaha is dramatically different than in Chicago or Washington D.C. Economic factors like fuel prices, taxes and insurance premiums fluctuate across states (and even counties), so an employee’s spending naturally varies depending on where they work.
Fixed and Variable Rate (FAVR) programs provide the most fair and accurate business vehicle cost reimbursement, largely because of the geographical sensitivity of the program design. To start, employers choose a vehicle model standard that fits their business need to base the program around. Any employee who travels for business can be eligible to receive both a fixed monthly sum (to cover taxes, insurance and registration) and a variable amount (scaled to their location-specific fuel and maintenance costs). This prevents sales drivers from being incorrectly reimbursed, no matter the geographic region. Organizations that opt for FAVR programs usually save more than $2,000 per driver annually.
In order to overcome an array of industry growing pains, business leaders need to reassess their sales driver reimbursement plans and the impact they have on the cost of field operations as well. There is no one-size-fits-all solution. Choosing the right program — or combination of programs – depends on an organization’s individual needs. With fair and accurate reimbursement (and greater visibility into their sales operations), distributors can not only mitigate costs — but also allot more time and resources to tackling larger issues.
Donna Koppensteiner-Reidy is senior vice president at Runzheimer International. Donna has more than 20 years of sales and business development expertise, the majority of which relates to the consumer travel, commercial fleet and logistic services markets. As senior vice president at Runzheimer, Donna is responsible for driving business growth through strong business knowledge, analytical skills and a dedication of fostering a collaborative team environment.