23/09/09

By Phil Peace, Director of sales, Hitachi Capital Vehicle Solutions

The global recession is hitting employee benefits hard, intensifying the challenge for HR professionals to continue to motivate staff. Phil Peace explains how HR staff can help businesses to at least keep hold of the company car.

What’s the problem?
Most businesses will lease company cars on a standard contract hire basis over a fixed term. The company pays a monthly fee to the leasing provider, based on a calculation that considers the vehicle’s residual value (RV); the estimated price at which the leasing company can expect to sell the vehicle at the end of its three year leasing term. Vehicles that can command a better price on the used car market for the leasing provider can therefore be offered to the customer at a lower monthly leasing rate.
However, since the economic downturn began, used car sales have significantly declined. This means the second-hand car market has stagnated with unsold product forcing traders to slash prices in order to shift vehicles. With this situation in mind, RVs have significantly declined, meaning that monthly leasing charges have risen in order to compensate. Companies acquiring vehicles on contract hire will therefore start to feel the pinch.

So what’s the impact?
Simply put, if leasing charges go up, fleet policy is pushed out of sync; employees will find they are no longer entitled to the same grade of vehicle and can end up understandably disgruntled.

To explain further: a user-chooser fleet policy will typically allocate a monthly allowance to a particular employee according to their benefit grade. They will be provided with a list of vehicles priced at that allowance from which they can make their choice of company car.
For example, a BMW 3 series might cost £394, which would allow a senior executive allocated up to £400 a month to choose a vehicle of that standard. However, the increase in leasing charges now means the same grade of vehicle is no longer available within the same price bands. The BMW 3 series that once cost £394 might now cost £420, for example, and is considerably out of range of the executive on the £400 allowance. This employee will now have to choose from a list of vehicles originally from the benefit grade below their entitlement.

With many companies having to freeze pay-rises and cut bonuses during this difficult economic time, the company car has become the last bastion of the employee benefit. The company can’t increase the individual employee’s allowance to afford the original vehicle — there simply isn’t the budget. So how can HR manage this motivational impact on staff when policy dictates their premium standard BMW has now been downgraded to a Ford Mondeo?

Are other areas of the fleet affected?
The problems caused by vehicle price increases aren’t just felt by individual employees. The fleet as a whole is affected by the impact of recession on its operational budget and as such, the fleet manager will need to consider other ways of reducing costs. This will inevitably have its own impact on the HR department, who still need to manage the challenge of incentivising and motivating employees with very little in the way of substance to help them.
Some companies might choose to revert back to a ‘solus badge deal’ with their leasing provider, which means they can lease vehicles at a cheaper rate thanks to their agreement to exclusively choose vehicles from one badge manufacturer. It’s an effective tool to cut costs, but a rather blunt instrument when it comes to taking a holistic view of the function of vehicles as benefits.

Restricting vehicle choice can often be perceived by employees as reducing the level of benefit available to them. It’s not much of a user-chooser policy if the choice has already been made for them. The danger in this instance is not only that staff will begin to feel undervalued, but they might even begin to resent the company vehicle and take less care when using it, resulting in duty of care and maintenance issues for the company.

What’s the solution?
There are a number of ways in which fleet leasing providers can work with both the fleet manager and the HR department to ensure that the business is getting value for money from its fleet, without reducing the level of company car benefit available to its employees or restricting vehicle choice.

For example, vehicle leasing deals are traditionally calculated according to a three year contract hire policy. However, when businesses are beginning to feel the pressure of price increases, it’s worth considering extending the length of the contract to four years; especially on modern cars with lower maintenance requirements. As with any financial loan, extending the term over which the loan is payable can considerably reduce the monthly repayment, which is very useful when managing cashflow in an uncertain economy. It could also then make that elusive BMW 3 series affordable for your senior executives once more.

Flexibility is key
Another creative approach is to allocate vehicles on the fleet policy according to whole life costs (WLC), rather than purely rental fees. WLCs encompass all the costs relating to the operation of the vehicle, which includes fuel and National Insurance. Using this figure for calculations gives a far clearer picture of the actual costs involved in running the vehicle on the fleet. Vehicle A might be cheaper to lease than Vehicle B, but if its fuel costs are higher and the vehicle therefore emits greater volumes of C02, under a WLC calculation it will be a more expensive vehicle to lease overall. The real benefit of this is that whilst some vehicles become unavailable as they are more expensive to operate, many vehicles that had a more expensive lease actually become available within the scheme.

Taking the environmental impact of a vehicle into consideration also helps to reduce benefit-in-kind obligations for employees, so is another measure that can support the HR department when calculating the most appropriate and cost-effective fleet policy for all.

The way forward
Your leasing provider should be prepared to work with those responsible in your company for internal fleet management processes – which should always include the HR department – to ensure that cost is not the only factor involved in driving departmental decision-making.

The company car is an important benefit which can help businesses to retain and motivate staff when morale is at an all time low. With a carefully managed policy and support from your fleet leasing provider, ensuring employees can keep the company car doesn’t have to be such an insurmountable challenge.

Phil Peace
Director of sales
Hitachi Capital Vehicle Solutions