HR Magazine, February 2001: Driving Home Your Awards Program

By Martha Frase-Blunt Feb 1, 2001

HR Magazine, February 2001Vol. 46, No. 2

Companies are using cars to reward top performers and lure new workers.

After years of being limited to the upper echelons of corporate management, cars are making a comeback as a perk, this time as a way to reward top-performing workers and to lure new employees into the fold.

Cars for personal, as opposed to business, use were widely used as perks until the 1986 tax reforms ended tax deductions for them as a business cost, explains Paul Platten, national practice director for strategic rewards at Watson Wyatt in Boston. “Once cars became taxed as income, a lot of broad-based car programs went away.”

The company sedan remains a perk at the highest tiers of the corporate world, but for the most part, “Companies have become more egalitarian, moving away from status-oriented perks like the car and the key to the executive washroom,” says Frank Gallo, leader of Watson Wyatt’s New England compensation practice.

Net2000, a Herndon, Va., integrated communication provider, and Extensity, an Emoryville, Calif., provider of Internet-based applications for HR, project management and procurement, are two high-tech companies that have brought car awards into their arsenal of efforts to solve staffing shortages and counter high turnover in a tight labor market.

A High-Powered Motivator

Don Clark, Net2000’s chief financial officer, says the idea came up in 1998, “when we were hit with a higher than normal turn-over. There’s lots of competition for tech workers here in Northern Virginia, and we felt we were being raided by our neighbors.”

Learning of an Atlanta company that was giving a BMW Z-3 to every one of its new hires, Clarke linked the idea to retention and performance. “The theory was to give something to our employees that they wouldn’t typically buy for themselves, and use it to motivate them.”

An employee who’s been around for two years and met a designated performance rating can earn a three-year lease on a BMW, Dodge Durango or Audi TT. Failure to maintain the necessary performance ranking sends the vehicle back to the dealer and the employee also has to pay any early lease termination penalties. But with nearly 70 cars awarded since the program began, Clark says, “We’ve never had to take one away.”

Extensity also needed a recruiting edge in the highly competitive San Francisco Bay Area. The company got its feet wet by leasing a Volkswagen Beetle in the corporation’s blue color and letting the Employee of the Month—who also got 1,000 shares of stock—drive it for that month. “It was a big hit,” says Jennifer Burt, vice president of human resources, but “We needed something to spice up our employee referral program.”

Despite offers to staffers of $3,000 for each referral hired, only a handful were coming in each quarter, so the company added a lottery program, enabling employees with successful referrals to put their names in a hat each quarter for a two-year lease on a Porsche Boxter. Since then, says Burt, “Our referrals have doubled.”

Like many HR innovations that started with dot-coms, the idea is expanding. At Freddie Mac, employees who refer a successful new hire are entered in a lottery for a Beetle. South Carolina’s 2001 State Teacher of the Year received the use of a BMW Z-3 for a year, plus a sabbatical and $25,000 in cash.

Bonus with a Buzz

Even though there are no tax benefits when a car is provided for personal use, and thus may seem like a very expensive employee benefit, many employers view a car as the cash equivalent of a signing bonus, a raise or a headhunter’s fee.

A car also can be “another tie to the company, like health insurance or a 401(k),” asserts Mark Metzler, head of the compensation practice at the Segal Co., the NYC-based benefits, actuarial and compensation consultants. “It’s a lot harder to give up than the promise of a bonus.”

And it’s much more visible. “If I was going to give you a pay raise, or a cash bonus, you probably won’t tell anyone,” Gallo adds, but, “the awarded car is very visible. It demonstrates that the company values its employees based on their skills, not their seniority.”

He believes creative employers know this incentive not only will attract a greater number of resumes, it also will create some buzz for the company that uses it. “That’s why you see so many BMW Z-3s being offered. A flashy, trendy sports car says, ‘We are a cool company, this is a cool car, we take care of our employees.’”

Interwoven, an international content management company in Silicon Valley, ran a program last spring promising a three-year lease on a Z-3—or the equivalent in cash—to newly hired software engineers who stayed for those three years. “It was the idea of our other engineers,” says Gary Wimp, vice president of human resources. “They needed teammates and knew this would attract a lot of interest.”

The offer attracted more than 1,000 resumes within a few weeks. The story was picked up in the national media, so Interwoven continued to reap word-of-mouth benefits even after the offer ended. Interestingly, only about half a dozen of the 35 engineers it hired chose the car over the cash, perhaps indicating that the mere idea of a hot sports car can be enough to spark a lot of interest.

Can You Afford the Payments?

While the potential tab for a fleet of high-end “Beamers” and Porsches may make some corporate bean-counters blanche, Net2000’s Clark and Extensity’s Burt say the program is cost-effective.

Clark balances the program’s $300,000 cost to date against more than $400,000 saved in recruiting, retention and training costs, noting that only two employees awarded cars have left the company, compared to a 20 percent turnover rate elsewhere in the Northern Virginia hi-tech community.

Even if the program stops paying for itself, Clarke doubts he’ll pull the plug: “We’ve seen some tough times already, but as long as the program is a true monetary benefit to the corporation and a psychological benefit to the employee, we’ll keep doing it.”

Burt said that at her company, “We looked at the 46 hires we made over the last two quarters, determined an average cost per hire, and factored that against what our agencies would charge. We have saved more than $130,000 since May 2000.”

Companies most commonly acquire cars for an incentive program by leasing them, though another approach is to simply provide a cash allowance. Either way, the monthly value is considered income to the employee for tax purposes.

Employers that lease cars typically pay the insurance, tax, tags, maintenance and all other related expenses, except for gas and oil, but Clark says his company has employees sign a statement accepting responsibility for maintaining the car and agreeing to pay any wear-and-tear penalties at the end of the rental period.

While most programs give an employee a car for the life of the lease, or as long as he or she remains eligible for it, some employers provide exotic wheels on short-term loan to favored employees. For example, a company may offer use of a “Hummer” or Jaguar to its Employee of the Month.

Outsource the Hassle

An HR department that has no car program and doesn’t want to deal with the paperwork can hire a fleet management company to handle it, as has Net2000. Its fleet operator orders the car—customized to the winning employee’s taste—directly from the manufacturer and is paid by the company.

Because insurance is carried on the employer’s policy, employees’ driving records are usually checked for insurability. Amy Jantz, manager of the knowledge services area for World at Work—formerly the American Compensation Association—suggests developing a close rapport with your insurance carrier. “Your insurer can do a lot of the legwork for you, running driving records, securing the best rates and letting you know if any driver claims are raising a red flag.”

She also urges that employers require employees to “pledge in writing to meet all the requirements for the insurance policy.” The company should spell out any grounds that would cause the employee to lose use of the vehicle, such as certain types of traffic convictions, as well as a requirement that the driver notify the employer of a license suspension, she adds.

Jantz notes that any information obtained about employee driving records would be treated like any other confidential HR document, not to be shared with supervisors or others who don’t need to know, but employees who don’t want to disclose that information can be allowed to carry the insurance themselves.

If you don’t want the administrative hassle of a leasing program, even if it’s outsourced, you can offer a cash allowance, which eligible employees can use to buy or lease a new car, or to make payments on a current one.

“Companies are becoming much more flexible with their car programs,” says Metzler, who described a client that wanted to provide a car for a senior employee who took the train into Manhattan every day. The employee balked because the cost of parking alone would have been $500 a month, so Metzler says he helped the company redesign its policy to permit a monthly cash payment in lieu of the lease.

The beauty of a car program, says Maryanne Wegerbauer, a compensation and benefits consultant and author of Job Offer! A How-To Negotiation Guide (JIST Publishing, 1999), is that “it’s both a fixed and floating cost. You know from day to day what it will cost you, yet can terminate it at any time it becomes cost-ineffective.”

Jantz adds, “You can also make this program as big or as little as you want, depending on your organization. And it stands out—it’s not something everyone is doing, like 4 percent bonuses.”

Before Handing over the Keys

Regardless of how the employer acquires the vehicle—purchase, lease or short-term rental—the company must clearly describe the terms under which an employee can win and retain its use.

Noting that “it’s human nature that there might be jealousy or questions about favoritism,” Wegerbauer recommends that an employer be very clear and objective about the behavior or accomplishment that is being rewarded, and about its administration of the program. “Car policies should be drafted in the same manner as any variable pay program, and reviewed by the company’s tax specialist, attorney and insurance broker,” she says.

Clear lines also should be drawn between cars awarded for personal use and those provided for company use, says Gallo. “When the line gets blurred, you can run into real problems.” The employee may claim expenses for business use of the company car—gas, mileage, etc.—in the same way she would her own car, creating a potential tax thicket for both parties.

There also needs to be a clear understanding of what happens to the vehicle if the employee is terminated or quits. “If the car is owned by the company, it will fall back into the pool,” says Metzler. “But if it is leased in the employee’s name, you can give them the choice of transferring the contract to them, or terminating the lease and make them liable for penalties.”

Burt advises making sure all the rules are laid out in advance. “You should draw up a plan document that explains absolutely everything. Brainstorm with your HR team on every ‘what happens if ...’ scenario you can think of.” Then, she says, “Plan for a huge success, and be ready to deal with it.”

Martha Frase-Blunt is a freelance writer based in Alexandria, Va., who frequently covers recruiting issues.


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