When senior management preaches to lower level management to think outside the box, it often doesn’t practice what it preaches. One place long overdue for management to start thinking out of the box is with corporate fleet operations.
Half of today’s fleet managers receive performance-based compensation incentives. To the other 50% of companies that do not incentivize their fleet managers with performance-based compensation, now is the time to start thinking outside of the box.
Most corporations reserve bonuses and other financial incentives for senior level management. Few make financial incentives available to middle management. However, I argue that the fleet manager position should be an exception and here’s why.
A fleet cost reduction program can generate substantial dollars to an organization that goes straight to the corporate bottom line. For instance, if a fleet manager successfully reduces annual fleet expenses by $100,000, it is the equivalent of generating $1 million in sales, if your company operates at a 10% annual net profit margin. With fleet managers managing hundreds of thousands to millions of dollars in corporate assets and expense, why isn’t it a universal best practice to incentivize fleet managers to achieve targeted performance goals? I argue that incentivization of the fleet manager is in the best interests of a company and its shareholders, especially since at many corporations fleet represents one of the top five indirect spend categories. The overwhelming majority of fleet managers who are financially incentivized will become more creative and disciplined in developing cost-reduction and cost avoidance initiatives. These tangible cost reductions would be based on actual hard dollar savings, directly attributable to the fleet function and validated by corporate accounting.
Importantly, a performance-based compensation program must include a cost avoidance component that tracks dollars that would have been spent, but were avoided due to actions and policies of the fleet department. This example would be based on metrics that substantiates a user department’s increased compliance to fleet policy. Cost avoidance metrics can be very granular in monitoring vehicle utilization, downtime, scheduled PM compliance, or fuel efficiency by vehicle and user department. These metrics would compare current fleet performance against historical data to set achievable performance goals. Cost avoidance incentivization is critical because you do not want to encourage cost reduction for the sake of cost reduction, which could be counter-productive to fleet efficiency, worker ergonomics, and field employee morale.
Fleet managers often lament, and rightly so, they are stretched thin. The beauty of a performance-based incentive program is it will force them to focus their limited time on the areas that make the greatest contribution in operating a cost-effective fleet.
With budget dollars constrained, fleet managers must be good business managers. A bonus structure program can help fleets target specific areas for improvement or target desired results for each fiscal quarter or by year-end. An incentivized fleet manager will be more creative and do a better job in managing fixed-cost areas, such as depreciation management, replacement cycling optimization, and residual value maximization. Similarly, an incentivized fleet manager will set higher goals in controlling variable costs, such as accident-avoidance, fuel management, tire replacement, and PM expenses. Performance-based compensation will motivate fleet managers to refine their business skills, which will yield better job performance as their skillset grows stronger. Similarly, an incentive work culture will motivate a fleet manager to focus on higher standards designed to create and attain measureable performance metrics. By implementing a “stretch” incentive program, fleet managers will be encouraged to be more innovative in controlling fleet expenses. A tiered incentive program by its very nature encourages managers to formulate creative strategies to achieve these progressively more elevated goals.
Learning from Public Sector Fleet Managers
Corporate management views fleet operations as a cost, which is justified. Operating a fleet is very expensive and worthy of its own line on the corporate P&L. If management wants to think out of the box, then it can learn something from our public sector breathen. In the 1980s, many governmental entities began to reassess how they were providing fleet management and other support services to internal customer groups. One response was the introduction of a fleet chargeback system, which charged internal users for services provided. A chargeback system can be adapted in a corporate environment with fleet operations organized as an internal business. In a fleet chargeback system, all fixed and operating costs associated with operating the fleet are identified and charged to user groups commensurate with the type of asset and its usage. Under this system, a fleet department functions as a service group to meet internal customer needs using a compensatory rate structure. Conceptually, a fleet operation will no longer be viewed as a cost center because its function will be to break even.
Incentive to Continually Raise the Bar
When fleet cost-effectiveness is measured, managers invariably improve their cost management skills. As goals are achieved, fleet managers should be incentivized to raise the bar to the next level. Operating an efficient fleet is not a goal, but a journey. During this journey, it has been proven time and again that for the majority of fleet managers one of the best motivators is money.
Let me know what you think.
Originally posted on Automotive Fleet