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Pros and Cons of Travel Per Diems

March 1, 1998
Related Topics: Managing International Operations, Policies and Procedures, Featured Article
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The authors of this article completed an extensive analysis to determine whether their company, International Approval Services Inc., as well as its clients and employees, would be better off using per diems rather than following the company’s policy of reimbursing for actual travel expenses. Their research indicated that continuing to pay actual expenses was the way to go for their organization. Here they share their findings to help you determine if your current policy supports your organization’s objectives.

Many companies have a cadre of employees who travel extensively on company business. These employees may, over the course of a year, spend hundreds of thousands of dollars on airfare, lodging and meals. This is especially true when it comes to international travel.

Some companies reimburse actual expenses. Others pay employees a set daily amount to cover some or all costs. But until you think about your company’s objectives, client-service practices and employee travel patterns, you won’t know which method makes most sense for your organization.

Popular uses of travel per diems.
According to a 1996 survey of 514 employers by The Bureau of National Affairs (BNA), virtually all U.S. companies reimburse their employees for meal expenses incurred while traveling domestically on business. The majority reimburse the full cost of the meal, often requiring that the expense be “reasonable.” One-third impose specific limits. On the other hand, 13 percent have established a fixed allowance for daily meal expenses.

Of the responding companies with domestic business travelers, 21 percent impose specific instructions on travelers’ lodging arrangements or expenditures. Many employers pay their employees based on in-state or out-of-state reimbursement rates, while others allow higher expenditures for lodging in certain cities. Per diems for lodging are rare, with just 10 employers (2 percent) using this method.

The BNA survey doesn’t track costs for international travel, but companies are certainly grappling with the same advantages and disadvantages for reimbursing their cross-border employees.

Advantages.
In many cases, per diem policies:

  1. Diminish record keeping. With per diems for travel expenses, employee record keeping is less of a burden. Employees whose companies dispense a $55/day meal per diem and a $75/day lodging per diem will receive $130/day without collecting and presenting receipts. And the diminished burden is shared with the employer who no longer has to review expense reports laden with receipts.

  2. Enhance employee choice. The employee can exercise greater control over the choice of restaurants and hotels. If the employee wishes to consume a higher-priced meal or book accommodations at a higher-priced hotel, it’s of little concern to the company. Conversely, if the employee wishes to consume a lower-priced meal (or skip a meal entirely) or stay at a lower-priced establishment, this too is of little concern to the employer from a financial perspective.

  3. Increase purchasing prudence. Per diems encourage employees to become partners with the employer in controlling travel expenses. Since employees receive a fixed amount, and presumably aren’t inclined to contribute their own money to cover excess amounts, the employee is motivated to keep the cost of meals and lodging at or below the per diem allowance.

  4. Ensure predictability of expenses. A per diem arrangement allows the employer to budget travel expenses more accurately because the expenses are predictable. If an employer knows that 10 employees will spend an average of 50 days a year traveling, the employer can easily calculate costs from the per diem amounts to budget the annual travel expenses. And if the employer is reimbursed for employee travel expenses by its clients, the employer will be ready to bill these expenses immediately following delivery of service, rather than having to wait for the employee to submit receipts. More timely billing results in improved cash flow.

Disadvantages.
These advantages have caused a number of companies to put per diem systems in place. But it’s also important to consider the disadvantages. Per diems:

  1. Can be difficult to develop and update. It’s difficult to establish a per diem rate that’s fair and equitable to employees and clients (since often clients ultimately pay the bills). One challenge is establishing rates that are fair when employees travel to both low-cost (such as Timbuktu, Mali) and high-cost (such as Kuwait City, Kuwait) areas. Even when employers establish urban and rural, and domestic and international rates, there will be localities with cost structures inconsistent with the low-cost or high-cost designations. Once developed, per diem rates need to be continually updated.

  2. Can result in inequities. Once established, per diem programs can unduly enrich some travelers while penalizing others. If a traveler consistently embarks on trips during the afternoon and according to company travel policy receives a full day’s meal per diem, he or she receives proportionately greater reimbursement than the traveler who consistently leaves first thing in the morning.

    Another potential source of inequity is the client-paid meal or lodging. If the client pays for dinner, the traveler’s meal per diem should be reduced. If it isn’t, the employee is reimbursed for an expenditure he or she didn’t make. And worse yet: The client could pay for the meal again through the per diem system.

  3. Sometimes result in undesirable behavior. While transforming employees into prudent purchasers seems like a good thing to do, some employees may respond with undesirable purchasing practices. Employees, attempting to keep travel expenditures to an absolute minimum (maximizing their income), may seek lodging in places that are unsafe or don’t reflect the company image. And freed from the burden of submitting receipts, employees may make inappropriate choices as to what they consume for meals (four martinis rather than one stuffed flounder, for example).

    Another potential opportunity for undesirable behavior is meals with clients. The company doesn’t want to discourage the employee from picking up the tab for a meal with a client if that’s the appropriate thing to do. In this circumstance, the meal shouldn’t “count against” the per diem.

    Many companies have decided the disadvantages associated with per diems outweigh the advantages and have stayed with the more traditional, cost-based reimbursement policies and procedures. But don’t decide this until you’ve weighed both sides.

Deciding factors.
There are several points to consider in deciding to investigate or implement a per diem policy.

Step 1: Consider whether the company’s current travel reimbursement policy is meeting the needs of employees. Does it fail to encourage employees to be prudent in the purchasing of meals and lodging? Is the current system of reimbursing actual expenses being abused? Are employees complying with the current policy, or have employees, in effect, placed themselves on per diems for meals below the amount required for receipts?

If the present system “isn’t broke,” it probably doesn’t make sense to “fix it.” If, on the other hand, the current system is being abused, or isn’t meeting the needs of the company or its employees, consider a per diem policy.

Step 2: Evaluate whether a per diem policy could be crafted that would minimize inequities and properly encourage employees to purchase meals and lodging prudently. To assess this issue, you may want to review the expense accounts of traveling employees to develop a sense of where people are going, what their purchasing practices for meals and lodging are, and what barriers might exist that would preclude or minimize the effectiveness of a per diem policy (such as client meals).

Step 3: Think about whether a per diem rate can be established that benefits the company, the employee and the client. Such a rate would minimize the expense while enabling the employee to be reasonably rewarded for prudent purchasing. Such a rate, however, won’t easily be determined and probably will require fairly extensive study by HR with the assistance of the accounting staff.

Step 4: If you determine that a per diem policy would be advantageous, you should develop one that can easily be implemented with a minimum of exceptions. Consider piloting a per diem system with a small group of employees before implementing the policy on a company wide basis.

The use of per diems isn’t a widespread practice, but it may meet your company’s needs. We recommend you look into it.

Global Workforce, March 1998, Vol. 3, No. 2, pp. 9-11.

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