By Ken Walker
Paying for travel expenses incurred by employees boils down to two choices: allocating a maximum amount per period (daily, weekly, or per trip) or reimbursement.
Setting a per diem (or weekly, monthly, etc) cap is the less precise method, but it does allow management to set a maximum spend amount that can be controlled. On the other hand, travel reimbursement is more precise but it leaves open the possibility that employees may spend frivolously. So which method should managers choose?
There are clear advantages and disadvantages to each method. In my personal opinion, I believe that travel reimbursement is more effective because the flaws of the per diem method.
Based on personal experience, I've seen a lot of employees who have been told they have a limit of $200 per day to spend on all of my travel expenses (meals, lodging, travel, and incidentals) that end up turning in an expense report near $200 regardless of whether they are in an expensive city like New York or the cornfields of Nebraska.
This is the fatal flaw of per diem. Sure, the company knows that it has a liability for expenses up to a certain amount before the trip is made, so planning is made easier. But I believe that responsible employees tend to police themselves, and problem travelers can be managed so that they learn to act in the best interests of the company given effective incentives to do so. Providing a blank check (albeit up to a maximum amount) does not institute effective incentives.
As a frequent traveler, I often wonder why companies spend so much time and effort setting per diem rates that employees must abide by while traveling on business. Reimbursing travelers for expenses seems like such a more effective method based on personal experience. A simple, conventional travel reimbursement plan tends to be the more effective method than a hard cap on spending limits.
Employees are given the opportunity to prove that they will act in the best financial interests of the company. Tell employees who are traveling on business to spend reasonably and, based on experience, most will comply. The majority of travelers who are told to be fiscally responsible on business trips will look for deals and be cost conscious. This includes trying to eat at reasonably priced restaurants and staying at reasonably priced hotels.
When an employee incurs wasteful spending, management should step in right away and see if the problem can be addressed. The next step for an employee who has not proven themselves reliable when it comes to travel spending may be to put in place a per diem cap.
An irresponsible employee who expenses lavish meals is one that might not be a team player, and thus may not be worth keeping around. Managers should audit travel expenses so that they can identify wasteful employees who have higher reimbursement rates or spend right up to the per diem limit.
In reality, the best way to manage expenses is to have a department that directly overseas and audits all business travel costs. Small businesses that don't have such a department should consider travel reimbursement policies as their best option.