Actually, the company saved $1,600 on the airfare and spent $1,000 of that per the policy. Like it does whenever someone authorized to fly business instead flies coach. Both the company and the employee are better off, but the employee B violated the policy by not booking the cheapest fare.

Although the company's total savings were only $600, co-worker B's travel still cost the company less $$$ than co-worker A.

A better policy (in my view) would be one that splits the savings evenly between the employer and the employee. If I wrote the policy, co-worker B would have been given $800, not $1,000. Co-worker C, who bought the non-upgradable ticket, would have received $1,500. That way, the employee and the employer would evenly share the savings.

If it were my company, I'd fix the policy. Why? Because it's capable of producing absurd results. What if the absolute cheapest available coach fare is $3,200? Employee opts to take $1,000 (your company's flat payment for opting to fly coach) and buys that $3,200 ticket and upgrades. Looks to me like the employee is better off by $1,000 but the company is worse off by $200. Unless your company policy prohibits buying coach when the price difference is less than $1,000, one could comply with the policy yet end up costing the company more $$$ than did the recently fired employee.