Paying money for a behavior is an incentive for that behavior.

Does that mean every employee would choose to live far away to maximize their commuter mileage benefit? No.

Does that mean some barriers to living far away would be reduced, thus increasing odds that some employees would live further away, or that some prospective employees that live at distance would consider applying to this company over a company that doesn't offer a commuter mileage benefit? Yes.

Companies also aren't worried employees "would spend most of their weeks driving". Most companies don't include drive time as hours worked.