Sum for All Reasons

Special report: relocation.

By Lin Grensing-Pophal Feb 1, 2004

HR Magazine, February 2004A way to reduce administrative headaches and cut costs when relocating employees is to give them a lump sum-one check upfront-to cover some or all of their expenses.

It begins routinely enough. Your company is moving an employee from its Boston headquarters to a satellite office in San Francisco. The employee is single, has no children and rents his home. You figure on relocation expenses of no more than $10,000. That amount should cover temporary living expenses, the costs of finding a place to live, moving and shipping household goods.

But now the employee comes to you to present some special circumstances: He has three pets that need to be boarded while he is in San Francisco looking for a place to live, and he needs help finding a reliable veterinarian in that area. What’s more, he has a “significant other” whom he would like to bring along on those house-hunting trips. And that other person has children—a reminder that assumptions about employees sometimes prove wrong: An employee with no children can nonetheless have children in mind when making relocation decisions.

In short, you’re now unexpectedly faced with a variety of requests for exceptions and special considerations from a relocating employee—and this isn’t the first time. Frankly, you’re tired of the administrative headaches of reviewing expense reports and of haggling with hiring managers and employees over the vagaries of their individual personal needs and expenses.

Is there a solution? An increasing number of companies are saying there is—a lump-sum arrangement for relocation costs.

Lump-sum allowances are paid upfront to relocating employees to cover all or significant portions of their relocation expenses. If the actual costs are less than the lump sum—for example, if the relocating employee has managed the lump sum frugally or has been particularly efficient in orchestrating the elements of the relocation to keep costs down—the employee keeps the leftover amount. If, on the other hand, expenses outpace expectations, the employee typically bears the extra costs.

Lump-sum arrangements “give a lot more flexibility for the transferee to really manage their relocation and accommodate their own unusual circumstances,” says Ellie Sullivan, director of consulting services for Weichert Relocation Resources Inc., in Morris Plains, N.J. “All of the things that would have been exceptions to policy are eliminated because the employee can spend the money the way they deem necessary.”

Advantages for HR

For the company, a lump-sum arrangement can pay off in reduction or even elimination of expense report tasks and negotiated exceptions. It simplifies relocation processes, says Anne May, program manager-relocation in Orlando, Fla., for Siemens Shared Services LLC, part of the global Siemens telecommunications company. “It takes us away from having to deal with requests for policy exceptions and having to get into discussions about trading benefits.”

The plan in place at Siemens, May adds, saves time all around—for employees, because they don’t have to fill out expense reports; for her, because she no longer has to process those reports; and for HR management, which now doesn’t have to handle special-needs requests.

The most common expenses covered in lump-sum allowances include those for temporary living, house hunting and transfer of household goods, according to Sullivan. Lump-sum allowances to cover all expenses are less common, “with the exception of the college new-hire category,” she says. Moving a recent graduate with no house to sell costs much less than transferring an employee who faces the expenses of selling one house and buying another. “Very rarely do you see a current employee or homeowner employee receive one lump-sum allowance to the tune of $40,000-$50,000 to cover the entire expense,” Sullivan says.

Research by Runzheimer International, a Rochester, Wis., relocation and business-transportation consulting firm, shows that 70 percent of companies with lump-sum programs in 2001 said their lump-sum allowances did not cover total relocation expenses, an increase from 63 percent in 1999.

Expenses not usually covered in a lump-sum relocation arrangement, according to Runzheimer, include loss protection on the sale of the employee’s home, any cost-of-living differential, help with finding employment for a spouse and house-purchase expenses at the new location. Also excluded are orientation trips, which are distinct from house-hunting trips; they are sometimes accorded to employees and spouses to help them get acquainted with an area before starting the relocation process.

A Growth Trend

The use of lump-sum payments is rising, according to Runzheimer, whose services include lump-sum programs for companies. Runzheimer’s Survey & Analysis of Employee Relocation Policies & Costs, 8th Edition (published in 2002, based on 2001 data) shows that 53 percent of organizations offer lump-sum payments to some transferees, up from 43 percent in 1999. The average lump-sum allowance in 2001 was $8,270, up from $7,762 two years earlier.

Donna Barber, consulting manager at Cendant Mobility, a relocation firm in Danbury, Conn., says: “The pendulum swings back and forth. For a while, when we were very cost-conscious, there were a lot of lump-sum programs because companies thought they were saving a lot of money. Then it swung the other way. Now we’re seeing that pendulum swinging back again—certain components are being wrapped up in a lump sum.”

Fran Kastengren, a spokesperson for Runzheimer, says, “More than 50 percent of our organizations are definitely looking at ways to tweak their policies because they have an opportunity for cost savings.”

Large organizations—those with more than $1 billion in annual revenue—reported saving an average of $150,000 annually by using a lump-sum relocation program, according to the Runzheimer survey. In addition, administrators reported that 97 percent of transferees said they were “satisfied” or “very satisfied” with lump-sum allowances, and 76 percent of respondents reported a reduction in exception requests under such programs.

Potential Drawbacks

The primary disadvantage for employees is an avoidable one—lump sums falling short of expenses because the amounts are pegged to outdated information. “Your policy may be based on one set of parameters, and the reality might be very different for that transferee,” says Sullivan. “For example,” she says, “several years ago in the tech boom, clients moving out to San Francisco area just couldn’t find a temporary apartment” while they looked for permanent housing. The market had become so tight, she continues, that they “had to sign six-month leases or annual leases in order to get in.”

Another potential pitfall, especially for high-level transferees, can be income taxes, Barber says. If you neglect to factor in the taxes that a transferring employee has to pay on funds received for moving expenses, the lump sum could shrink by half before it’s even used for relocation costs, she says.

Sullivan notes that it may be advisable to keep certain expenses—household-goods shipping and some final move expenses—out of lump-sum payments so that the transferee can deduct them or exclude them from taxable income. If they are included in the lump sum, she adds, “these deductible/excludable costs should be tracked separately, enabling the transferee to claim the deduction and saving the company the costs of tax assistance on this portion of the lump sum.”

There also may be perceived inequities among transferees receiving lump sums—too much for some, too little for others. “You need a methodology for calculating what the lump sum will be,” says Sullivan. “That methodology needs to be applied to every employee from a consistency point of view. Inherent in that is the recognition that you’re not going to cover every expense that an employee might incur and every individual situation that might drive those expenses. You really have to know going into a lump-sum program that Employee A might be able to pocket $3,000 of unused relocation expenses. Some companies feel really uneasy with the potential that they could be overpaying a transferee.”

How Much Is Enough?

“There are a number of different ways a company can calculate what the allowance should be,” says Sullivan. Most companies start by examining their existing policies, she says. For instance, a company that, under a traditional reimbursement arrangement, customarily pays for 30 days of temporary-living costs and two house-hunting trips of two days each would determine a lump-sum allowance for those two types of expenses based on the company’s history of paying for them.

May underscores that it’s important to take expense history into account when crunching the numbers. If you base your lump-sum amount on only your current policies without factoring in “a historical analysis” of what you have spent for such costs, she says, you could set your lump sum higher than necessary.

“Most corporations have very generous relocation policies that provide for a number of house-hunting trips, for example, or a specified amount of time for temporary living,” May says. “But if they go back and look at actual historical use of those policy benefits, they’re likely to find that not every employee used every benefit.” So she recommends that “when you go to establish a lump-sum calculation, if you try to pay out based on all the benefit components in your current policy, you’re likely to find that your spending will far exceed your historical spending. One of the first things you have to really look at is what your historical spending has really been. Then go back into your lump-sum calculation so you can achieve the desired expenditures.”

May adds that “if your reason for making a change to a lump-sum program is for cost savings, then you’ll need to adjust for that in your calculations so that your end result is actually less than your historical spending.”

Depending on the complexities of your relocation experiences, you may find it helpful to create a matrix, says Sullivan. “Once you’ve established a grid, it’s pretty easy to administer, and your recruiters out in the field can say, ‘OK, your relocation allowance, based on where you’re moving to and from and your family size, will be $XXX.’”

Each method for calculation has its advantages and disadvantages, Sullivan says. “The bottom line is the company needs to look at how they’re going to use the lump sum with the demographics of their population and their corporate culture.” In addition, she says, input from the accounting and finance area and information from recruiters about the types of challenges they’re facing can prove valuable to the analysis and calculation of lump-sum amounts.

Relocation firms such as Runzheimer, Cendant and Weichert can calculate such amounts and can manage lump-sum programs for client companies.

Have Answers Ready

Although requests for exceptions can still come up when you’re relocating employees under a lump-sum plan, there are ways to minimize the likelihood that they will be raised.

First, make sure you have “senior management endorsement and buy-in to the fact that it’s not a negotiable program,” says Sullivan. “If you’re negotiating the lump sum every move, then you really defeat the purpose. You really need a strong commitment from management to prevent those negotiations.”

May adds: “It’s very important to set clear expectations with employees about what expenditures the funds are intended to cover.” Then, she recommends, prepare for situations in which the relocating employee says the lump sum couldn’t cover the costs for which it was allocated.

“Under our policy,” May says, “if an employee feels that sufficient funds were not allocated for their expenses, we ask them to submit all of their receipts and a summary of their expenses for the entire relocation, and we review it to make a determination of whether additional funds can be allocated.”

To date, she says, no one has challenged the policy. She feels this is in large part due to clear communication, upfront, about what the funds are intended to cover and stressing the “no exceptions” practice.

The aim in developing or revising your relocation policies, says Barber, is to consider what’s most important to you—cost or employee satisfaction? “Trying to align these two sometimes-mutually-exclusive goals can be challenging,” she says. “You really need to determine how it fits within the organization and whether it’s going to get you to where you need to go.”

Lin Grensing-Pophal, SPHR, is a Wisconsin-based business journalist with HR consulting experience in employee communication, training and management issues. She is the author of Human Resource Essentials: Your Guide to Starting and Running the HR Function (SHRM, 2002).


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