by Lisa Johnson, global practice leader for consulting services at Crown World Mobility
After years of staying put due to the stagnant economy, the improved current economic conditions have resulted in more and more workers—confident in the job market and willing to move to new places and take chances—happily relocating for new jobs. With this influx of relocating employees, many organizations are seeking ways to reduce the administration time of their mobility programs.
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One method of relocation expense reimbursement is the lump sum benefit. Intended to be used for any expenses the employee may incur from the relocation, the lump sum allowance—or the Miscellaneous Expense Allowance (MEA)—offers flexibility for the employee to apply the funds as needed and potentially cuts down on the administrative burden for the company.
Straightforward and flexible, it’s easy to see why the lump sum approach is at first glance a good option, but there are potential pitfalls that companies should consider.
Pros vs. Cons
Once you dig a little deeper, the lump sum approach is not a Panacea. Not all relocating families are alike. Not all will have lifestyles that require the same level of relocation assistance. For instance, employees who are moving with families, cars, and pets—and own homes that they need to sell, and perhaps have valuable furnishings to move—will require different assistance than, say, a newly hired college grad moving straight from a residence hall.
For the latter group, a lump sum offers many advantages: It gives funds to dispose of low-value items and replace them in the new location; it encourages the employee to explore lower cost ways of moving (i.e. self-move vs. hiring movers); it also inspires efficiency and supports self-sufficiency.
However, self-sufficiency only works when the employee knows enough about relocation to make effective choices—and many do not. To solve this, some companies provide a relocation counselor to give knowledge and support. That may work against the goal of reducing costs, but it has a lot of benefits.
Even for employees who have experience moving, use of a lump sum without counseling can be challenging; employees who are given a lump sum are frequently frustrated with the unexpected or unintended consequences of planning and managing their own move.
Keeping Current
From the company’s perspective, one of the biggest challenges to a lump sum program is keeping the lump sum allowance amount up to date. If the lump sum amount is based on the company’s experience with reimbursing costs, the amount could become outdated pretty quickly.
It is also not uncommon that the lump sum amount is higher than it needs to be and therefore the company may not experience the cost savings initially sought. Few companies have a formula for what percentage of cost experience should be allocated when using a lump sum rather than reimbursement.
Ultimately, the company should look at how the lump sum approach fits with the demographics of its population and its corporate culture, and should also receive input from the accounting and finance departments. The company’s recruiters can also give valuable input about the types of challenges they’re facing with new hires. These insights can prove to be valuable tools for analyzing and calculating the right lump sum amounts.
Meeting Half Way
One approach to address the inevitable challenges described above is the use of a managed lump sum approach, which offers the best of both worlds. Like the pure lump sum, it still provides a single allowance upfront for employees to use as they choose, but it comes with two valuable types of support.
First, assistance is provided by experienced relocation consultants to support effective and timely decision-making. Second, some minimal amount of relocation support is built in, so that the choices left up to the employee in terms of the relocation are more focused on lifestyle choices, but not basic relocation support.
This also better enables the employee and company to take advantage of tax benefits that come with the company paying directly for relocation expenses. While the advantages are obvious compared to self-managed lump sums described earlier, the potential disadvantage to the company is that it may not see the extent of cost savings it sought, given the additional cost of counseling.
Another advantage is that managed lump sum programs provide data the company can use to ensure the amount of the lump sum allowances provided remains aligned with the program’s intent, which may turn out to be a money-saver over time.
As with any decision regarding employee mobility policy and practices, the culture of an organization has a lot to do with both the choice of an approach and the success of that approach. For a company with a high number of single, early career new hires, a more flexible approach in the form of a lump sum or managed lump sum might be the way to go.
In the end, the fit between corporate culture, employee demographics, and relocation policy plans—especially pertaining to lump sum programs—may be the biggest factor for the program’s success.
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Lisa Johnson