What is a lump sum relocation package?
A lump sum relocation package is an allowance that a company gives to an employee to help them relocate for a new job opportunity. Lump sum packages are designed to help employees get settled and back to work faster because they have more flexibility to move quickly into their new city and role. The packages also help employers keep valued employees while also controlling costs on their end.
What is covered by the lump sum?
Lump sum packages cover a wide range of expenses that can come up during a relocation. Mainly, they help pay for the general, moving-related expenses associated with a national or international move. These expenses can include temporary living quarters, sale and closing costs of a home, breaking of a leasing agreement, and the final, permanent move.
How are lump sum relocation packages negotiated?
Negotiating a relocation package should be an open dialogue between an employer and their employee in order to set proper expectations on both ends. The employee needs to present a rough timeline for when they should move and what they need in order to move, i.e. selling their home, transporting their recreational vehicles, or child care. And an employer should enter negotiations knowing which packages they can offer their employee, when they will need the employee to start their new role, and what corporate relocation services they can recommend and offer.
How are relocation package lump sums paid?
It’s important for companies to know what payment options are available for their lump sum packages. Typically, there are three methods of payment for lump sum packages.
A lump sum is given to the employee directly and they can use those funds in any way they need in order to relocate. The employee is required to file that amount as income.
This option puts moving companies and the employer in direct contact. The company is billed for any moving expenses, eliminating the need for the employee to get involved and potentially having to pay taxes on their moving expenses.
During this process, the employee pays all of their relocation expenses upfront and gets reimbursed by their company once their move is complete. Though the employee has to pay for their move, they are not responsible for the tax burden, and it gives both the company and the employee flexibility during the process.
Lump sum relocation packages offer benefits to employees and employers alike. For employers, it is not only easier to control costs with lump sum packages, but administration of these packages is also much simpler. For employees, it places more control over the relocation in their hands and allows them to shop around for the most cost-effective relocation options. These are four primary types of lump sum relocation packages you may want to consider.
1. Flat (Fixed) Lump Sum
These packages acknowledge that the moving expenses are the same for employees at all levels of experience within the organization. As such, the relocation package involves the same lump sum payment for entry-level employees as it does for executive-level employees.
2. Variable Lump Sum
These packages are unique to different employees and/or transferees according to standards the company establishes. These standards may include any of the following.
- Relocation distance
- Renting vs. buying
- Size of families
- Level of responsibility within the organization
- Salary level
- Typical relocating costs
With variable lump sum relocation programs, there isn’t a one-size-fits-all employees plan and the employer sets the parameters.
3. Alternative (Partial) Lump Sum
Employers can offer a lump sum payment for some of the relocation expenses and then reimburse the remaining expenses upon submission of receipts and supporting documentation the employer decides which expenses are covered under the lump sum portion and which will require receipts for reimbursement. Typically it is recommended to reimburse the employee for relocation expenses such as final move and household goods shipments.
4. Managed Lump Sum
These programs allocate a capped lump sum amount to the employee. The policy will delineate the provisions covered and any individual provision limits and may require the employee to submit receipts for expenses. Additionally, the policy may be enhanced by authorizing the services of a relocation management company to assist them in spending their funds wisely.
How Do Lump Sum Relocation Programs Benefit Businesses?
Worldwide ERC conducted a survey in 2013 on lump sum policies. The survey results provide important insight as to why businesses choose to offer lump sum payments for relocation expenses. According to the survey, 46 percent of companies offer lump sums to pay for specific components of a relocation policy. 28 percent offer a lump-sum-only policy to some of their relocating employees, while 9 percent offer a lump-sum-only policy to all relocating employees.
The primary reason for offering a lump sum was stated as concerns for employee flexibility. The second most commonly stated reason was cost control.
The record-keeping aspect of relocation packages should be considered. Traditional packages do offer some tax benefits for the business, but the complexity of record keeping involved for expenses at all levels is unwieldy and difficult to manage. Examples of these expenses could include:
- Temporary living
- Return trips while living in temporary quarters
- House hunting trip
- Final move
- Home Sale and Home Purchase Closing Costs
- Lease breaking assistance
Lump sum relocation packages allow employees to prioritize needs and expenses according to the money available to them in the package. This can make it easier for businesses to control the costs and reduce the record-keeping and expense tracking burden on the employer.
Relocating employees is a large expense for many businesses. Any of these lump sum relocation packages could help businesses keep these expenses in check, while allowing transferees the opportunity to take more control over their relocations and related relocation expenses.
What Standard Procedures are Companies Following?
A Mobility Magazine survey uncovered some interesting facts about how companies are managing their lump-sum corporate relocation packages.
- Most partial lump sums are a fixed amount for every employee.
- Most lump-sum-only payments vary based on a number of factors, including individual needs or the employee's level within the company.
- Fixed payments are more common with entry-level employees
- An executive relocation package usually varies based on a number of factors.
- In a complete, variable lump-sum corporate relocation package, whether the employee is a renter or homeowner was a big factor in calculating the lump-sum amount. In a partial lump-sum payment, homeowner or renter status was rarely taken into account.
The Trade-offs of Using Lump-Sum Relocation Packages
More and more businesses have been favoring lump-sum relocation packages for employees in recent years. After all, they are cheaper than just doing a regular relocation - right? Unfortunately, the truth of the matter is not always so cut-and-dry.
One thing about lump-sum packages that is easy to overlook is the fact that, like many other "discount" programs, they can cost more than they save in the long run. While this isn't necessarily true in every case, it happens more often than anyone would like; how do you know if it's true of what you offer your employees? Let's take a look at some of the trade-offs and explore how it all adds up (or doesn't).
How a Lump-Sum Relocation Policy Saves Money in the Short Run
Lump-sum relocation packages obviously have their advantages. Otherwise, none of us would ever use them! When employers favor them, they do so because:
- They have a lower front-end cost.
- They seem to be an easy, "hands-off" way to manage employee relocation.
- In some cases, lump-sum relocation packages provide greater flexibility to employees.
- They eliminate the chance that you'll buy an employee's home, only to be stuck unable to sell it in the current housing market.
- Lump-sum packages put less strain on Human Resources.
It's true that a lump package will help any business with front-end costs. But what about the longer term costs? They are often easy - and dangerous - to overlook.
The Hidden Costs of Lump-Sum Relocation Packages
The biggest trade-off with lump-sum packages is what you get back in employee satisfaction and loyalty. Making a move is always a stressful procedure, even when it involves a better position at the end of the tunnel. Even the smallest thing you do (and don't do) for your relocating employee during this time will have more impact than it would under less stressful, more routine circumstances.
Probably the biggest drawback in today's economy is that each employee is left to take care of home sales on his or her own. Unless you live in a select few markets, this is likely to double or triple the stress your employee feels about their move.
This often translates to increased frustration or even bitterness towards you as an employer--especially if your relocating employees know anyone whose employers provided them with AVOs, BVOs, or other buy-out options.
Another prospect looms even larger for most employers: the difficulty of working with an employee who is trying to sell his or her old home. At the very least, this takes time and energy away from your employee's vital functions.
At worst, a slow home sale could result in a disappointed employee who moves back to their original location, leaves at a critical moment, or stirs large amounts of discontent with your other employees.
When it comes down to it, a lump-sum employee relocation package often represents moderate initial savings. But a more well-handled employee relocation policy is actually an investment: an investment in your employee's loyalty and productivity, as well as an investment your business's future.
If you're structuring (or re-structuring) your corporate relocation policy with lump-sum packages, benchmarking can help you set payment amounts. A full-service corporate relocation firm can help.