LUMP SUM ALLOWANCE: LUMP SUM ALLOWANCE -

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POWERED BYLUMPLUMP SUMSUM ALLOWANCE:ALLOWANCETHE EFFICIENTAPPROACHTOTHE EFFICIENTAPPROACHTO ESRelocation and Living Cost Intelligence

To control costs while keeping their organizationscompetitive, most companies offer some type of lumpsum allowance. This enables them to deliver at least aportion of their relocation program benefits.The passage of the Tax Cuts and Jobs Act removed the tax benefit tocollecting receipts for several components of the relocation process. Giventhese recent changes, the use of lump sums has never been more appealing.Organizations have their choice of several lump sum programs. Each typeoffers specific advantages. For many organizations, a “fixed amount” is thefirst approach implemented. Often designed and managed by an internalstaff, this approach can work initially. However, increased accountability,varied geographic costs and the growing complexity of relocation processesincreasingly limit the sustainability of providing fixed amounts. As a result, anincreasing number of organizations are switching to a “transferee-specific”lump sum allowance.With the various approaches and data quality involved in establishing andmaintaining lump sum allowances, it helps to know your options beforechoosing the program that will best support your company’s needs.2

RELOCATION EXPENSE PROGRAMSOrganizations often help employees cover the costs of moving to new worksites.Historically some of these relocation-related benefits (e.g., final move and householdgoods shipment) were non-taxable. The company either paid for the service directly orcollected receipts to reimburse the transferee.Today, these expenses are now taxable to the employee. This change, along with adesire to avoid inequities inherent with traditional reimbursement programs, have ledmany organizations to shift to the use of lump sum allowances.OVERVIEW OF LUMP SUM ALLOWANCES“WITH A LUMPSUM PROGRAM,EMPLOYERSMAKE A SINGLEPAYMENT TOTHE EMPLOYEE.”With a lump sum program, employers make a single payment to the employee atthe start of the relocation process to cover various expenses. This approach helpsorganizations control costs and reduce both the administrative and management timeneeded to process/approve multiple expense reports for an employee’s relocation.Most lump sum allowance programs share these attributes:Covered relocation costs are identified prior to move, simplifying the budgetingprocess and controlling costsEmployees receive funds up-front, eliminating the need to fund expensesthemselves while awaiting reimbursementEmployees are empowered to use the funds to best suit their circumstances3

IMPORTANT CONSIDERATIONSA well-designed lump sum program balances corporate objectives with employee needs.Most lump sum programs are a combination of three or more major considerations.CONSIDERATION #1: TOTAL VERSUS PARTIAL LUMP SUMA total lump sum program covers all relocation expenses as the only source offinancial support. This has been historically popular for college grads, new hires andentry level transferees. A partial lump sum program covers only certain componentsof the move, with the transferee receiving additional benefits directly paid by theorganization. For example, home finding trips, temporary living, final move and/orhousehold goods shipment expenses may be paid with a lump sum allowance, whilehome sale, home purchase, or other services that are billed directly to the organizationor RMC are not included in the lump sum allowance.CONSIDERATION #2: FIXED VERSUS TRANSFEREE-SPECIFIC LUMP SUM“A fixed lump sum provides the employee with a predetermined amount set by thecompany that does not vary by transferee. Generally, this approach provides the sameamount to all employees, or different fixed amounts for different levels of employees.On the other hand, a transferee-specific lump sum program will provide the individualemployee with a tailored amount, based on the company’s relocation policy and costsspecific to that employee. This takes into consideration variables such as geography,family size, salary, homeowner/renter status, etc. Each organization is unique.Understanding the differences between these fundamental approaches will help toidentify the right fit.”The decision between a fixed or transferee-specific allowance may be the mostsignificant decision in the selection process. More detailed examinations of these twoapproaches are provided on pages 6 and 7.MOST LUMP SUMPROGRAMS AREA COMBINATIONOF THREE ORMORE MAJORCONSIDERATIONS.TOTALCovers all allowed e sizefits all”PARTIALCovers partial costsThe decision between a fixed ortransferee-specific allowance maybe the most significant decision inthe selection process. More detailedexaminations of these two approachesare provided on pages 6 and 7.4

CONSIDERATION #3: DATA ACCURACYLump sum allowances are based on cost data for the various relocation expensesintended to be covered by the lump sum. What if that data is incomplete, out ofdate, or does not reflect geographical differences? Then cost control, employeesatisfaction and fairness may be jeopardized. Examining the source and quality ofthe data used is an essential step in designing an effective lump sum program, asshown in the following examples:“EXAMINING THESOURCE ANDQUALITY OF THEDATA USED IS ANESSENTIAL STEP.”Example - AirfareExample - LodgingWhether an employee is flying to theirdestination for a home finding trip oras part of their final move, a majorityof employees utilize airfare during theirrelocation. Of all the travel-related costcomponents, airfare has the most pricevolatility based upon when an employeebooks a ticket. Prices can changequickly and are subject to seasonality.Many employees utilize hotels at somepoint during the relocation process.Lodging rates vary widely, and thesedifferences will have a material impacton cost control. This can also impactthe employee’s perception of fairnessand satisfaction.The average cost for a 14-day advanceeconomy flight from Chicago O’Hare toSan Francisco in September is 340. InMarch, the same flight would be 427,an 87 difference or 25%. If airfare is notupdated regularly, the allowance is likelyto be too high or too low.The average daily lodging rate fora business class hotel in ColoradoSprings is 177. The same class of roomin Boston downtown/airport area is 276, a 99 difference, over 50%, perday. If specific location data is notused, the allowance is likely to be toohigh or too low.5

THE KEY DECISIONThe overview above helps frame discussions regarding employee relocation assistance.However, the choice between a fixed amount and a transferee-specific programwill likely have the single greatest impact on the outcome and ongoing support oforganizational goals. With that in mind, additional important details on each approachare provided to help organizational leaders make well-informed decisions.FIXED LUMP SUM PROGRAMSFixed lump sum programs provide the employee an amount pre-determinedby the company. Organizations selecting this approach have an array ofoptions for determining the fixed amounts. In most instances, these amountsare determined using one or several of the following considerations:Manager discretionHistorical averagesBudgeted amounts divided by the anticipated number of relocations“ORGANIZATIONSSELECTING THISAPPROACH HAVEAN ARRAY OFOPTIONS FORDETERMINING THEFIXED AMOUNTS.”Multiple fixed amounts: a grid is created providing a range of fixed amounts basedon factors such as homeowner or renter status, job level, distance and family size.Simplicity is a feature of the fixed amount lump sum program. However, simplicitycomes at a cost – such as: Employees are unable to budget how to spend their lump sum allowanceeffectively, since the amount is fixed and not the result of calculatingindividual expenses. Limited differentiation in the flat amount increases the likelihood thatamounts will not be sufficient for some employees while others willreceive a windfall. Lump sum amounts need to be updated frequently to ensure they willcover the intended program costs. This is especially important given theunpredictability of components such as airfare and temporary housingcosts. Fixed allowances are difficult to update over time, since the processfor creating the fixed allowance is typically not repeatable or sustainablegoing forward.6

TRANSFEREE-SPECIFIC LUMP SUM PROGRAMS:Transferee-specific lump sum programs provide the employee with an amountbased on two factors:1. The organization’s relocation policies2. Costs specific to the employee’s actual relocation.Tailored to an organization’s specific requirements, a transferee-specificlump sum program integrates:“PROPERLYSTRUCTURED ANDCONSISTENTLYENFORCED,RELOCATIONPOLICIES ENABLECOST CONTROL.”COMPREHENSIVE POLICIESTRANSFEREE-SPECIFIC REPORTSComprehensive policies establishneeded parameters around any lumpsum program. Properly structuredand consistently enforced, relocationpolicies enable cost control whileensuring adequate financial assistance.Relocation policies should establishparameters addressing all relevantissues, for example:After policies are established,customized lump sum reports arecalculated for each individual transfereeusing policy parameters, precise preand post-move locations and familysize including the composition of adultsand children. Lump sum allowancesare calculated using current costsand consistently applied, provenmethodologies to ensure accuracy andfairness over time.AIrfareCoach or first classRestricted or unrestrictedLodgingDeluxe, first class or economyLow, average or highMealsBreakfast, lunch or dinnerLow, average or highCar RentalCompact, intermediate or full sizeOther ExpensesMiscellaneous expenses, childcare,mileage reimbursement, etc.Organizations should also considerthe best method for sharing pertinentinformation about the lump sumcalculation with employees.Choices include:1. Costs rolled up to one total amount2. Costs rolled up to subtotals (e.g.,home finding, temporary living, etc.)3. Clearly identified individual costcomponents (e.g., airfare, hotels, etc.)7

EXPERT ASSISTANCETransferee-specific lump sum allowance programs tend to deliver an attractive returnon investments through cost controls and employee satisfaction; however, this requiresspecialized expertise. Organizations using transferee-specific lump sums typically turn tothird-party specialists for assistance.When examining potential service providers, business leaders may wish to pay specialattention to several key points, which will identify the quality of service that can be expected:PROGRAM DESIGN ASSISTANCEAND ONGOING SUPPORTThe service provider’s relocation expertsshould work closely with the organizationto design and set up the lump sumprogram that best fits the organization’sgoals and should offer ongoing support.Initial assistance should include:Review current programs and costsAnalyze goals and needsDevelop initial lump sum parametersGenerate sample lump sum allowances“THE SERVICEPROVIDER’SRELOCATIONEXPERTS SHOULDWORK CLOSELYWITH THEORGANIZATION.”Review parameters and modifyas necessaryFinalize parameters and assist indeveloping communication materialsPOLICY ASSISTANCEDetermine what level of assistanceis provided to establish clearand enforceable policies. Onceestablished, effective policies ensureconsistency across multiple offices,departments and divisions. Thisis particularly beneficial to highlydecentralized organizations.MANAGEMENT REPORTINGManagement reports are typically includedin the provider’s scope of services. To aidcompanies in making strategic decisions,management reports examine the impactof policies and parameters, while alsodetailing cost components. As a company’scircumstances and philosophies change, theirpolicies and resulting allowances can reflectthose changes accurately and defensibly.DATA QUALITYWhen interviewing service providers, specialattention should be given to the source andquality of the cost data used to calculatelump sums for each employee. Cost controland employee satisfaction may be negativelyimpacted if the cost data is not geographicallyaccurate, current, or defensible.A successful and well-designed lump sumallowance program will not only eliminatethe burden of expense report reconciliation,but provide a consistent, accurate and fairprogram that clearly communicates thecost components. This allows administratorsto focus on value-added services andemployees to more quickly becomeproductive at the new location.8

SUMMARYMost organizations today rely on some form of a lump sum for certain relocation benefits.This allows them to control costs while maintaining competitive positions for attracting andretaining talent. With the passage of the Tax Cuts and Jobs Act, this number is growing.When instituting a lump sum allowance program, the key decision is to determine the rightapproach – a fixed amount program versus a transferee-specific program.“A TRANSFEREESPECIFIC LUMP SUMPROGRAM OFFERSSEVERAL DISTINCTADVANTAGES.”For many organizations, a fixed amount program is the first approach implemented. Theprogram is likely to be designed and managed by the organization’s staff. This approachappears simple at the outset. However, the increased accountability, varied geographiccosts and growing complexity of relocation processes increasingly limit the sustainability offixed amount programs. As a result, an increasing number of organizations are switching toa transferee-specific program.Policy-driven and established with the help of industry experts, a transferee-specific lumpsum program offers several distinct advantages, including:Cost control through better policy adherence and fewer exceptionsReduced administrative burden (now more than ever since final move expenses andhousehold goods shipments are taxable)Flexibility for each employee to use funds specific to their needsEquity and fairness across all employees9

Runzheimer is the premier relocation and livingcosts intelligence solution, powered by Motus.Understanding that today’s workforce is driven bydata, Runzheimer provides employers and theirmobile workers with the actionable insights andtools needed for a successful move. Our world-classsolutions support companies with everything fromequitable compensation calculations between multiplelocations to understanding relocation-related expensesand needs. With comprehensive data, Runzheimerempowers employers to win the war for talent whilegetting the most from their budget.info@runzheimer.com 800.558.1702 runzheimer.comCopyright 2018 Runzheimer

A total lump sum program covers all relocation expenses as the only source of financial support. This has been historically popular for college grads, new hires and entry level transferees. A partial lump sum program covers only certain components of the move, with the transferee receiving additional benefits directly paid by the organization.File Size: 826KB