Balancing-Act-Lump-Sums

Balancing Act: Lump Sums

Relocation can be somewhat of a balancing act. Company goals, budgets and employee needs and expectations must be met and managed. Nowhere is this more apparent than in a discussion about lump sums.

First Glance

As a mobility solution, lump sums seem straightforward. Simply stated, a lump sum is a cash payment to a transferring employee in lieu of all, or specific relocation benefits. At first glance, a lump sum seems to balance all needs. The positive aspects are:

  • A lump sum meets the company’s mobility goals and gets the employee or new hire from one location to another
  • A lump sum can provide cost savings or at least cost containment, and provides easy budgeting and administration
  • A lump sum provides the employee with flexibility to use the funds as needed/desired.

Considerations and Complexity

Sounds good so far. But consider this: would the company ever provide a lump sum to all its business travelers instead of reimburs- ing actual expenses for business trips (ignoring the taxability issue)? The likely answer is no, because some employees would receive a windfall and others would complain – loudly – that the lump sum amount was not enough. Lump sums for relocation are a similar concept.

In addition, dig a little deeper, and the complexity of lump sums starts to be revealed. Start at the top and consider a company’s culture when determining if a lump sum is right for the mobility program. How does the company perceive itself and how does it want to be perceived? What about the employee experience? Is the company comfortable with a “you are on your own” type of relocation? It’s important to remember that lump sums can impact company productivity and revenue because the employee is managing the move on his/her own, looking for low-cost suppliers so the lump sum can be maximized. This can also create issues for the company’s Mobility group, which may be drawn into problem resolution when employees encounter challenges with their choices.

Other considerations that should be carefully examined before implementing a lump sum include:

  • The type of lump sum (in lieu of all relocation benefits or some? If it’s the latter, which ones?)
  • The population that will receive the lump sum (all relocating employees, lower level new hires, or specific policy levels?)
  • The impact a lump sum may have on the company’s recruiting efforts (assess the difficulty in attracting desired talent)
  • The lump sum’s financial impact on the employee (overpayment for some, underpayment for others)
  • The company’s exception philosophy (what happens if the lump sum is too low? Will additional funds be approved? How to control exceptions/cost?)

Budget

And then there is the question of budget, which can be especially thorny. Not only does the company have to determine its overall relocation budget and potential spend, but it then has to determine how to calculate the lump sum, regardless of whether the lump sum is intended for all benefits or just some. Who will determine the amount? Does the company have historical data on which to base the lump sum? Will the amount be fixed or will it vary by employee level, homeownership status, distance to the new location, family size, etc.? If the amounts are fixed, how often will they be updated? Will the lump sum be tax assisted (grossed up)?

No matter how they are structured, lump sum payments are taxable income to the employee. However, certain relocation benefits are considered excludable from income if the move meets IRS guidelines. A company that provides a lump sum that covers items such as the majority of final move expenses, and household goods shipment and storage may be spending unnecessary dollars. It’s also important to remember that a properly structured home sale program can result in tax benefits that are unavailable if a lump sum is used.

The Numbers

Looking at several lump sum scenarios can be helpful to the decision-making process:

Lump Sum in Lieu of All Relocation Benefits


Lump Sum: No gross up
Lump Sum:
Grossed up

Amount
$50,000
$50,000
Gross upN/A$30,000
Total received by employee$33,500$50,000
Total cost to CompanyN/A$30,000

Gross up increases costs to the company, but not grossing up results in a significantly reduced payment, which may result in financial hardship for the employee. This can trigger exception requests or even cause the relocation to fail.

Lump Sum for Certain Relocation Benefits

Assumes Home Value of $350,000
Lump Sum for Home Finding
Trip & Temporary Living

Fully Managed Move
Lump Sum amount (grossed up)
$8,000
N/A
Home Sale(Buyer Value Option)$28,000$28,000
Home Finding TripN/A$2,000
Temporary Living/Return TripsN/A$2,000
Home Purchase Costs$7,000$7,000
Houseshold Goods Move$10,000$10,000
Final Move Excludable Expenses$1,500$1,500
Final Move Meals$250$250
Miscellaneous Expense Allowance (not grossed up)$5,000$5,000
Subtotal$59,750$60,750
Gross up$9,150$9,750
Total cost to Company$68,900$70,500

Historical data, when available, can be critical when considering a lump sum. Upon analyzing historical data of their home finding trip costs, one company decided against a lump sum because it was discovered that the majority of employees used only part of the time allowed them or did not take a home finding trip. A lump sum would have increased their overall spend.

Combining the various scenarios can be enlightening and helps the company understand the immediate, hard costs for lump sum programs. The unknown costs of lost revenue and lower employee productivity, marketplace reputation in the industry and possible exceptions that can result from certain lump sum programs are harder to quantify.


Assumes Home Value of $350,000
Lump Sum
Only: NO
gross up

Lump Sum
Only:
Grossed up

Lump Sum for
Home Finding Trip
& Temporary
Living: Grossed up

Fully
Managed
Move

Lump Sum amount
$50,000
$50,000
$8,000
N/A
Home Sale(Buyer Value
Option)
N/AN/A$28,000$28,000
Home Finding TripN/AN/AN/A$28,000
Temporary Living/Return TripsN/AN/AN/A$7,000
Home Purchase CostsN/AN/A$7,000$7,000
Houseshold Goods MoveN/AN/A$10,000$10,000
Final Move Excludable
Expenses
N/AN/A$1,500$1,500
Final Move MealsN/AN/A$250$250
Miscellaneous Expense
Allowance (not grossed up)
N/AN/A$5,000$5,000
Gross upN/A$30,000$9,150$9,750
Amount received by
 employee*
$33,500$50,000$11,350$3,350
Total cost to Company$50,000$80,000$68,900$70,500

 *Reflects all cash payments to the employee, including the Miscellaneous Expense Allowance, but does not include reimbursements of expenses 

These scenarios illustrate that an off-the-cuff decision on lump sums is never a good idea. Careful forethought is highly recommended to ensure that decisions that impact the mobility program are the right ones for the company and maintain that all important balance of managing costs, meeting recruitment goals and providing support to relocating employees.

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