Lump sum allowances for employees are becoming more and more common in our industry, particularly for new hire and lower tier employees or in organizations that have little experience in relocation. Typically the employer chooses an amount to give to the employee to cover their relocation expenses and gives it on to the employee in a “lump sum” to use as they wish.
The pros:
- They’re easy to set up – no time spent on choosing the services that you want to offer to employees….sort of the relocation equivalent of giving money in a card on someone’s birthday, maybe a little less thoughtful but they end up getting what they want
- They’re easy to administer – determine what you’re giving, cut a cheque and advise payroll, quick and easy.
- The amount is usually set in stone – there’s not much leeway for employees asking for more money if they run out unless you’re in the habit of granting exceptions
- They’re not as susceptible to abuse – the amount is the amount, there’s not usually a way for your policy to be abused like there is in more complicated policies
- They’re flexible for the organization from one employee to the next – they fit nicely into a tier system where certain levels get certain amounts. Its also easy to decide on an amount specific to the employee’s situation if you don’t want to tier.
- Freedom of choice for the employee – they can do what they want with the money and choose the services that best suit them
The cons:
- Income tax implications – if you’re giving the lump sum directly to the employee, it’s income and the government will take their pound of flesh. If your employee is a big earner, this can be a significant portion and significant dollar amount
- Budgeting usually goes out the window – The employee doesn’t usually make a budget, they get prices for the first service they will need chronologically and cross the next bridge when they come to it. The big picture is not often viewed until the end of the relo, and allowance money often runs out before that.
- Inexperience can be costly – If the employee doesn’t speak the languages of the industries that they will be using, it can be costly in terms of time, peace of mind and cold hard cash. For example, if the employee chooses the origin realtor who tells them the highest estimated value for their home and banks on getting that amount, then finds out that the realtor was wrong (or told them what they wanted to hear to get the listing), that employee might be much poorer than they believed when they accepted the transfer. Or, if employee doesn’t know how to get their move estimate guaranteed, and the actual bill comes out much higher, the employee may run out of allowance long before they run out of relocation expenses. All of these little pitfalls could lead to a failed relocation, which costs your organization money and makes your HR department look bad. It also leaves you with a vacated position to fill, which probably means spending money to relocate another employee in
- They put the onus on the employee – The freedom is great, but it comes with the burden of organization, supplier selection and management, figuring out all of the paperwork and processes, then coordinating it all to fit together.
- “Use it or lose it” is common – Employers often dictate that any remaining balance at the end of the relocation be returned to the organization. Knowing this at the outset makes the employee more spend-happy during the relocation which can sometimes be a little wasteful
Techniques for doing it successfully:
- Get educated – if you’re going to administer a program like this internally, it will help to know the ins and outs. If you’d like help with this, please ask us. We have materials and education available, for
- Offer some education to your relocating employees to help them make the best use of their allowance. We can help with this too.
- Use a relocation company (ahem…maybe TransferEASE?). We have all kinds of bells and whistles to deal with the pitfalls:
- Income tax optimization guidance (not a substitute for professional tax advice, but a good start) – we will guide the employee to spend the allowance on the items that can’t be written off, and if they must pay out of pocket for some items, to do so on items that can be written off for income tax purposes. Our fee for helping to manage the employee’s lump sum is almost always lower than the income tax the employee would pay if given to them directly…sort of a no brainer
- We will build a budget and track all of the expenses to that budget – this way the employee knows how far the money will go, and the suppliers are held accountable to keep their actual bills in line with their estimates
- We do speak the languages of all of those suppliers whose services your employee will need. We will warn your employees about the pitfalls in terms that they will understand, and we will gently steer them away from the dangers
- The onus of coordination shifts away from the employee – our a la carte service menus let the employee choose the things they need, but choosing those services comes with all the coordination and administration assistance that the employee needs.
- We combat “Use it or lose it” – we build a budget right at the start and advise you if the allowance is likely over what is needed. We also work for the organization, defending against spending for the sake of spending. Ultimately you have given your employee an allowance and we won’t stand in the way of them spending it, but we will advise you if we think its being spent wastefully.
How doyou know if a Lump Sum program is right for you? Here are some general guidelines:
- You have HR or Payroll staff who are able to determine a reasonable amount to provide, either on their own or with the assistance of a relocation company
- That same staff don’t have time to manage a comprehensive program and manage the suppliers involved directly, though they may have the knowledge to offer a little bit of guidance to the employee
- You are confident in your transferring employees’ ability to be self-reliant through the relocation process – this type of program puts a lot of responsibility squarely on the employee’s shoulders. If you don’t think they’ll fare well at managing it themselves, this probably won’t work for you
- What is your objective with having a relocation program – are you trying to get your employee from A to B efficiently, or is your relocation program a swanky perk for your highly valuable people? Lump Sum programs are the economy car of relocation programs – they’re practical and efficient, take little maintenance and are inexpensive….but they won’t wow your employee (unless you give them an absurd amount of money).