You’ve set your sights on that highly-coveted senior executive to spearhead your global strategy. But before she can relocate and join your company, you have to overcome two significant hurdles: her million-dollar home that will very likely sell for a loss of $150,000, and the fact that your loss-on-sale policy caps at $50,000.
Such obstacles to talent deployment are becoming all-to-familiar to corporate relocation and HR managers. The results of Worldwide ERC’s 2011 New Hire Survey reveal that “providing or increasing the cap for loss-on-sale assistance” ranks among the most frequently-granted policy exceptions, while a poll conducted during a recent WRRI webinar had participants citing exceptions to loss-on-sale policy among their most significant relocation challenges.
In most cases, when companies step outside of policy, they’re doing it for a senior executive, like the one in our example. Our 2011 Mobility and the Current Real Estate Market survey revealed that at 24% of companies, senior-level execs are the only employees eligible to receive any type of loss-on-sale assistance, while 23% of companies reported that among new hires, only the senior-level qualify. This isn’t surprising, as employees in this demographic typically have higher-priced homes (over $1 million) which may have lost significant value in downward trending markets. They also tend to be highly mobile and perhaps more likely to have bought a home at market peak – making these homes more susceptible to losses.
Like most policy components, exceptions have their pros and cons. While they can portray your company as flexible, they can also set precedents that can cause problems down the road. Not to mention the fact that, in the case of loss-on-sale exceptions, they can be fairly expensive. In the aforementioned webinar poll, 34% of participants noted that their largest loss-on-sale payment over the past year was in excess of $100,000—12% of which were over $300,000.
Should your company be held accountable for an employee’s lavish lifestyle or dubious buying decision? The harsh reality is that a reasonable exception to your loss-on-sale policy may, at times, be necessary to recruit the top-tier talent you want. That said, when evaluating exceptions that could be publically disclosed, your company should carefully consider the possibility of attracting negative attention from the media or shareholders, who today place greater scrutiny on such payments to high-ranking executives.
For those companies that strive to avoid exceptions because they want to maintain fairness and consistency in their policies and don’t want to give employees the impression that everything’s negotiable, there are two alternatives:
Pre-Decision Services: More than half of the companies participating in our 2011 Mobility and the Current Real Estate Market survey offer some form of pre-decision services to employees, and with good reason. This process ensures full disclosure of the financial ramifications, allowing employers and employees to make informed decisions. If, for example, up-front analysis determines that the employee would take a loss in excess of your policy cap, and your company is unwilling to approve an exception for additional loss-on-sale assistance, that employee may opt to turn down the move without a lot of squandered time and effort on behalf of either party.
Shared responsibility: Most companies won’t cover 100% of the amount of a loss; instead, they look for simple ways to share responsibility like establishing caps, minimum thresholds or formulas that are tied to the resale status of the home. One technique is to establish a threshold or minimum amount of loss that must be incurred before the company bail-out applies. Our research indicates that 12% of companies currently utilize such a threshold, which varies considerably based on home value. This shared responsibility concept—think of it as similar to the HMO co-pay you put down every time you visit the doctor’s office—holds the transferee accountable for a portion of the costs associated with the loss.
Avoiding loss-on-sale altogether can be tricky, but one way to better position your company going forward is to require employees to use home purchasing counseling and avoid buying new construction which tends to be more susceptible to loss. A pre-purchase independent appraisal can serve as the basis for future loss payments and help ensure that your employees are buying right in the destination location, and that the home isn’t overpriced/overvalued.
Remember, there is no one-size-fits-all approach to loss-on-sale programs. What works for your company will not necessarily work for another due to variances in locations, market conditions, budgets, critical skills and talent shortages. But the evidence suggests that companies that manage loss-on-sale on a case-by-case basis tend to spend more than those companies that maintain a consistently implemented policy.
Considering the amount of time that companies invest in identifying the right mix of relocation benefits to attract the most desired candidates and the additional sweat equity being poured into such selection and assessment strategies as pre-decision programs — not to mention the actual cost of a move — it’s not surprising to see the widespread use of payback agreements.
Essentially, payback agreements allow employers and employees to share responsibility for the success of a relocation by requiring the employee to agree to repay all or a portion of the cost of the move is he or she leaves the company within a specific window of time after being relocated.
The results of our 2011 Mobility and the Current Real Estate Market survey show that 82% of companies require both current employees and new hires to sign a payback agreement, with roughly one half using a 12 month repayment window and the other half using 24 months (45% and 43%, respectively). About half of companies enforce the agreement by recovering all relocation costs, while a smaller number will recover partial costs only. An additional 32% evaluate costs on a case-by-case basis.
To get some additional, first-hand info on how payback agreements are being used, we recently held a roundtable session on the topic with some of our clients, representing the energy, consumer products, entertainment, retail, manufacturing, and food/beverage industries. Among our findings from this session:
— The majority of participants have payback agreements of two years. Repayment is typically at 100% for year one and at 50% or pro-rated in year two.
— One participant noted that in cases where the timeframe of the relocation is extended, the employee is required to sign a new agreement.
— The primary intent behind payback agreements, the majority of participants agreed, is not to recoup the costs of the move but to communicate to the transferee population (particularly high-level moves that incur steep relocation costs) that the company expects long-term retention. The message here is, “we’re making an investment in you, and we want to know that you’re committed to us.”
With rising costs and decreasing budgets, protecting a company’s investments is more important than ever. One of the most obvious ways that companies can ensure that their mobile employees have a stake in the organization’s future is to require that they sign a repayment agreement before any relocation costs are paid to them, or on their behalf.
Whenever I’m asked to review a policy to see where the company’s program stacks up against their industry peers, I go directly to the repayment agreement. Payback agreements can often be an indication of how the company’s program reflects the culture–or at least it should be. Many policies are increasing the repayment terms from one to two years, a sign that the company views the relocation as a financial investment in the employee’s – and the company’s – future.
How do you determine the right timeframe for your company’s payback agreement? This can be a challenge without any method to measure the success of relocations. At the very least, keep track of the rate that employees stay with the company one to two years after the move. Beyond that, I’d like to hear your thoughts on repayment agreements. Does your company enforce them? Do you use the same one for new hires and current employees? Have you changed your agreement recently? Did it help?
Leave a comment below or e-mail me at firstname.lastname@example.org, and we’ll revisit this topic next month.