On paper, lump sums look like a great option for both relocating employees and the companies that move them. They’re easy to administer, and allow HR managers to flex with the needs of their talent.
However, lump sums are not the right approach for everyone.
For the most part, when trying to decide which employees lump sums will work best for, it’s important to know that they’re best suited for employees with fewer relocation needs. Think interns, millennials and new hire graduates — three groups which make up a sizable demographic in today’s mobile workforce.
Beyond that, it’s also important to know if a lump sum program is right for your organization’s unique goals and budget.
Because companies define lump sums so differently and the components that are offered vary so significantly — something that is frequently reinforced in my work with corporate mobility managers and industry research — there is limited data on exact amounts and the benefits that the allowance is intended to cover. In other words, to answer that question I hear so often, there is no “magic number” when it comes to determining lump sum amounts.
With that in mind, here’s my playbook for determining the appropriate lump sum allowance for your company:
Evaluate the current lump sum. What kind of feedback do you hear from transferring employees? Do you receive a lot of requests for exceptions? Do you hear criticism that the amount is not sufficient to cover the costs intended? Do employees turn down moves? The answers to these questions will help you gauge the current program’s effectiveness. If you don’t have insight into their concerns about the lump sum amount, it might be time for stakeholder input/survey.
Define the lump sum as specifically as possible. Don’t simply include house hunting trips. If it covers a certain number of days or includes meals and transportation and spouses or children, this should be included in the provision.
Calculate the average cost of each benefit for your traditional move corridors (i.e., Boston to Chicago). If necessary, calculate different amount based on employee level or tier, and by homeowner or renter. Add up the amounts to determine estimated cost per employee. This is going to reflect the top of the range for the lump sum. Also, don’t forget the gross-up provision. Data from one of our recent surveys shows that 56% of companies include estimated taxes in the lump sum payment and 30% withhold the tax liability and pay the employee the net amount. Only 14% of companies don’t cover the taxes on lump sum payments.
Determine whether a total lump sum for all provisions or for partial lump sum makes sense for this group/tier of mobile employees. Keep in mind that once this is in place, it will be difficult to determine how the allowance is spent and to gauge future policy enhancements.
Develop the approach that is appropriate for your company’s financial/accounting culture. Many prefer a straightforward fixed amount, while others develop a matrix using a few variables (homeowner/renter and mileage, for instance). Research indicates that 32% of companies use a fixed amount while 68% use a variable approach.
Determine the amounts based on the calculation method. Use amounts that are conservative and encourage the employee to be resourceful, but not so low that it prevents mobility or creates negative feelings among employees.
Lastly, and this is important, whatever lump sum approach your company uses, you should plan to re-assess your program regularly. Ask for candid feedback from employees who’ve received lump sums regarding their experiences. Solicit input from managers, too. Were the initial estimates accurate? Is your method of calculating the lump sum meeting employee expectations? Are there instances of misuse or double dipping?
The resurgence of lump sums in the industry reflects the fact that they’re easy to implement and provide the highest level of flexibility. But it’s important to be vigilant; without guidance or planning or knowledge of the process, your lump sum program can swing from blessing to curse fairly quickly.