What are lump sums? What questions should you be asking?
More than 1 in 10 job seekers relocate for work each year – whether for a new job or a job transfer. These moves come at a great expense to families and businesses alike, and how they are approached can make a real difference in how talent is acquired, utilized, and retained. While in the past, fully company-managed relocation programs were standard, lump sum relocation programs have become increasingly more common.
At first glance, a lump sum relocation package seems simple: A single, one-time payment given to an employee to aid their relocation. However, not all lump sums are created equal. While lump-sum relocation packages can offer a low-cost, low-complexity alternative to full-service relocations, they still require diligent consideration prior to implementation and put more responsibility and ownership on the transferring employee.
BACKGROUND ON LUMP SUMS
Lump sums come in many forms. In order of complexity, from lowest to highest, they are:
- Fixed – Also known as ‘flat lump sums’, fixed lump sums are the simplest type. These pay a single amount, regardless of transferee needs. Fixed lump sums tend to work best when your transferee’s expenses are predictable and low. However, fixed lump sums can have up to a 70% chance of under- or over-paying relocation expenses. While this lump sum is paid out by the Relocation Management Company, the transferring employee who receives this typically manages every aspect of their move.
- Tiered – A tiered lump sum system divides a handful of different lump sum amounts that are appropriate for different relocation needs or are separated by band level. For example, an ‘associate’ package might be limited to a moving van rental plus the cost of gas, whereas an ‘executive’ package may account for the additional expenses of spouse job-hunting and temporary housing. These will often utilize the Relocation Management company to manage and guide the employee as needed.
- Variable – Variable lump sums vary based on each employee’s specific relocation needs. A variable lump sum program can use a calculation program which takes in consideration specific costs of the destination location and family size and puts out a dollar value. Another form of variable lump sum programs is a menu of relocation necessities, paired with payments to cover those necessities.
- Partial – Partial lump sums give a truncated amount ahead of time to facilitate certain benefits such as house hunting, temporary living and final move while utilizing the Relocation Management company to facilitate the other policy components.
- Managed – Managed lump sums function more like expense accounts that have a pre-determined amount. The Relocation Management Company will manage this this as a capped program and audit all relocation receipts and expenses to ensure costs stay within the designated amount.
Additionally, the payment of a lump sum to a transferee is taxable income on the employee’s end, in which case, the effective budget the employee has for relocation will be reduced unless tax assisted by the company. This is something that would need to be determined upfront and be consistent for all employees.
Also note that the 2017 Tax Cuts and Jobs Act (TCJA) has added an additional complication by eliminating moving cost tax deductions for non-active-duty military. This deflates the effect of the lump-sum payment. That said, the TCJA is scheduled to end on January 1st, 2026, and may not be made permanent.
Despite these complexities, lump sums programs offer some significant virtues, and more companies are turning to lump sums as an employee relocation solution. Results from a 2018 AIRINC survey report that companies use lump sum programs for the following reasons:
- Lump sum programs give more flexibility to the employee (87% of respondents)
- Lump sum programs simplify administration (77%)
- Lump sum programs save money (26%)
- Lump sum programs provide more cost transparency to the business (25%)
- Even among companies that have not yet implemented a lump sum program, nearly one-in-five are considering implementing one.
QUESTIONS YOU SHOULD ASK
Getting the right person in the right place, for the right role, is a subtle process. Even similar employees with similar roles can have very different needs. Being aware and responsive to your employee needs will give you a great deal of help in choosing the right relocation programs for your company. Before considering adding a lump sum policy to your relocation program, you should be asking the following questions:
- How complex is your transferee’s life? Are they moving with a spouse or children? Do they own a home or rent?
- Are they looking for flexibility and prefer to self-manage their own funds?
- What level role is the employee entry level or experience employee?
- If their relocation is complex how much support will they need? How quickly do you need them to move and start being productive in the new role?
- Are you trying to control and keep costs contained?
- What is the culture of your company and what level of support are your employees used to?
- Some other factors to consider:
- Lump sum programs are generally not built to relocate personnel with large households or hold executive-level roles. Reports on employee relocation tend to set the highest threshold to $15,000 for an effective lump-sum program., ,  Beyond this point, company-managed programs should be considered.
- While gender is not much of a factor, age is. A recent survey found that as employees get older, they expect their company to give more attention to facilitating their transfer, and that employed persons under the age of 35 preferred receiving a lump sum to arrange their own move.
- Other factors you should consider about your transferee: Whether they have children (especially young children), whether they care for aging parents, whether their spouse has a job, whether they are a homeowner, whether they are advanced in their career, if this would be the first time they’ve undergone relocation. If any of these are so, then the transferee might expect and need a more supportive program.
Before creating a new policy, it is wise for the Global Mobility Manager to consult with their Relocation Management Company to understand how best to support the Business and transferring employees while keeping the company’s goals and objectives in mind.
 Nitz, Mary Beth, Worldwide ERC, April 8 2019: https://www.worldwideerc.org/news/sponsored-content-are-your-employees-losing-productivity-in-a-lump-sum-relocation/
 Pub.L. 115–97: https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf Sec. 11048, Sec. 11049.
 Sirva, 2019: https://www.sirva.com/en-us/insights-and-publications/detail/what-keeps-employees-from-being-successful-with-a-lump-sum-policy-best-practices-for-calculation-management-and-distribution-of-lump-sum-allowances
 Gibson, Ivana, Worldwide ERC, 2017: https://www.worldwideerc.org/news/lump-sum-and-managed-cap-moves/
 Atlas Van Lines, Corporate Relo Survey, 2017: https://www.atlasvanlines.com/AtlasVanLines/media/Corporate-Relo-Survey/PDFs/2017survey.pdf
 Sachs Media Group research survey, September 5, 2019