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Trends to Watch

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Lump-Sum and Managed-Cap Moves

Controlling costs is a top priority for most organizations, making lump-sum and managed-cap programs an increasingly viable alternative to unlimited relocation packages.

Lump-sum programs consist of giving employees a specific amount of money upfront to cover—or help cover—the costs of their moves. Employees then typically manage the move themselves, although some companies provide assistance through a third-party relocation provider.

Managed-cap programs don’t provide funds directly to the employee but contain expenses by limiting the amount that can be spent per relocation—e.g., $15,000—and may also designate monetary caps for benefits such as temporary housing and homesale closing costs. Companies usually engage relocation providers to manage these relocations, which will track costs up to the caps and coordinate services delivered by supplier partners (van lines, temporary housing, car shipments, etc.). As individual needs can vary, some managed-cap programs allow for the selection of benefits as long as the total cost does not exceed the cap.

Both options have their pros and cons, which companies must weigh against their budgets, objectives, and organizational cultures.

Lump-Sum Programs

Pros/Cons:

  • Less work (sometimes) for HR/mobility: It’s commonly assumed that once employees receive lump-sum payments, they’re on their own and that HR/mobility needn’t manage exceptions or reimburse expenses. It’s also assumed that lump-sum programs provide greater financial certainty than other options and will streamline the budget process. However, this isn’t always the case. In some instances, employees may come back to HR/mobility asking for more money if the lump sum isn’t sufficient, and/or may involve those departments with any challenges they’re having in procuring their own relocation services. In some cases, this is due to the complexity of one size not fitting all.
  • More employee flexibility and control: Since there are no restrictions on how lump sums should be spent, employees aren’t limited to specific service providers and can select anyone they wish. Also, if there’s anything left over once a relocation is complete, the employee can keep it. That being said, though, employees who are not using vetted suppliers when on their own will also have to deal on their own with any issues that arise.
  • Less efficient: While lump-sum programs mean less work for the company, they can sometimes be quite onerous for an employee, especially for complex moves that involve a homesale and/or home purchase. These moves also tend to take longer, which can mean less focus on the job while the employee attends to the relocation’s many details.
  • Not as competitive: Companies wishing to recruit and retain top talent may find it harder with a lump-sum program.
  • Taxable income: The IRS treats a lump sum as income, so employees are taxed between 40 and 45 percent on the entire amount. While it is a best practice to provide tax assistance (gross-up) to allow the employee to net the entire amount of the lump sum, this comes at a significant cost to the company.
  • Tracking and reporting: Once employees receive their lump sums, they needn’t account for how the money is spent—at least not to the company—so tracking and reporting aren’t necessary. This can have a downside, however: Companies are less likely to know the true cost of each move and whether they’re giving employees too little or too much.

Managed-Cap Programs

Unlike lump-sum programs, companies using managed caps are more likely to have them in place for all employees. With this type of program, spending limits can be based on whatever parameters a company establishes: employee level, percentage of salary, the employee’s profile, etc. This last item could take into account factors such as family size, departure and destination location, etc.

Pros/Cons:

  • Less work for HR/mobility: Though not as hands-off as a lump-sum program, managed-cap moves, which are handled by the company’s relocation provider, often have fewer exceptions associated with them.
  • Less employee flexibility and control: Employees must use designated service providers for specific services and can’t spend the budgeted amount however they want but must use them for predetermined relocation benefits. Also, if the entire capped amount isn’t used, the employee will not receive the difference.
  • More competitive: Although nothing beats a deluxe relocation package in terms of competitiveness, a managed-cap program is often preferred by current and prospective employees over a lump sum.
  • Tracking and reporting: Throughout the relocation, all applicable costs within a managed-cap program are tracked. This indicates how money is being spent and enables more accurate budgeting.

Which Option Is Right for Your Organization?

Deciding whether to offer a lump-sum or managed-cap relocation program will depend on several factors, including company culture, talent availability, competitive positioning, employee experience, and the budgeted amount. If the latter is $5,000 or less, a lump sum is generally the better option. For amounts that exceed this, a managed-cap program may be best, as it often provides the employee with a better relocation experience while still keeping costs fixed (up to the cap) and reducing the company’s and/or employee’s tax liability.

For more information and a comparison chart, see the original article.

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