A traditional fixed lump sum policy approach provides the relocating employee with a flat amount of money that he or she can use to pay relocation expenses. Under this program, the employee is usually responsible for coordinating the move details and allocating the available funds. Companies can use several criteria to determine the amount of the lump sum, including: 1) Job or grade level of the employee; 2) Homeowner versus renter status; 3) New hire versus current employee; 4) Historical averages for similar types of moves; 5) Distance of the relocation and family size; and 6) Discretion of the employee’s manager.

Companies can also engage a third-party data provider to determine the amount of the lump sum. The provider will consider current costs, distance, family size and any other parameters set by the employer in calculating a lump sum amount.

Pros of a Traditional Fixed Lump Sum Program

Companies have most commonly used a traditional fixed lump sum policy for entry-level employees and/or new college graduates. These employees typically do not have extensive households to move and they appreciate the flexibility to budget and allocate funds in a way that is most applicable to them. Employers have the flexibility to determine how generous the lump sum will be, and lump sums tend to reduce administrative burdens and exception requests. From an accounting or accrual standpoint, the traditional fixed lump sum is typically the simplest in terms of reporting and expense administration, since the company offers the lump sum as a single, fixed payment, with the employee retaining any remaining funds.

Cons of a Traditional Fixed Lump Sum Program

While simple to use and administer, the traditional fixed lump sum has drawbacks for the employee and company. A new hire or college grad will probably have little understanding of what moving services or amenities cost and the amount of time it can take to make all of the necessary arrangements. In fact, some employees might not even know where to begin. Even for more experienced transferees, moving is stressful. Reducing the amount of assistance provided can result in the employee feeling overwhelmed, mismanagement of funds and lost employee productivity as the employee focuses on move details rather than work priorities.

Companies can end up spending more than they budgeted if the employee manages the lump sum poorly and requires additional funds to complete the move. Ironclad policies tend to crumble in the face of the real world need to hold onto valuable talent and return employees to productivity as soon as possible.

Another shortcoming of the traditional fixed lump sum is the lack of data when tracking actual spend as well as spending trends. Prudent companies need data to analyze the cost effectiveness and market competitiveness of their employee relocation policies. With traditional fixed lump sum policies, it is extremely difficult to analyze whether or not the monies provided are appropriate, as there are no individual benefit expenses to track.

Management Tips

By providing more than just financial assistance, companies managing talent mobility can overcome some of the negatives associated with traditional fixed lump sum programs. A relocation consultant (whether in-house or from a third-party provider) can counsel employees on how to utilize the lump sum funds most effectively, and to leverage any discounts that may be available from relocation partners, such as household goods shippers and temporary living providers. If a relocation consultant is not possible, companies can provide access to a web portal with destination area information, moving options and applicable discounts.

One strategy that is growing in popularity with employee relocation is to provide the household goods shipment as a benefit in addition to the lump sum. The company adjusts the lump sum to remove the portion the employee would use for household goods transportation. This allows the employer to leverage any van line or self-move relationships they may have. In addition, under current IRS guidelines, the cost of household goods transportation is a tax-excludable event for the company.

To help you understand the complexities of lump sum policies, download the white paper, “Lump Sum Policies Best Practices” to learn about the advantages and disadvantages of each type of lump sum policy; how each type of lump sum program works; and which type of policy is the best fit for your employee relocation program.

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