The 5 problems with lump sum relocation allowances

According to the PwC 15th Annual CEO Survey, "Mobility is increasingly recognised as playing an important role in attracting, retaining and engaging talent". PwC’s Talent Mobility 2020 report predicts that international assignments will rise by 50 percent by 2020, following an already steep increase over the past decade.

Costs can quickly mount up when it comes to relocation: school fees, shipment of effects, accommodation allowances and travel. Hundreds of thousands of dollars can be spent on the cost of a relocation so it can be difficult to determine a reasonable allowance to relocate for an assignment.

The tightening of corporate budgets has seen an increased popularity in lump sum allowances. That is, giving a relocating employee a fixed lump sum amount for them to spend as they wish. These offer the promise of cost control, and minimal administration and management to the employer. Together with the flexibility and freedom for the employee, it can appear to be an optimal solution for both parties.

Once you scratch the surface, however, the hazards become apparent. Here are the five pitfalls of lump sum allowances:

1. One size does not fit all

Employee circumstances and needs can vary widely – from children, pets, standards of living, marital status, age, and the list goes on. What is a windfall for one could leave another seriously out of pocket as a result of the move – causing undue burden on the employee and family.

2. Determining what is equitable and fair

Given that everyone is different, the task of arriving at an equitable amount or policy can be fraught with ‘what if’ scenarios and not quite achieving a policy that is fair for all. A young and single go-getter vs someone married with children may have the same grade or job description, but very different personal needs. Determining the right amounts and thresholds can be a minefield, and coming up with an equitable and cost effective policy can be a mammoth task.

3. Consistency

The process of transitioning to a new role in a different culture runs a similar course (or rollercoaster!) for all expats. Managing this in a consistent and efficient way is critical to ensure that all employees have the same opportunity to on-board at the same speed. Integrating into a new team and environment is a process that should be closely supported with adequate preparation and cultural support.

4. Judgement

The very nature of a lump sum allowance assumes a level of judgement on the part of the employee – that they will spend the money how it was intended: to ease the burden of the relocation. Pocketing the proceeds rather than investing in the success of their relocation can be tempting, but can be short term gain for long term pain. Placing the burden of this decision onto the employee can be stressful without adequate guidance.

5. Duty of care

The personal upheaval involved in a relocation can often been overlooked in favour of succession planning and getting stuck into a new role. There is a danger of perceived lack of care, and resentment that the relocation benefits the business, at the cost of stress and anxiety to the employee and family. Proceed with caution, as the ‘here’s a lump sum, off you go’ approach can be seen as uncompassionate. There is a duty of care to ensure employees assimilate not only to their new role, but also to their new home.

The verdict

There’s no doubt that the lump sum allowance has its merits. The perceived simplicity of implementation and minimal administration is so appealing, that it’s easy to forget that family and spouse issues continue to be the biggest challenges that threaten the success of international assignments (according to the Ernst & Young Global Mobility Survey). Sixty-five percent of international relocations fail or result in early repatriation. Encouraging staff with the right skills to mobilise must come with adequate support for the family.

It’s crucial for business to ring-fence a budget for the success of an employee relocation – covering not just the logistics, but the important task of adapting to a new environment.

Appreciating that this varies widely by individual is a good first step to establishing an approach, or an amount, which is workable for all involved.

A viable alternative

A flexible allowance plan is a great start to adapting the lump sum in a way that considers the employee’s needs and circumstances. Creating a range of categories of services and costs involved in a relocation is a good start; ranging from the logistics, orientation services, home and school search, cultural support and so on. Setting out a matrix of these categories against criteria such as tenure, number of family members, seniority, distance from home country and type of living arrangements, with budget ranges for each can go a long way to suiting both the employer and employee.