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Smooth Moves

February 1, 1994
Related Topics: Relocation Management, Featured Article
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What goes up, must come down. The theory applies to gravity and also aptly describes U.S. real estate values. Declining real estate prices over the past few years in certain areas, such as California and the Northeast, have caused a chain reaction in corporate relocation problems within the U.S. Employers that move operations to less costly areas often experience resistance from homeowning employees who stand to lose lots of money on the sale of their properties.

Many corporate moves in 1993, prompted by downsizings and reorganizations, were group moves rather than individual ones-creating greater challenges than ever before for HR professionals.

Uncle Sam didn't help matters much either last year. New 1994 tax laws now prevent employees from itemizing deductions for certain moving expenses, forcing employers to decide whether to gross workers up by making up the difference.

Employers have to deal with the relocation turmoil and figure out how to get the right people, to the right places, at the right time-for the right price. Corporations are countering transferee resistance with improved ways to smooth out the relocation road. These new strategies, developed over the past few years, are holding new promise for the relocation challenges of 1994 and beyond.

Some of the strategies have been around for a while, but are being reintroduced with renewed vigor. Others are being discovered by many relocation professionals for the first time. The strategies include such real-estate sales incentives as self-marketing and bonus programs, and loss-on-sale assistance. They also include relocation reimbursement strategies like lump-sum payments. The effect of these programs has been to slow or eliminate employees' resistance to relocate in the wake of depressed housing markets while also helping save on the high administrative costs of running a relocation program.

Depressed housing markets cause resistance to relocate.
According to the Washington, D.C.-based Employee Relocation Council's (E-R-C) 1993 relocation trends survey, nearly 60% of the respondees had problems relocating employees during 1992. E-R-C cites the biggest reasons why employees were reluctant to relocate (in order of significance): as slowed real-estate appreciation and depressed housing markets at the old location, high housing costs and high costs-of-living at proposed destinations. The E-R-C also reports that in 1992, more than three-quarters of companies have either "some" or "a great deal" of transfer activity in high-cost areas.

The areas that employees most resisted moving to in 1993 were the Northeast states such as New York, New Jersey and Massachusetts, and California, which has experienced the biggest housing downturn in recent memory. The National Association of Realtors (NAR), headquartered in Washington, D.C., confirms that home sale prices were lower in the West and the Northeast in 1993 than they were in 1992, while home prices in the Midwest and South have steadily risen for the past three years.

The NAR reports that homes sales were up in every region except the West at the end of 1993. "What has happened there is overinflated home values," explains Alvin Wagner of A.L. Wagner & Co., a real-estate appraisal company based in Flossmoor, Illinois. "California has had the highest housing losses and continues to be in a rapidly declining market from 1% to 1-1/2% per month."

In addition, depressed housing markets causing relocation resistance, corporate reorganizations and downsizings forced many employees to make moves that they otherwise wouldn't have had to make. According to a survey conducted by Evansville, Indiana-based Atlas Van Lines, Inc., more than 42% of the organizations surveyed named corporate reorganizations rather than promotions or resignations as the internal condition that prompted the most relocations in 1992.

According to relocation experts, that trend also continued in 1993 and caused a huge upswing in group moves. Most group moves were from high-cost regions on the West and East coasts where the stubborn recession persists, and to areas such as the South and Midwest where it's generally less expensive to operate.

The group-move scenario caused an outcry among many employees caught in the reorganization cycle last year. For example, Beverly Berberich, corporate relocation manager of Racine, Wisconsin-based SC Johnson Wax, handled her company's first-ever group move in 1993. Because Johnson Wax purchased the Drakett Co. from Bristol-Meyers Squibb Co., it had to move 55 of Drackett's 1,200 employees from Cincinnati to Racine.

"Whenever you have a group move situation, there's a lot of dynamics going on," says Berberich. "People are going to an unknown. It's normal for a group move to cause some apprehension, and in some cases, resistance." The biggest resistance comes from younger employees who tend to look at how a relocation will affect their quality of life rather than how it will enhance their professional career.

For other organizations, such as Armonk, New York-based IBM Corp., however, moving groups of employees didn't create much resistance for the company last year. Although most of its 8,700 domestic moves in 1993 were of a group nature, anywhere from 20 to 1,000 employees at a time, transferees didn't complain much. The reason? While workers may lose money on the sale of their homes as they move out of depressed housing markets, they still have a job-at least for the time being.

"The changes occurring in the relocation industry parallel the changes that are going on in corporate America," says Cris Collie, executive vice president of the E-R-C. For example, the continued surge in corporate restructurings have led many of the E-R-C's members to conduct more relocations in 1993 than they anticipated at the beginning of the year, says Collie. Many employers thought that overall transfer volume would decrease. In fact, it either remained steady or increased slightly in 1993 and is expected to continue on the same path this year.

And how will real-estate values affect relocation? Is the end of the housing slump in the West in sight? Not likely for a few years, say the experts. Continued good interest rates (around 7%) in the Northeast, however, may spell some relief for home-selling transferees in that region who may find it easier to locate buyers now than they have for the past few years. According to a November 1993 report in Resources, a newsletter published by the Gillette, New Jersey-based Tri-State Relocation Services Group, Inc. (a not-for-profit corporation serving New York, New Jersey and Connecticut), the buyer's bull market in the Northeast may last for at least another year, if not two or three.

Where does that leave employers? Looking for strategies that will get employees to go where they need them to go, while also holding down ever-increasing prices. "Every company is looking to control costs," says Collie. "In order to accomplish that, companies are requiring their employees to participate more in the relocation process."

Self-marketing programs and bonus programs help keep costs down and morale up.
mployers are taking a renewed interest in home-sales incentives such as self-marketing and bonus programs. Self-marketing programs topped Rochester, Wisconsin-based Runzheimer International's list of relocation trends for 1993. More and more companies are asking employees to get involved in selling their homes through premarketing or self-marketing programs—so that employers don't have to step in and handle home sales themselves, or worse, take homes into inventory.

With self-marketing programs, a third-party counselor helps a worker through the home-sale process. For instance, counselors help transferees identify real-estate agents and know what to look for, such as:

  • What types of activities the real-estate agent should be performing throughout the listing period
  • How often to hold open houses
  • How to develop counteroffer plans.

"It's someone in the employee's corner to talk with about the sale of the house," says Laura Hamilton, manager of relocation services for Midland, Michigan-based Dow Corning Corp. Dow Corning, which relocated 43 employees domestically last year, has offered this service as an option to employees for the past two years. "It's been very successful in helping avoid purchasing employee homes and taking them into inventory, which is extremely expensive," says Hamilton.

Almost 90% of Dow's relocating employees participate in the company's home-marketing assistance program. Of those employees, more than 80% are successful in selling their homes themselves. Dow ends up taking approximately 20% of transferees' homes into inventory.

While the idea isn't new, self-marketing continues to increase in popularity. The E-R-C reported that between 1988 and 1991, the use of home-marketing assistance programs in general nearly doubled, from 15% to 29%.

Relocation experts say that employee-generated home sales are an increasingly attractive alternative to taking homes into corporate inventory. Although employee sales costs increased slightly in 1992, the average cost of employee home sales is still less than half the cost of selling inventoried homes, according to Runzheimer. In dollars, that translates into a $120 savings per $1,000 of a home's appraised value.

"Once homes go into inventory, you're talking 20% to 24% of the value of the property," says Tom Peiffer, executive vice president of Runzheimer's living-cost division. "If you can get the employee to market the home for 45 to 90 days, that saves the company a lot of money."

Will the home-marketing idea continue to be important in 1994? "I think it will," says Peiffer. "If companies want people to move from soft or depressed housing market areas, I don't know how they can do otherwise." Home-marketing isn't as crucial for employees who've been in their homes for eight to 10 years. They'll probably make money on the sale of their home regardless of specific marketing strategies that help ensure a higher price. However, transferees who've been in their homes only a few years may need home-marketing programs to get as much equity out of their home as possible. They even may help transferees break even.

According to E-R-C trends surveys, bonus programs that are tied to home-marketing programs are another increasingly popular relocation provision and help get employees more involved in the home-sale process. The E-R-C reported that in 1991, almost 40% of companies with third-party home-marketing assistance programs gave workers a bonus or cash incentive if they found a buyer for their home during the self-marketing period. Although methods of determining the dollar amount vary, the most common method is to base it on a percent of the home's sale price with no dollar maximum.

In addition to offering transferees home-marketing assistance, Dow Corning also offers a bonus program. An employee need not use home-marketing assistance, however, to qualify for a bonus. "It's positioned as an extra benefit," says Dow's Hamilton.

Dow bases its bonus program on a sliding scale that takes into account the appraised value of the home and the actual sales price. If an employee finds a buyer for his or her home at the appraised value, Dow pays the employee a 3% bonus. If the employee sells the home at 99% of the appraised value, he or she earns a 2.5% bonus. The scale goes down to 96% and yields a bonus of 1%.

Employees at Dow are guaranteed to earn 100% of their homes' appraised value through the company's policy to take homes into inventory if employees can't sell them outright. "The idea is to bring more offers to the table," says Hamilton. "So the way to get them to do that is to give them a monetary incentive."

By contrast, IBM doesn't take transferees homes into inventory if employees can't sell them. But it does offer transferees a bonus program in association with a self-marketing program. Nearly two years ago, IBM implemented a bonus program that allows employees to receive 1% of a home's appraised value if they sell their home within 90 days.

According to Suzane Parker, manager of international assignments and relocation services for IBM's WFS Workforce Solutions, a bonus program gets employees more involved in selling their homes from the outset. "It's an issue of getting them up and running faster," says Parker. "If you really get employees charged up about premarketing, hopefully you can get the home sold in 45 days. That's less cost to the corporation, but it's also an emotional boost for employees as well." The sooner their homes are sold, the sooner they can get to their new assignments.

While bonus programs may be popular, one relocation expert warns that companies first should see how well a self-marketing program works in getting homes sold before tacking a bonus program onto their relocation policies. Ellie Monty, president and publisher of the Relocation Compass, a newsletter published in Hinsdale, Illinois, says that when self-marketing programs first came into vogue a few years ago, many employers automatically threw in a bonus incentive with them.

"Bonuses are being reexamined by companies because, while they're an incentive for the employee, they might not be necessary to implement a successful home marketing program," says Monty. She advises that employers first check to see how a well-managed home-marketing program works before attaching bonus incentive, because once it's written into policy, it's often difficult to remove later.

Loss-on-sale programs spread.
Where home-marketing and bonus programs end, loss-on-sale programs begin. While loss-on-sale programs are another increasingly popular option in the relocation professional's bag of tricks, like self-marketing or bonus programs, they aren't an entirely new idea.

For several years, companies have been reimbursing workers with part or all of the difference between what they sell their homes for and what their homes are worth. For example, in 1989, 40% of companies provided loss-on-sale assistance via a formal policy to transferees, according to E-R-C. And another 27% provided such assistance on a case-by-case basis. By 1992, 75% of companies provided loss-on-sale assistance and the other 25% provided it on a case-by-case basis.

Despite continued increases in loss-on-sale amounts because of transferees who are forced to sell their homes in depressed housing markets, fewer companies are willing to shoulder the entire burden when a loss on sale occurs. Only 25% of companies with formal loss-on-sale policies cover 100% of the loss, according to the E-R-C.

Dow Corning is one of them. It upgraded its loss-on-sale program from 80% to 100% reimbursement in 1993. "We recently reviewed our loss-on-sale policy to help us avoid employees' hesitation in accepting jobs from one location to another," says Hamilton. While loss-on-sale programs may be a good option for companies that transfer small numbers of employees each year, it might be an impossibility for the firm with large numbers of transferees.

IBM is one company that doesn't cover employees' real estate losses-on-sale. "It's really an affordability issue," says Parker of IBM. "If we tried to offer that type of program, we'd have an awfully huge financial impact on the corporation," she says.

Loss-on-sale programs, however, aren't the only way that employers can ease transferees' burdens during the move process. Companies increasingly are handling the discretionary relocation items such as temporary living expenses and house-hunting trip expenses through lump-sum payment programs. Employers dole out a chunk of money to transferees before the move and let them keep whatever they don't use.

Are lump-sum payment programs the best thing since sliced bread?
Although lump-sum payment programs aren't new-they've been around for more than eight years-their popularity increased dramatically in 1993. Some companies swear by them. Employers ask employees to manage their moving expenses, and in return, the employee can keep any excess money.

And why not? Companies can save enormous amounts of time and administrative expense. By not having to collect and process a receipt for every relocation item such as meals, lodging, airfare and rental car expenses, relocation professionals can spend more time counseling transferees on other important issues pertaining to the move.

"Lump sums are a hot topic," says Runzheimer's Peiffer. Proof: the E-R-C reports that in 1993, 3% of companies gave current employees a lump-sum payment (with no requirements to itemize expenses). The same study indicated that 2% reimburse the household goods shipment but provide a lump sum for all other moving expenses. And 3% of companies even cover real-estate sales expenses, such as closing costs, with lump sums.

The benefit of lump sums for employees is that they get to manage the cash and spend it as they see fit. In the end, managing the lump-sum relocation benefit may be one of the only aspects of the relocation that transferees have control over. For instance, if an employer is dictating which moving companies a transferee must use, such as the real-estate company, the premarketing company and the homefinding company, the lump-sum allowance at least gives the transferee the ability to pick which hotel to stay in during the move or whether to fly first class or coach.

Says Peiffer, "It helps people settle in a lot faster." Given the enormous emotional and psychological stress that's associated with any move, allowing the transferee to make some decisions on his or her own is no small consideration in getting the transferee up and running in the new location as quickly as possible.

A new twist in the tax laws, however, have thrown companies using lump-sum programs a curve ball. The federal government's new moving expense deduction rules (Section 217 under the Revenue Reconciliation Act of 1993, Public Law 103-66), which took effect January 1, 1994, restrict transferees who itemize from deducting lump-sum payments that cover house-hunting trips, temporary living expenses, or residence-sale or residence-purchase expenses. However, for the first time in many years, renters who don't itemize deductions are able to claim such expenses as van line or date-of-move expenses.

Under the old law, employers had difficulty determining what was tax deductible and what wasn't. "Now it's clear that it's all going to be taxable," says E-R-C's Collie, "so it's easier to handle in terms of grossing up of that tax liability."

Many corporations are having to decide exactly what they want to do about the grossing-up issue. "It's going to take more money on their part to make the employee whole," explains Monty. For example, if an organization in the past had given an employee a lump sum of $10,000, that employee, in essence, may have received only $7,000 under the new tax law because he or she has to pay taxes on that money. So that organization will have to determine if it wants to give the employee $3,000 or more to make up the difference. "A corporation can still say, 'I'm sorry that that person has to eat that money, but we can't continue to just gross this up either," says Monty. "That's the decision that corporations are making."

IBM has offered a lump-sum payment to domestic transferees since 1989, and to international transferees since 1990. "The one challenge that we face is the handling of the enroute expenses," says Parker. Many corporations that have lump sums have chosen to take out the enroute portion and handle that with expense accounts. "It isn't a difficult thing to handle, but it's more administration for us," she adds.

Companies that have large transferee populations such as IBM usually benefit the most from a lump-sum program. Fewer receipts to process means less administrative paperwork.

Those employers that provide lump sums generally are satisfied with the way these programs work. But some employers are cautious. Johnson Wax's Berberich says that while she's thought about implementing a lump-sum program, she's carefully considering whether it fits in with her company's culture. "We're a very paternalistic company," says Berberich. "I wouldn't want our employees to think that we're pushing them away by giving them a lump sum and by saying, 'Here, go take care of your own relocation.'" While she has seen that most employees at other organizations who get lump sums don't see lump sums that way, she's still considering the pros and cons.

Hamilton of Dow Corning agrees. "One of the reasons we've opted not to provide lump sums is that [not offering them] it keeps us in closer contact with our transferees, which we feel is important for customer service," she says. When Hamilton's relocation staff sees expense reports coming through, they know at which stage the transferee is in the relocation process and can offer assistance wherever necessary.

Lump sums tend to eliminate employees asking for additional funds. Because lump sums usually are based on a set policy that takes into consideration how much it costs for certain expenses such as a house-hunting trip for an employee and his or her partner to a certain area, including airfare, meals, rental car and so forth, advance lump-sum payments usually meet the need. But not always.

Therein lies the potential problem with lump-sum payments. "The downside with a lump sum is that you hand an employee money thinking that that employee shares your objective of covering the intended relocation costs," says Monty. The money may be spent on peripheral expenses not related to the relocation such as credit card bills or college tuition. If an employee mishandles the money, says Monty, you've got a big problem—the employee still hasn't moved, but may ask for more money. "That's the story with lump sums," says Monty, "they need direction."

So do most relocation policies. Relocation professionals increasingly report that they have to revise their relocations policies nearly every year, rather than every five to 10 as they used to.

As relocation policies struggle to fit all the people all the time in the midst of reorganizations, group moves and ping-ponging real-estate values, relocation professionals are left wondering what will go up and what will go down next. No one can be certain. However, relocation strategies that capture the spirit of a company's culture and are weighted carefully with financial priorities will get the most people where they need to go, when they need to get there.

Personnel Journal, February, 1994, Vol.73, No. 2, pp. 68-76.

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