Five Tips To Cut Relocation Costs
But take heart. You can treat employees well without looking like relocation's answer to Zsa Zsa Gabor. To provide some assistance, Personnel Journal assembled a roundtable of professionals.
- Arthur Layton:
- Halina Dragin:
- Mary Ann Williams:
- Sharleen Padgett:
- Beth Derman:
Vice president, consulting services, for Wilton, Connecticut-based The Hessel Group—a firm specializing in relocations
Analyst, relocation policies, for San Francisco-based Chevron Corp.
Payroll accountant with relocation responsibility for Phoenix-based The Dial Corp.
Manager of corporate programs for Prospect Heights, Illinois-based Household International.
Here's how it worked: Layton suggested five tips companies can follow to cut costs. The experts bounced around their opinions on the tips, and even tossed in a few of their own. Some follow, or are planning to implement, all five tips. Others use combinations. Layton, however, supports the use of all five, and maintains that if you successfully implement the changes, you could save up to $3,500 per move—and ditch the spendthrift label for good.
Cap the MEA.
Auto registration. School physicals for the kids. New drivers licenses. Minor emergencies. They all add up, and they're all generally covered under the catch-all: "miscellaneous expense allowance." The general formula employers follow is to give transferees one month's salary, which, according to The Hessel Group, is approximately $5,000 (assuming the average transferred employee's salary to be $55,000). Yet most employees incur only approximately $1,500 in expenses not covered elsewhere in the relocation policy.
The upshot? Layton recommends capping the MEA at $2,500. "First of all, $2,500 is half of what you're paying now on average. Second of all, it provides more than enough for an employee to cover expenses," says Layton. If the employee can document greater expenses, reimburse against actual receipts, he suggests. This is a relatively easy step that could save $2,000 per transferred employee—$3,000 if you gross up this allowance for taxes.
One of four do this; the others aren't planning to.
Sharleen Padgett, of The Dial Corp, relocates 200 to 250 employees a year and currently has the $2,500 cap in place. Generally she pays even less: "We give a two-week allowance, up to $2,500. We don't allow any exceptions to that. Nobody has ever questioned that because we've always done it."
None of the others are considering a cap in the near future—all pay one to one and a half months' salary. Explains Household International's Beth Derman, who relocates approximately 150 employees at the executive level every year: "We pay one month's salary. I benchmarked other organizations and found that to be compatible."
Halina Dragin, who moves about 600 employees a year, admits the idea may be useful for Hoechst Celanese in the future: "It's a good point. If we were ever in the position to come up with ideas, that would probably be an area we'd look at."
Reduce reimbursement for discount points.
One, two or three? Most companies will pay up to three discount points on a new mortgage. However, many lenders are currently quoting between one and two points for market rate loans. Some transferees will seek a lower rate by paying the three points because they know their employer will reimburse them for it. Curb this habit by reducing reimbursement for loan discount points to a maximum of two. Deal with higher discount point requirements only by exception. "If I say we'll reimburse up to three points on your mortgage, you're not going to call me up and say, 'Hey, I found a mortgage at one point, how about that?'" says Layton. "You're going to call up the lender and tell them your company will reimburse up to three points. So the lender will give you a term for three points." The Hessel Group estimates capping at two points saves $450 per relocated homeowner.
Three in four do this. Only Hoechst Celanese will go higher. Says Chevron's Mary Ann Williams, who moves 800 to 1,000 employees a year: "We pay two. We reduced it years ago because we realized we didn't need to do three."
Double-check your tax coding.
Here's a little word problem for you. An employee moving from Cleveland to California goes on a homefinding trip. He submits his hotel bill, airline costs and meals on an expense report. The employee finds a house, buys it, puts it on the expense report for reimbursement. Which costs are considered taxable income to the employee? Are household-goods shipment and final move expenses taxable as part of the transferee's income?
"Sometimes companies don't do a good job of putting things in the right category, and they end up counting things as income that aren't really income," explains Layton. "Very often, expenses aren't coded as taxable or non-taxable." Take for instance, the lumping together of new-home closing costs and discount points. Reimbursements for new-home closing costs, such as title insurance, legal fees and title search, are non-deductible. Loan discount points, however, are deductible.
The result? The total is entered as new-home closing costs, and the whole amount is inadvertently grossed up for taxes. The moral? Provide adequate training to your tax-coding staff, outsource the function or find competent auditing services, because miscoding of reimbursements costs companies $250 to $500 per transfer.
All agree it's an important issue. Hoechst Celanese and Chevron outsource the majority of the task. Household International uses software that forces users to break out expenses properly, but Derman says it's not enough: "Even with the software, people should get together each year with their tax departments or attend seminars so there's an understanding of the changes in tax law."
Padgett handles The Dial Corp's tax coding herself, but still continually brushes up: "I've been going to seminars for years now, and each year I find a few more things to fine-tune. I'm sure there were times when we put non-taxable things into the tax category. I'm sure it cost us money. But I think we're pretty good at this point."
Offer incentives to employee home sales.
Approximately 87% of companies either offer to purchase the homes of transferred employees or use a third-party home vendor to do it. If the transferee can find a buyer, the average costs are $14,000 to sell the home, according to The Hessel Group. If the employee sells his or her home to the home-purchase company, costs jump to $25,000. "There's a potential to save a lot of money if we can get more of our transferred employees to sell their homes rather than just turning them over," says Layton.
Obviously, offering incentives to increase the number of employee sales is key to the economy relocation plan. A good starting place is a bonus system, in which an employee earns a payout of 1% to 3% of the sales price if he or she can find a qualified buyer and valid sales contract. "A bonus gets employees' attention to market their homes more equitably," says Layton. "It gets employees to be more realistic about their list prices, which makes their homes more attractive to buyers." If a house is appraised at $250,000, and the employee can get a sale for $248,000, Layton suggests basing the bonus on $250,000, because it's still more reasonable than taking it into inventory or selling it third party.
A marketing assistance program can also help. For instance, the most common reasons transferees can't sell their homes are because their asking prices are too high or they make a poor broker selection. With marketing assistance, employees are counseled on such things. A combination of marketing assistance and an incentive may double the percentage of employee sales at a company. If you increase your employee sale rate from 30% to 50%, saving the earlier estimate of $11,000 on each sale, Layton says you can save $60,000 over traditional home-sale plan costs.
All four have some kind of home-marketing or incentive program, although the degree of aggressiveness varies. Hoechst Celanese and Chevron both offer the suggested incentive bonus of 2%. Chevron even links the bonus to its home-marketing program: Employees aren't eligible for the bonus until they've been educated on home marketing. Says Williams: "Our program includes getting at least two brokers' price opinions, and meeting some listing requirements, such as using a realtor with a good track record. Linking benefits is key. If employees don't do the marketing program, they don't qualify for the 2% bonus. They don't qualify for a buyout. They don't qualify for a home-sale loss. So we've hit them with a big club. But we get 90% of homes to go to outside buyers."
Provide a lump sum for temporary living and homefinding.
Budget accommodations or the penthouse suite? Coach or first-class? Fast food or four star? In which case do you think an employee is more likely to splurge a little—when they're doling out the money or when the company is?
Most companies reimburse employees for expenses as incurred for interim living and homefinding costs. Few questions asked. Hotel and meal costs can average $150 a day during temporary living at the new location. Total travel and lodging expenses for these two items can easily run more than $5,000. Layton recommends that rather than reimbursing against actual expenses, companies should provide a lump-sum payment. "There are plenty of data bases that allow you to estimate costs, so you can give a flat dollar amount, based on family size, new location, travel distance and so on," says Layton.
What employees don't spend, they keep. That way, you reduce administrative expenses for processing myriad reports and producing countless checks. You reduce the number of expense reports you process. You reduce the chances of making tax-coding mistakes. Perhaps most importantly, you take advantage of employees' tendency to economize when they're spending their own money. "When you give employees, say, $5,000, suddenly they're not staying at the finest hotels anymore," says Layton. "By giving a lump sum, you end up giving less than you'd normally spend, because employees find ways to be more efficient. And they're more happy with the situation." Layton estimates that offering lump sums will save $500 per employee over traditional reimbursement for incurred expenses.
They're all for this idea—either planning it, considering it or already doing it. Chevron and The Dial Corp both are strong advocates.
"We pay actual transportation, because airline rates can be all over the board and are hard to estimate," says Williams. "We pay a lump sum for everything else. They can eat at the Ritz, they can eat at McDonald's. We don't care. For interim living, we reimburse actual lodging and per diem meals. Because of the wide variation in the communities into which our employees transfer, we decided not to do a lump sum at this point."
Padgett: "We just started it last year, and I love it. It's a lot less paperwork. The employees seem to be content with it. We've had only a handful who've asked for more money. It's working great."
Household International is even more of a newcomer, having only switched to lump sums in July. But Derman says it's working well so far: "Employees are going to manage their funds better when you give them a lump sum. Also, when you get down to the nitty-gritty, there's a lot of administrative time and expense for cutting checks and so on. Lump sums all around are a cost saving and a lot more efficient."
So what do you think? If you successfully implement all five of these changes, Layton estimates you could save $3,500 per move. Imagine what they'll be calling your relocation policy then: Thrifty! Frugal! Economical! Music to your ears.
Personnel Journal, November 1995, Vol. 74, No. 11, pp. 74-78.