Moving Employees to Hot Housing Markets is a Tough Sell

November 4, 2003

When the network computer maker Sun Microsystems wants to relocate a manager from its Austin, Texas, office to its headquarters in the much pricier San Francisco Bay area, the decision is not as easy as it was a few years ago. Even then, the difference in housing prices was dramatic, but today it’s even worse. In 1999, an employee could buy a three-bedroom home in Austin for $298,800, whereas a comparable home in San Francisco costs $630,300, a difference of $331,500. Today that same house in Austin costs $400,700, while the house in San Francisco is worth $987,500, a difference of $586,800.

    Convincing employees to move to high-cost areas almost always means paying mortgage subsidies and cost-of-living assistance, and carries the expensive risk of taking homes into inventory. With the economy in a slump and relocation costs climbing each year, Sun Microsystems is an example of a company that is treading more carefully in deciding whether to relocate employees. In the past five years, the firm, which was hit hard by the tech downturn and continues to lay off employees, has slashed relocations annually by 70 percent, from 800 to 250 moves. Sometimes moves to high-cost areas are a must, and Sun, like many other organizations, must be more creative about managing relocation costs. For the Santa Clara, California-based company, that means allowing employees to live in less expensive outlying areas and work from home rather than automatically moving them to high-rent districts. Employees also can work from "flexible offices"--cubicles or closed-door offices located in Sun office buildings or leased space that’s closer to the suburbs than the company’s headquarters.

    "The economic downturn made us take a hard look at how and why we were moving people," says Julie Dollahite, Sun’s corporate relocation manager. "We’re asking ourselves, ‘Is there really a need to move that person?’ "

    The average cost of moving a homeowner climbed from $60,831 to $65,555 in 2002--an 8 percent increase over the previous year, according to the Employee Relocation Council. A big chunk of that expense is assistance for transferees moving to areas with a higher cost of living: an average of $5,259 in mortgage subsidies, $5,036 in home-sale incentives and $8,936 in loss-on-sale assistance. As the economy improves and companies compete more for good employees, organizations will be under greater pressure to offer these cost-of-living benefits. Also, it may be tougher to get key talent to relocate, particularly to high-cost areas. A recent study by Prudential Relocation shows that high cost of living is the primary reason why employees are reluctant to move.

    "The economy is changing, and we will see another war for talent," says Margery Marshall, president of Prudential Relocation in Irvine, California. "Now more than ever, companies need to be more creative about getting people to say yes to relocating."

    Experts say that there are many proven strategies for managing costs when moving employees to pricey locales--from learning ways to sell employees’ homes more quickly to using new tactics in negotiating cost-of-living adjustments.

"The economic downturn made us take a hard look at how and why we were moving people. We’re asking ourselves, ‘Is there really a need to move that person?’ "

Selling the house
    Tom Marshall, manager of relocation for the Wilmington, Delaware-based DuPont Company, is well acquainted with the bind that companies get into when homes don’t sell. Getting a transferee’s home to sell quickly is the key to managing moving costs, he says. About 10 years ago, DuPont had 800 homes in inventory, valued at approximately $275 million. This year the company relocated almost 700 home-owning employees. But after implementing an incentive program in which employees receive 3 percent of the sale price if they sell their home within four months, the company has just 15 homes in inventory. "It’s a major savings for the company," he says. "A home sold by an employee costs half the associated closing costs of a home sold from inventory."

    Like DuPont, more and more companies are requiring employees to try to sell their homes first, before they are taken into inventory, says Lina Paskevicius, consulting manager at Cendant Mobility, a relocation services company in Danbury, Connecticut. If the employee sells the home, the company doesn’t have to pay for an appraisal, an added benefit worth between $1,500 and $2,000. Companies also are requiring employees to list the home’s price within a certain percentage of an appraiser’s value. That helps prevent the employee from overpricing the home and having it on the market longer.

    "The culture is changing," Paskevicius says. "More companies are requiring these things, rather than suggesting it…Companies want to get these homes sold."

    Some companies have found success in not even offering to buy employees’ homes if they can’t sell them, says Michael Schaetzle, senior vice president of U.S. relocation services for GMAC Global Relocation Services. "When there’s no other option, employees often become very focused on selling the home," he says. And it can save companies a lot of money, Schaetzle says. If GMAC, for example, helps an employee sell and close a home without using real estate appraisers to create an offer, the cost is approximately 9 percent of the value of the home. On a $200,000 home, that’s $18,000. If GMAC orders appraisals and makes an offer to buy the home from the transferee, the cost climbs to 19 percent of the value of the home, or $38,000.

Helping employees financially
    Since a higher cost of living is a significant barrier to convincing employees to move, corporations must offer financial help to get them to agree to relocate. Mortgage subsidies are one of the most common benefits of moving, and companies can control costs by offering the subsidies for a fixed period, usually three years. With interest rates so low, some companies have eliminated this benefit until rates increase, consultants say.

    Cost-of-living adjustments also should be given for a fixed period, usually three to five years. A cost-of-living adjustment, which is usually paid on a monthly basis, is a subsidy that takes into account the increase in cost of housing, taxes, groceries, gas and goods and services. It’s important to be clear with employees that the COLA is designed to help them adjust to higher costs in their new city, not to live an improved lifestyle, Margery Marshall says. "Set realistic expectations with employees about their financial well-being." It’s also crucial for managers to keep cost-of-living assistance separate from discussions about annual compensation, she says. Employees often envision the COLA as a permanent salary boost, but that’s dangerous because once their base increases, it can throw off the organization’s salary structure.

    When helping employees cover moving expenses, companies are saving money by using lump-sum allowances. The lump sum is usually based on the employee’s job level and number of dependents. More than half of companies surveyed by Runzheimer International offered a lump sum in 2001, with an average of $8,270. Since it’s up to employees how they budget the money, they usually spend it more carefully than if they were expensing the company for each part of the move, consultants and relocation managers say. "Rather than staying at a four-star hotel [for a house-hunting trip], they’ll stay at a friend’s house," Schaetzle says. "By empowering the employee, it works very well [for the company]."

    At Sun Microsystems, transferees have the option to "cash out" of benefits they don’t need, such as a house-hunting trip or temporary living expenses, and to receive a lump sum instead. The company saves a lot because the lump sum is not an even dollar-for-dollar exchange of benefits. The standard benefits offered to employees, which include temporary living accommodations, a house-hunting trip, car rental, meals and a miscellaneous allowance, cost the company about $10,000. If employees cash out of the benefits, they would receive $7,000, a savings of $3,000. About half of transferees opt to cash out. "Often cash is more important to [the employees] at that time," Dollahite says. DuPont, which moves about 1,000 employees domestically and globally each year, started using lump-sum allowances in 1997, then studied the program two years ago and learned that employees rarely used all the money. The science company trimmed the allowance and saved $4.4 million in just one year.

    Offering tiered benefits packages is another way to save money. More than half of companies surveyed by the Employee Relocation Council offered tiered relocation packages in 2001. At DuPont, for example, recent college graduates receive different relocation benefits than more experienced employees or critical hires. Some companies also offer different benefits packages to renters and homeowners. Renters may get only one house-hunting trip, while homeowners receive more time.

Relocation strategy
    How a company crafts its relocation strategy can help control costs, too. About six years ago, DuPont shifted its relocation philosophy. Instead of offering the same package of benefits to all employees--a practice that led to overspending, particularly in the area of mortgage subsidies--it treats moves on more of a case-by-case basis, especially when there is a relocation to a higher-cost city, Thomas Marshall says. When employees are transferred to DuPont’s Manhattan office, they receive a "Manhattan allowance," a cost-of-living adjustment for the time they live in the city. For moves to other cities, DuPont pays a three-year COLA only if the cost-of-living difference is above 5 percent. But if an employee is moved to DuPont’s holographics business in Santa Barbara, where the cost of living is extremely high, the 5 percent threshold is waived, and employees are paid the entire difference.

    Consultants recommend that companies study their relocation policies every year. A plan should be in sync with corporate strategy, says Michelle Nerny, vice president of the Midwest region for Weichert Relocation in Morris Plains, New Jersey. If a company is aggressively recruiting, the policy should be more comprehensive. If the organization is downsizing, it may have to trim some of its benefits, she says. Companies also should benchmark their policies against those of their top competitors. After looking at its competitors, DuPont saved $500,000 by reducing the length of time it pays cost-of-living adjustments from four years to three.

    "It’s always something we’re talking about: What can you do about cost containment?" Tom Marshall says. "We’re always looking for ways to save--to still give the benefits, but to trim so you’re not overpaying."

Workforce Management, November 2003, pp. 47-50 -- Subscribe Now!