Reining in Relocation Costs
For many organizations, of course, moves are a must--and so is substantiallyshaving the cost of big-ticket items like home sales. Experts concur that thesethree techniques are proven ways of curtailing runaway expenses: home-saleprograms, tiering, and cafeteria plans. At the same time, they also are shiftingto cost-containment methods that create a tighter link between the cost of amove and an employee’s long-term value to the firm.
When large numbers of relocations are unavoidable, cost containment becomesparticularly crucial. Last year, Lafarge North America, a construction materialscompany with 15,500 employees, launched a major restructuring. The company hadto face up to an inevitable increase in the number of relocations. "We began athree-month crash course to centralize our relocation policy," says BobShepard, director of compensation. "The focus was on updating the policy withcurrent best practices, improving cost controls on home sales, and standardizingthe relocation process by putting it on a national basis."
In recent years, the Herndon, Virginia, construction firm has grown rapidlythrough mergers and acquisitions. The result has been a decentralized and looserelocation policy. "Employees were negotiating their own relocation deals,"Shepard says. For assistance with its relocation program, Lafarge turned toCendant Mobility, a relocation services company in Danbury, Connecticut, with2,100 corporate clients worldwide. With home prices rising quickly in many partsof the country, home sales are among the most expensive components of arelocation program. "Companies are addressing home-sale programs because theycan have such a huge impact on costs," says Pete Klein, Cendant Mobility’svice president of consulting services.
Cendant’s objective is to keep the company from owning the home. That’sbecause the cost to the employer doubles once the home moves into inventory.Consequently, Klein says, companies are adopting the following techniques tohasten the sale process:
Mandatory marketing. Companies require the relocating employee to workwith a marketing consultant to help sell the home.
List-price requirements. Employers require the employee to list the homeat a price that is within a certain percentage of an appraiser’s value.
Selling incentives. Companies offer an incentive, usually 1 to 3 percentof the home’s sale price, if the employee completes the sale within aspecified time.
Buyer value option programs. The tax-advantaged status of these programsreduces selling costs and gross-ups, which are the allowances employers pay forthe taxes that employees will owe on reimbursements.
Lafarge adopted a new policy that requires a home-owning employee to use arelocation company to sell the home and pays the employee a generous incentiveof 5 percent of the sale price if the house is sold within a specified period."This program has been successful in vastly reducing the number of houses wetake into inventory," Shepard says. "Carrying a house in inventory is likestepping into a black hole. It costs us 1 to 1.5 percent of the value of thehouse per month, so it’s very advantageous to avoid this."
Different cost tiers for different employee levels
Another major trend in relocation cost containment is tiering, which setsdifferent levels of benefits for specified groups of employees. "Companieshave turned to tiering to cut costs and provide flexibility for hiring managers,"Klein says. Today, 61 percent of Cendant’s clients use tiering, up from 34percent five years ago. A typical structure provides four tiers. According toKlein, a tier 1 complete relocation package for executives averages $70,000 permove. A tier 2 package for middle managers carries an average cost of $45,000 to$50,000, and a tier 3 move for all other exempt employees typically averages$35,000. A tier 4 relocation for a newly hired college graduate is commonly a$3,000 lump sum.
Lafarge doesn’t use a formal four-tier structure but offers two differentpackages for new hires and existing employees. The company typically does notoffer new hires a home buyout or the 5 percent incentive for selling the home,and does not pay the settling-in allowance that is provided for transferees.
Companies are also capping their payments for specific relocation expenses,Klein notes. For example, for miscellaneous expenses, companies commonly coveredan amount up to one month’s salary, but many are now capping the payment at aspecific salary level. Lafarge has instituted some caps but tries to strike abalance between cost issues and the needs of relocating families. "We havebeen somewhat flexible in areas such as temporary living expenses for familieswith school-age children or a spouse with career needs," Shepard says.
The integrated systems sector of Northrop Grumman Corporation, the aerospaceand defense company, is based in El Segundo, California. The group employs12,000 people and relocates about 350 annually. In 1999, the divisioncentralized its relocation program under one department, representing 16 sitesin six states. Before the reorganization, "we were lucky to operate smoothlywith relocations, because our program was so decentralized," says Mickey Leong,relocation project manager.
Prior to 1999, the company used a two-tier program with benefits based on joblevel. With centralization, the company introduced a new third option--acafeteria plan with a dollar cap based on tiered job levels that allowsemployees to select the relocation benefits they will receive. "We added thethird option for greater flexibility for the employees and to help control andpredict costs," Leong says. Program constraints and requirements determinewhether the original two-tier plan or the cafeteria plan is utilized for aspecific relocation.
In a recent group move that involved transferring 40 employees from Floridato Georgia, all of the employees were offered the cafeteria plan with a dollarcap. The program manager negotiated the budget with the customer. "It was verysuccessful," Leong says. "The cost savings were so significant that therelocations came in under budget, so Northrop Grumman was able to raise the capby 10 percent and allow the transferees to select additional benefits."
Northrop Grumman works with GMAC Global Relocation Services in Warren, NewJersey, to achieve effective relocations. Rita Triano, client relations manager,says company relocation consultants work with Northrop Grumman’s transfereeson a one-on-one basis to help them assess their needs, evaluate benefit options,and give them an approximate dollar value for the benefits in the cafeteriaplan. GMAC Global Relocation Services also tracks and reviews all reimbursementsso that Leong can communicate to program managers exactly what they are spendingfor relocation-program expenses.
"The move to the cafeteria plan with the dollar cap has been verybeneficial for employees because they select what they need," Leong says. "Ifan employee does not have a home to sell, the employee can choose other benefitsthat are more useful for renters. The program is also beneficial for programmanagers because they can budget costs and come up with solid numbers. They knowthat they may come in under budget, but they will not go over budget because ofthe cap."
Northrop Grumman also converted its home-sale plan with direct reimbursementto a buyer value option plan, which eliminated the costly gross-ups needed tocover tax consequences. "This change, instituted in 2000, has already savedthe company almost $1 million," Triano notes. Leong reviews the NorthropGrumman relocation policy annually, with careful attention to benchmarking andcost containment.
Any company that installs new cost-containment programs must measure theireffectiveness and monitor employee reactions. Hewlett-Packard Company, the PaloAlto-based technology solutions giant, tracks relocation cost containmentresults carefully. The company relocates more than a thousand employees annuallywithin the United States. In 2000, it outsourced its domestic relocationprograms to Prudential Relocation.
"After successfully managing our relocation programs for a number of yearsin-house, it was determined--after significant research and cost analysis--thatit would be more cost-effective to outsource to a third-party company," saysRegina Richardson, domestic vendor program and policy development manager.Hewlett-Packard also simplified its programs by reducing the overall number andinstituting cafeteria plans.
To measure its cost savings, Hewlett-Packard regularly reviews the costsassociated with administering the programs as well as those related todelivering the provisions within each program. "These costs are measuredagainst our anticipated targets for a given quarter or year," Richardson says.To date, the cost-savings targets have been met. "To ensure that our managersand transferees are receiving satisfactory services, we conduct an annualinternal survey," she says. "In addition, the third-party company conductsits own survey at the close of each relocation. Both surveys are used to monitorand enhance service levels."
Employee and managerial acceptance
Companies that install cost-containment programs are running into littleresistance from employees because they see cost-cutting trends across the board,Klein says. "Now cost-containment policies are so common that employeesgenerally find them acceptable."
Communication is, of course, still important. At Lafarge, Shepard reports,"the change in relocation policies has not been smooth because the companyimplemented the changes so quickly and did not solicit as much input frommanagers and other employees as it normally would have." The shift from loose,decentralized rules to a tightly written policy roiled some managers, but didnot create major disruptions in the relocation process. The new policy hasreceived solid support from senior executives, many of whom have personallyexperienced relocations under the new program.
Under the old relocation policy, hiring managers had a free hand innegotiating deals. Now they don’t. "But they are adjusting," Shepard says."These adjustments required a lot of face-to-face discussions, but the companyhas been fairly firm about the need to centralize and formalize the relocationpolicy."
He stresses the importance of fast and efficient relocations. "If you arespending a significant amount of money to move someone, complete the relocationrapidly to maximize the employee’s efficiency and productivity," he says."Balance the need to control costs with the need to re-establish the employeeand his or her family quickly in the new location."
Workforce, November 2002, pp. 34-38 -- Subscribe Now!