How to design company relocation assistance programs for relocating employees.
INTRODUCTION
America is a mobile society. One in every
five families moves each year. Many of these moves are at the request of
the company for which one of the members of the family works. This
chapter examines the costs to the company and the employee involved in
an employer-requested move. These relocations may be to a location just
beyond the current commuting distance, to a different state, or to a
foreign country. The employee may be a new hire or a current employee at
any level, from entry to top executive.
Relocation involves costs, both monetary
and psychological. Monetary costs include those costs connected with
selling and buying houses, transportation of household goods and family
members, and settling-in costs such as temporary housing. The main
concern of this chapter is these monetary costs, what they are, and who
will pay for them. However, there are other subtle costs that need to be
taken into account when relocating an employee to another site. These
costs are related to the disruption of the employee's life and, in
particular, that of the employee's family. These disruptions increase
with the distance of the move and are most intense in relocations to a
foreign country. The company's concern for these costs is real in that
the effectiveness of the employee in his or her new job is directly
related to how well the employee and the family adapt to the new
circumstances. In an extreme case, a newly relocated employee might
quit. The company would not only lose a formerly productive employee,
but also the costs of the relocation.
Moving a single, recent college graduate
a few hundred miles would probably amount to a few thousand dollars.
However, a four-year overseas assignment for a top-level executive and
family could cost the company over $1 million (see Chapter 21).
Administering these costs is an important human resources
responsibility. This chapter will describe employer-provided relocation
programs, including assistance with selling the house, moving and
settling in. Two special groups of employees will then be examined: new
hires and expatriates.
DISENGAGING
To an employee, a transfer means breaking
the ties he or she has developed both on the job and within a community.
This is also true for the transferred employee's spouse and children.
The transfer process is time consuming, costly and psychologically
difficult. The company can make this change easier or more difficult,
depending on the demands placed upon the employee and the help provided
to the employee. With the changing labor market and nature of today's
work force, employers are providing more help to transferees than in the
past.
Selling the Home
While the home is the major asset of most
employees, it is usually also the employee's most costly expense. For an
employee, being transferred means selling a home or, at a minimum,
breaking a lease on an apartment or house. At the other end, the
employee must make arrangements for new housing. These activities are
both costly and time consuming. Depending upon the present condition of
the real estate market and the length of time a person has been in the
current home, an employee may have a considerable investment on the
line. The employee may even have to sell the home for a loss.
Regardless, selling a home takes time and energy on the part of the
employee, and incurs costs such as real estate broker commissions.
Employers have developed a number of programs to ease the selling
process for the employee.
Direct Reimbursement
This is the simplest form of assistance
to the employee. In this program, the employee is responsible for
selling the house. The employer pays for some or all of the costs
incurred in selling the house. The major cost will probably be the real
estate agent's commission. In addition, there are usually closing costs
associated with a home sale (for example, title searches, inspections,
and transfer fees). Companies should establish clear policies detailing
the expenses that are and are not a part of selling the home. For
instance, are required repairs found in a termite inspection classified
as a selling expense?
It may be a problem for the employee to
come up with the money necessary for these costs. This is a particular
problem when the sale of the old house and the purchase of a new house
do not coincide (for example, when the new home is purchased before the
old one is sold). The employee may need a loan for this period of time.
Companies may make such loans from their own funds or from other
sources. How much to loan the employee depends on the probable selling
price and the amount of equity the employee would have in the home given
that price. This probable selling cost is determined by having an
appraisal done on the house. This topic will be covered below. Loans for
this purpose are ordinarily interest-free or at a reduced interest rate,
and for a specified length of time (usually a short period to encourage
the employee to sell the current home).
A further expense that can occur at this
time is the double payment of mortgage payments, including taxes and
insurance. This occurs if the first home is not sold before the second
home is bought.
The major disadvantage of this type of
program is that it creates a tax liability for the employee. The payment
of these costs by the employer is considered income to the employee.
There is also a problem if loans are made interest-free or at reduced
rates, as these may be considered imputed interest income. Employers who
wish to include the cost of these taxes in the expenses they pay "gross
up" the reimbursement check by calculating the taxes and adjusting the
gross amount of the reimbursement. Therefore, the net amount with taxes
taken out equals the amount of the net expenses to be paid to the
employee.
Guarantee-Against-Loss Programs
A guarantee-against-loss program is a
method of protecting the employee against having to pay for two houses
if the old house does not sell in time. This program also protects the
employee against losing money from that sale. It is -the responsibility
of the employee to sell the house. The first step is for the employee to
place the property on the market. The company then obtains an appraisal
(usually two) of the property. If the results of the two appraisals are
far apart, the company obtains further appraisals. The -company
establishes the value of the property as the average of the two
appraisals. The company guarantees that the employee will receive that
amount for the property. If the employee accepts the offer, he or she
continues to market the property until it is sold. If the property sells
for the guarantee price or above, the company pays nothing to the
employee. If the property sells for less, the company makes up the
difference.
If the property has not sold by the time
the employee moves, the company will ordinarily assume the mortgage
payments, maintenance, insurance, utilities, and repair costs. Since the
employee has probably purchased a new home, the company may also loan
the employee the down payment for the new home on a short-term basis.
Upon the sale of the old home, there is a settling up that includes a
charge to the employee for things like the amount of principal paid in
the mortgage payments and any deferred maintenance done on the home
during the sales period.
This type of plan is easy to establish
and understand. Also, it doesn't leave the company with a piece of real
estate if the property doesn't sell. However, the carrying costs can add
up if the property doesn't sell, and the motivation for the employee to
sell at a low price is reduced. Further, the need to deal with the
selling process on the old home is a distraction to the employee at a
time when there are new challenges on the job.
Home Purchase Plans
This type of plan changes the
responsibility for whose time and energy goes into selling the house if
the house does not sell expeditiously. The employee being transferred is
first enrolled in the program, at which time the program is explained
and the necessary forms are completed.
Ordinarily, an appraisal is the first
step in this program. This is used to set the amount the company will
pay for the house. However, most plans have a 30- to 60-day period in
which the employee is responsible for trying to sell the house. What the
employer does provide during this time period is pre-marketing
assistance. The company contacts a real estate company to work with the
employee to establish a marketing plan, develop a reasonable sales
price, and help the employee prepare the house for viewing. Since the
employee knows the company will take the house over after a certain time
period, it may be wise to develop an incentive for the employee to sell
the house during this time period (while the house is "fresh" and
occupied).
If an offer is received during this time
and is above the agreed upon appraisal value, there are some options on
how to handle this situation. The first is an amended value offer.
In this option, the original appraisal value is amended, and the company
proceeds to buy property from the employee and re-sell it to the
prospective buyer. The employee is now out of the loop. If the escrow
falls through, the employer owns the property.
A second plan is an assigned sale
transaction. In this option, the employee signs the offer and then
assigns the benefit of the contract to the employer. The employee
receives the appraised value upon assignment, and then receives the
additional increment upon the closing with the prospective buyer.
A third option is a buyer value option.
This option does not require an initial appraisal, so the employer has
made no offer to the employee. The employer steps into the process when
an offer has been made as in an amended offer. The appeal of this option
is that it reduces the probability of the property ending up in the
company's inventory.
Why all these options? As discussed
earlier, when the company pays the selling costs, the payments to the
employee are taxable. When it is the employer selling the home, the
employer absorbs these costs, and the employee does not incur a taxable
event. In order to ensure these options, there are 11 key elements that
must be considered. These are listed in Figure 22-1.
Figure 22-1. Key
Elements for an Amended Value Option
| 1. |
In the employee's
listing agreement with the real estate broker, a suitable
exclusion clause is contained whereby the listing agreement is
terminated upon the sale of the property to the employer. |
| 2. |
Under no circumstance
does the employee accept a down payment from the potential buyer. |
| 3. |
Under no circumstance
does the employee sign an offer presented by a potential buyer. |
| 4. |
The employee enters
into a binding contract of sale with the employer. |
| 5. |
After execution of
the contract of sale between the employee and the employer, and
after the employee has vacated the home, all benefits and burdens
of ownership accrue to the employer. |
| 6. |
The contract of sale
between the employee and employer at the "amended" higher price is
unconditional and not contingent on any event, including the
potential buyer obtaining a mortgage commitment. |
| 7. |
The employee does not
exercise any control over the subsequent sale of the home by the
employer. |
| 8. |
The employer has its
own separate listing agreement with a real estate broker to assist
with the sale of the property. |
| 9. |
The employer enters
into its own separate contract to sell the home to a buyer. |
| 10. |
Upon resale of the
home, the employer arranges for the transfer of the title to the
buyer. |
| 11. |
The purchase price
paid to the employer by the ultimate buyer does not change the
purchase price that was paid to the employee. |
Source:
Supplement to the Guide for Managing the Mobile Work Force,
Employee Relocation Council, 1999.
Appraisals
Most of the programs discussed above
require the company and/or the employee to obtain an appraisal of the
property. This appraisal compares the property to other listings and
sales in the appropriate geographical area to establish the value of the
property. In addition, this analysis must consider broader factors such
as interest rates, the general real estate market, and the local and
national economy. The end product is a "best guess" as to current value.
While this analysis does examine the condition of the home, it does not
include the money invested or owed on it by the employee.
Because appraisals are judgments of
experts and because people often have inaccurate ideas about the value
of their homes, there will be differences of opinions as to the exact
value. The best way to alleviate this is to have more than one appraisal
performed. If there are two appraisals and they are close in their
conclusions, within 5%, then the average of the two is usually used. A
third appraisal may be called for if the two original appraisals are too
far apart. If the third appraisal is close in value to one of the first
two appraisals, then the average of the two close appraisals are used.
Although good appraisals are expensive,
they can save money and the feelings of the employee in the long run. An
overly high appraisal can lead to the employee obtaining more from the
sale than necessary, leaving the company to sell the house at a loss.
Conversely, a low appraisal may create bad feelings in the employee, as
he or she may suspect that the company is trying to make money off the
sale of the house. In addition to the appraisal, it may be useful to
obtain a Brokers Market Analysis as well.
Loss on Sale
There are economic times when it is
difficult to convince an employee to transfer, such as when the market
value of the house is below the employee's investment in the home. Since
this is usually the major asset of employees, companies sometimes
develop programs to alleviate loss in order to convince the employee to
move.
The employee's investment is in the house
is usually calculated as the home's purchase price, plus any capital
improvements made. If this is more than the sale price, then a loss has
occurred. This loss is particularly bad if the principal amount of the
mortgage exceeds the net amount received at sale. Company loss-on-sale
policies usually provide the employee with a lump sum to make up the
difference between the sales price and the amount invested. However,
this payment is taxable, so it may also be necessary to "gross up" this
amount.
Advancing Equity
Timing the sale of one house while
purchasing another is tricky. If the new house is clearing escrow before
the old house, then the employee needs an advance against the old house
in order to put money down on the new house. The company may advance
this money out of operating capital, borrow the money, or arrange for
financing for the employee. If possible, this advance should be treated
as a down payment on the company's purchase of the old home. If it were
a loan with no-interest or below market rate interest, there would be
tax consequences.
Choosing a New Location
The employee and family need to have an
idea of what the new location will be like as they decide whether to
accept the transfer. This can be done in two ways, by collecting data
and taking a trip to the new location.
Collecting Data
Much information can be gathered from
travel agencies. The Automobile Club and the Internet also are obvious
sources in this regard.
One of the most important pieces of
information for anyone moving to an area is cost-of-living, particularly
in comparison to where the person is currently located.
Relocation Assessor database
|
Prepared For |
Housing |
Automobiles |
|
Name: Mary smith |
Own/Rent: Own |
Autos: 2 |
|
Earnings: 125,000 |
Area: 2,331 |
Value: 26,667 |
| |
Family Size: 4 |
Miles: 30,000 |
|
|
Cost Categories |
San Diego, CA |
Redmond, WA |
Difference |
|
Consumables |
25,181 |
23,926 |
-1,255 |
|
Transportation |
13,899 |
12,256 |
-1,643 |
|
Health Services |
2,713 |
3,015 |
302 |
|
Housing/Util/Prop Tax |
39,399 |
34,573 |
-4,826 |
|
Income+Payroll Taxes |
30,708 |
25,506 |
-5,202 |
|
Miscellaneous |
13,100 |
13,100 |
0 |
|
Total Cost of Living |
125,000 |
112,376 |
-12,624 |
|
COL % of Base City |
100.0% |
89.9% |
-10.1% |
|
COL % of U.S. Average |
122.4 % |
110.0 % |
0.0 % |
|
Estimated Home Value |
372,504 |
333,078 |
-39,426 |
|
Per Diem Lodging |
96 |
55 |
-41 |
|
Per Diem Food/Other |
46 |
30 |
-16 |
|
When the cost of living is
substantially higher in the area to which the employee is transferred,
companies use a number of methods to adjust for this difference.
Salary Increase
It may seem that the easiest
way to adjust for an employee's transfer to a high cost-of-living area
is to raise the employee's salary to accommodate the change. However,
this route has its problems. If you then move the employee to a low
cost-of-living area, do you reduce the salary? What about the other
employees working in the area? Will they be resentful if this employee's
salary is out of line with theirs?
Companies that have
employees in multiple locations often have separate wage structures for
employees in each area. To obtain information on how to develop such
plans, see the Course 83: Designing a
Branch Office Salary Structure.
Relocation bonus
A second method of adapting
to differences in cost-of-living is to provide the employee with a lump
sum bonus upon moving. The advantage of this is that it provides the
employee with cash at a time when he or she is experiencing a lot of
out-of-pocket expenses. The disadvantage is that although the bonus may
appear large, it will be small compared to continuing higher living
costs.
Cost-of-living allowance
An allowance is a salary
add-on that is clearly identified as separate from the basic salary for
the job. These allowances are usually established for a specified time
period, up to three years, and are reduced over time. The idea is that
the employee gets used to the cost differentials over time and no longer
needs the allowance.
Visitation Trip
The best way to get a feel
for a new area is to make a visit. With this in mind, most companies
provide the transferring family (or at least the employee and spouse)
with a trip to the new location. The provision of this visitation
usually pays for itself through lower costs in after-arrival hotel
expenses and a shorter settling-in process. The closer the coordination
between the sale of the current home, the movement of the employee, and
the availability of new housing, the quicker the employee can
concentrate on the new job.
MOVING
Once disengaged from the old
site, the transferring family needs to travel to the new site. This
consists of getting the people involved and their possessions to the new
site.
Moving Household Goods
Moving household goods is an
expensive proposition. The average cost is a little over $7,500. If
possible, the mover should be contacted at least 90 days before the
move. While some companies leave the choice of mover to the employee,
most companies contact the mover and assign it to the employee.
Companies usually use two or more movers to perform their employee
transfers. The choice is based on costs, service, and geographical
coverage.
Moving policy
There are a number of issues
that must be clear in order to keep the cost of moving within limits.
The company can provide this clarity by maintaining a policy on moving
household goods.
Weight Limits. Most
companies do not have a limit on weight, as the amount of household
goods a person has is a function of age, marital status, and other
personal characteristics. Those that do have limits vary between
10,000 and 35,000 pounds.
Excluded Items.
Some household items cannot or need not be transported because it is
illegal or uneconomical. Explosives and paints are examples of items
that are illegal to transport as household goods. Firewood and bricks
are examples of items that are uneconomical to transport. Further,
perishable items such as plants should not be included.
Pets. Household
goods carriers may not transport pets under federal regulations. If
pets are to be included, specially licensed companies must transport
them. Issues that need to be considered in a pet policy are:
Should pets be
included in moving costs?
How many and what kind
of pets will be included?
Will the company pay
for temporary boarding?
Automobiles. One of
the family's cars will usually be used to transport the family to the
new location. But will the company pay for transport of a second car
or a recreational vehicle? If so, how?
Storage. Storage,
either at the old site or the new site, is ordinarily paid for by the
company until the employee has located and is ready to move into new
lodgings. However, a policy that limits storage time may encourage the
employee to finalize new housing plans. Since storage is expensive, it
behooves the company and the employee to coordinate the sale of the
old home with the purchase of the new home.
Special Handling.
The cost of moving can be much higher when there is a lot of crating
for items that require special handling. The company may wish to limit
special items to a certain amount to hold down costs.
Estimates
Movers will provide the
employee and company with an estimate of the weight and cost of the
move. This should be done so that both parties know what the cost will
be. This cost can shift dramatically depending on what is moved to the
new location. Most people collect a lot over time, and a move is a good
time to dispose of unused items. The estimate also identifies items that
require special handling. The accessibility of the old and new
residences should also be included in this estimate.
Insurance
It's usually necessary to
insure household goods for loss or breakage during transport. The
minimum amounts required by the moving company are inadequate. There are
a number of additional options that are available.
Released Value
Tariff regulations require
movers to insure household goods for at least 60 cents per pound, per
article. It is called released value because the employee must sign a
waiver agreeing to this minimal coverage. This coverage should only be
accepted if there is other insurance that covers the move or if the
company is willing to self-insure the move.
Declared Value
If the employee does not
sign the released value option, the mover is required to insure the
shipment for $1.25 per pound. The liability is limited to current
replacement cost, less depreciation. The mover can charge for this
higher level of protection. If the value of the shipment exceeds $1.25
per pound, which is likely, the protected value can be made for a
specified dollar amount. This is particularly important if there are
valuable items (for example, art or antiques).
Full Value Coverage
This insurance covers the
full replacement value of the item without depreciation. This is the
most common choice of employers transferring employees. It minimizes
bad feelings when there is breakage. Sometimes the company will opt
for a deductible policy that protects the household goods, in which
the company assumes an initial amount (such as $1,000).
Tax Considerations
The reimbursement to the
employee or payment to the moving company for transportation of
household goods is considered income to the employee. However, the
employee may deduct most of these expenses on his or her taxes. This
deduction occurs "above the line," that is in computing adjusted gross
income.
Moving the Employee and
Family
The employee and family will
probably move to the new location by car or plane. Depending on the
method of transport and the distance involved, this may take a single
day or an entire week. While in transit, the company can expect to pay
for the cost of the transportation, lodging, and meals (depending upon
company policy). If the method of transportation is by air, then the
cost of the tickets plus any baggage charges should be reimbursed. If
travel is by car, then mileage needs to be paid at the rate established
by the company for that year. The company should be sure to advise the
employee's previous manager and new manager of the timing of relocation.
If the employee departs
before his or her family, the company will pay for the employee's
temporary housing in the new location until the family can join the
employee. Although putting the employee up in a hotel might seem
easiest, it may be more efficient and comfortable to find a furnished
apartment for the employee. There are now a series of hotels that cater
to long-term stays. This split in travel time may be the result of an
immediate need for the employee in the new site, an inability to sell
the old home, or a desire to wait until the end of the school year
before transferring children to new schools. If the time period is long,
the company should provide return visitation trips for the employee
and/or spousal visit trips (for house hunting).
SETTLING IN
The employee and family must
have a new home to begin the process of settling into the new community.
This section will examine obtaining a new home and the issues relating
to the family adapting to the new environment.
Finding a Home
House hunting is almost as
traumatic as house selling. Proper planning and collection of
information can aid the process. Some things that are useful to know
before starting to look for a house are:
Family Needs
Each family has a
different set of needs with regard to space and types of rooms
desired. These needs should be carefully discussed within the family
and perhaps with a real estate agent.
Commuting
What areas are within
commuting distance of the work site? What are the traffic patterns
(particularly at rush hour)?
Neighborhood Areas
What neighborhood areas
are within commuting distance, and what are their characteristics and
costs?
Schools
What are the
characteristics of schools within the convenient neighborhoods?
Real Estate Practices
Each state has different
laws regarding how property may pass from one person to another. The
employee needs to be aware of the process in the state to which he or
she is moving.
Real Estate Agent
Is it up to the employee
to find a real estate agent, or should the company suggest one? Should
the company require the employee to use a particular agent?
As a further aid in starting
to look for a new home, the employee needs to know exactly what he or
she can afford to buy. This can be accomplished by obtaining a
pre-approval from a mortgage broker. This can also speed up the purchase
of a home once the employee has found one.
The company can aid the
employee at a number of points in the process of obtaining a new home.
Three are discussed below: pre-purchase appraisals, mortgage assistance,
and closing cost assistance.
Pre-Purchase Appraisal
The company can aid the
employee by providing an evaluation or appraisal of a property that the
employee is interested in purchasing. This can be done on a number of
levels. The broker can provide a comparison to other properties sold in
the area recently; a home inspector can be called to inspect the
residence, and suggest changes and improvements; or, an appraiser can
provide a full appraisal of the property. If this is a service that the
company provides, the employee needs to be informed that any offer made
is contingent upon the results of the inspection or appraisal.
Mortgage Assistance
In the 1980s, high interest
rates created a need to help transferees with their mortgages if they
were to accept a move. Since then, the mortgage and labor markets have
changed so that companies now find it necessary and convenient to help
transferees not only in obtaining mortgages, but also in making these
mortgages affordable.
Employees who are
transferred into a high-cost area may find that they cannot afford to
buy a house equivalent to the one they're moving from. Since raising pay
for the transferee may create more trouble than it is worth, companies
have developed two ways to help their employees: permanent buy downs and
temporary buy downs.
Buy Downs
A buy down means to lower
the interest rate by putting money up front. This can be done on a
permanent or temporary basis. In a permanent buy down, the company
pays points at closing to reduce the interest rate. For instance, the
company may pay five points (or $5,000) to lower the interest rate
from 7.75% to 6.5%. In a temporary buy down, the interest rate is
lowered substantially in the first years and then rises to the
original rate after a specified period of time. For instance, the
interest rate would be 4% for the first year, 5% for the next two
years, and 6% for the fourth and fifth years. After that, the rate
would be 7%.
A temporary buy down is
superior in most cases. Using the temporary alternative helps the
employee afford more. The gradual increase allows the employee to get
used to the increased costs of the area gradually. Finally, if the
employee is likely to be transferred again, say within five years, it
is better to have the temporary reduction.
Corporate Second Loans
Although rarely used now,
a corporate second loan may be the only alternative in extreme cases.
This loan is typically an interest-free loan for some time period,
after which interest is charged and is followed by a balloon payment
of the principal. Another option for the interest is a shared
appreciation loan, in which the company is repaid upon the sale of
the home in the future.
High Interest Rate
Assistance
When interest rates
skyrocketed around 1980, companies were forced to help transferees
cope with high interest rates for their new mortgage loans. The
Mortgage Interest Differential Assistance (MIDA) was developed. This
is a temporary subsidization of the employee's mortgage payment for a
limited period of time (3 to 5 years). The company makes up the
difference in the payment from the old mortgage payment to the new
mortgage. If the old mortgage was $150,000 at 6.5%, and the new
mortgage is at 9.75%, then the company would subsidize the payments by
$12,276. These payments may be made as a lump sum, a constant payment
over three years, or a graduated payment that starts high and ends
low.
Closing Cost Assistance
As in selling a house, there
are costs associated with purchasing a house. The transfer of title from
one person to another is handled differently throughout the United
States. An escrow office, a lawyer, a title company, a broker, or a
notary public (depending upon the state in which the sale takes place )
may do the transfer. What the closing costs are and who pays them also
depends on where the sale takes place. The most common closing costs
are:
Sales Commissions
This is ordinarily a
percentage of the sales price. There may also be a "Broker Service
Fee."
Legal representation
A lawyer's services may
have been used in negotiating or processing the sale.
Conveyancing
This is a charge for the
preparation and processing of the real estate documents.
Title Charge
These charges relate to
developing the title chain, and protecting the buyer and seller with
insurance.
Survey Fees
These are fees relating to
performing a survey of the property (if needed).
Lender's Fees
These are fees connected
to the issuance of the new mortgage.
Impounds
This is a fund to pay the
pro-rata share of taxes, insurance, and other items.
Recording Fees
These are charges for the
recording of deeds and other documents with the appropriate government
agencies.
Whether the buyer or seller
pays these costs depends on local custom. Companies generally help their
employees by paying the costs charged against the purchaser.
Family Assistance
Moving to a new location
involves re-establishing yourself in a strange community. It can be time
consuming and frustrating to learn where all of the necessary services
are. Until recently, companies left this entirely up to the family, but
the tight labor markets have now led some companies to provide help to
transferees in settling into their new surroundings. The added advantage
to the company is that the employee settles into his or her job more
quickly.
One major assistance program
is called the Spousal Assistance program. Since an increasing number of
families have two breadwinners, the transfer may depend upon whether the
spouse can find employment in the new location. This is complicated by
the fact that the jobs needed by spouses are of a much higher level than
in the past.
Spousal assistance programs
can consist of a wide variety of aids:
Preparation for Job
Hunting
This may consist of
coaching the spouse in job search techniques, resume writing,
networking, interviewing skills, or how to negotiate a salary.
Developing Contacts
This may range from
showing the spouse how to find job opportunities (such as through the
use of the Internet), to putting the spouse in contact with
headhunters in the new location.
Providing Specific Job
Leads
The company may have jobs
within the area or be able to contact specific companies and people in
the new area.
POLICY DEVELOPMENT
This chapter has discussed a
number of possible relocation policy options. While most companies would
not opt for all of these options, those chosen can create a large policy
statement that treats all possible transferees equally. This section
presents some methods to simplify the policies relating to relocation.
It examines ways to allow the employee to enter into the decision
making.
Cafeteria Approach
A cafeteria approach
requires two components. The first is a definition of the total amount
of money the company is willing to allocate to the employee for
relocation. This may be a standard amount that the company allocates for
any employee, or it may be a variable amount (depending upon the
employee and the need for that person in another place). The second
component is a list or menu of possible relocation assistance along with
the cost associated with that assistance. It is then up to the employee
to decide which combination of services he or she desires.
The company can control the
total relocation bill by setting a cap on the total cost allowed, and by
establishing the options included. For instance, a company may choose to
include spousal assistance or not, depending upon the corporate culture.
An alternative is to provide
a core set of relocation services, and then add an optional list of
other possible services from which the employee may choose. The amount
allocated to this optional list would be less than under a plan in which
the employee could choose from all options.
A cafeteria approach
provides good cost control, and simultaneously allows maximum
flexibility for the employee. One of its best assets is that the number
of exceptions requested is likely to be minimized.
Lump Sum Relocation Plans
Probably the simplest
possible policy for relocation is to grant a lump sum and allow the
employee to spend it as he or she pleases. In this way, the company can
be divorced from the whole process, placing the entire responsibility on
the employee. The advantage of this (besides the simplicity for the
company) is that it provides an up front amount of money to the employee
when it is most needed. Further, it encourages the employee to keep
relocation costs in check, as the employee may keep any amount left
over.
The disadvantage of the lump
sum approach is that it keeps the focus of the employee on the
relocation process and not on the job. Further, as has been discussed at
a number of points in this chapter, there are tax advantages to having
the company absorb the costs of relocation.
Tiered Relocation Plans
A tiered relocation plan
places each transferee in a category. The relocation amounts and options
are different for each category of employee. Typical categories would be
new hires, skilled employees, professional employees, managerial
employees, and executives. Most companies also have a special category
for expatriates.
Generally, the amount and
options granted to each category increases with the level in the
company. This approach allows the company to control costs, while
responding to the needs of different groups of employees. This type of
plan is not simple, and keeps the company in the relocation process with
the employee.
Two of these categories need
to be discussed in more detail: new hires and expatriates.
NEW HIRES
Companies use some, but
usually not all, relocation programs for new hires. Payment of household
goods and transportation to the work site are the most typical. As
recruitment has become progressively more difficult, companies have
begun to include more programs to attract the talent they require.
Relocation help is typically
tiered for new hires. New college graduates require minimal programs,
while a new executive would probably be granted most of the programs
discussed in this chapter.
An increasing number of
companies are turning to the use of a lump sum payment for new hires.
This, combined with a tiered system tied to salary rate, provides a
simple solution to granting relocation help to new hires.
EXPATRIATE TRANSFERS
The most difficult and
costly relocations involve the transfer of an employee from one country
to another. An expatriate is an employee, a citizen of the company's
home country, that is transferred to another host country. An example is
an American citizen of an American company who is transferred to London,
England. Another type of cross-border transfer involves transferring a
citizen of a third country between two countries. This person is called
a third country national. An example is an English employee of an
American company who is transferred to Singapore. While the process of
relocation is approximately the same, there are special circumstances
for this type of transfer, and there are factors that are unique to this
type of relocation.
Disengaging
The same breaking of ties
exists in international transfers as in domestic transfers. However, the
destination is less familiar than in a domestic transfer. The transfer
is also almost always temporary in nature, lasting from two to five
years.
A Note on Selection
Companies transfer employees
internationally for similar reasons to those of domestic transfers,
either to have the skills of the employee in that location or to provide
a breadth of training and development for the employee. But using just
these criteria in selecting employees for overseas assignments can lead
to unhappy results for both the company and the employee. Some employees
are not good candidates for overseas assignments either because of their
characteristics or because of their family situation. Selection of
overseas candidates should be done carefully, because the possibility of
failure is so high and the cost so great.
Preparation
Transfer to a foreign
country means immersing the employee in a new and different culture and
economy. Preparing the employee, and the employee's family, is
exceedingly important. The company can provide a number of things to
help the employee and family understand what the new assignment will
entail.
Cultural Training
The purpose of this type
of training is to familiarize the employee with the culture, mores,
and proper behaviors in the foreign country. This training is needed
not only for the employee in carrying out business in the country, but
for the family to live in the country.
Language Training
The English language is
understood in many countries. However, it's necessary that the
transferring employee and family be given training in the language of
the assigned country for purposes of business and life. While in many
countries one can be understood in English it is necessary for both
business and living that the family be given training in the language
of the country. This is particularly difficult for Americans, who
often are unaccustomed to needing to learn or speak a second language.
Data Collection
Gathering information
regarding the country will help employees know what to expect. This
can range from cultural information to economic information.
Visitation
The best way to get a feel
for the new country is to take a trip there. This also aids in
starting the process of finding adequate housing. Being in the country
for a visit awakens the employee and family to the reality of the
assignment.
Obtaining Documentation
Unlike moving to a new
location in the United States, the employee and family need to obtain
or update a number of official documents.
Passports
All members of the
family will require an up-to-date passport. New passports may take
up to six weeks to obtain, so this needs to be started early.
Visas
Most countries require a
visa for entrance into the country, at least for any extended period
of time. Depending upon the nature of the stay, a different type of
visa may be required. Some countries specifically require a business
visa for anyone to conduct business activity in the country. Visas
need to be obtained from the embassy of the country to which one is
traveling.
Work Permits
Almost all countries
require foreign nationals to obtain a work permit to work in the
country. It is important that this permit be obtained before travel
commences. Processing time varies considerably. It should be noted
that in many countries a spouse is not allowed to work in the
country.
Residency Permits
Many countries also
require a residency permit for all members of the family. Some
countries will require a physical before a residency permit will be
issued. This information can be obtained from the embassy of the
country. It is also not unusual to have to register with the local
police department. A few countries also require an exit permit.
Medical Information
The employee and all
family members need to obtain a physical examination before going
overseas. This should be at company expense. Part of this process
includes obtaining all required inoculations.
Not all countries have the
level of medical resources that we have in the United States. Therefore,
there are a number of precautions that need to be taken. Some things,
such as orthodontic treatment, may not exist and must be taken care of
before travel starts. Prescriptions should be written in generic terms
or arrangements should be made to ship supplies from home. People should
take extra glasses with them, as well as a copy of the prescription. In
areas where there are no adequate medical facilities, emergency
procedures for evacuation need to be made and explained to the employee
and family.
Closing Out
Besides housing, which will
be discussed below, there are a number of other areas that need to be
taken care of before an employee leaves on a three-year assignment.
Change of Address
The employee needs to make
sure that a whole series of people are informed of the move, including
accountants, lawyers, credit card companies, insurance companies,
magazines and friends. Further, plans need to be made to forward mail.
The standard forms at the post office will not allow forwarding to a
foreign country. The company or relatives are alternatives.
Financial Affairs
It is probably a good idea
to maintain a bank account with an American bank that has
international connections. The employee should also have a credit card
that is widely accepted (such a Visa or American Express).
Arrangements need to be made with other financial persons, such as
stock brokers or trustees, regarding how to handle financial
transactions while gone.
Automobiles
It is not a good idea to
take automobiles overseas. Aside from the expense, the requirements in
other countries may be different than in the United States and the
roads may not be suitable for an American car. With the exception of
vintage cars, storing a car is not a viable alternative because the
expense of preparing them for storage is high and automobiles are not
really meant to be stored. The company may have to reimburse the
employee for any loss taken on the sale of personal automobiles.
Inventories
Taking an inventory of
personal and household items is a must. There are many things that
need to be recorded in this inventory, including the number of bank
accounts, credit cards, insurance policies, safety deposit boxes, and
the location of wills and other legal documents. This inventory should
be copied. The original document should be kept in a place where it
can be located easily and the copy should be with the employee.
Selling the House?
One of the most difficult
decisions for an employee and family assigned overseas is whether or not
to sell the house. If the decision is to sell the house, then the
programs discussed earlier in this chapter should be instituted. These
programs will help the employee sell the house and be in a position to
take on the new job in a reasonable time period.
Two things should be noted
about selling a house. The first is that it is not likely, nor usually
practical, for the employee to purchase a home in the overseas location.
Given this, the employee will be renting during the time spent overseas
and will therefore be out of the real estate market. The second is that
being out of the real estate market for a number of years can have a
negative or positive effect, depending upon what happens in the real
estate market during that period of time. A dramatic rise in the market
may put the employee at a definite disadvantage for purchasing a home
upon returning from the assignment.
There are alternatives to
selling a home. A transferring employee can put the house up for rent,
find relatives or friends to reside in the house, or close up the house
during the period of time spent overseas. The latter two alternatives
involve the problem of paying both the mortgage and the rent on the
overseas residence. Renting the house may cover the mortgage payments,
but if it doesn't, the company may need to provide an allowance to cover
the deficit. If the house is rented, it is best to have a property
management company involved with at least managing the property and
ideally with finding the tenant. The company should pay the fee for this
service.
Moving
Expatriate moves consist of the same two factors as domestic moves:
getting household goods and people to the new location.
Household goods
Domestic moving policies
can, in general, be used for overseas assignments. However, it's likely
that not all of the employee's household goods will be moved, since the
assignment is for a limited period of time, the employee will be
renting, and quarters will be smaller. In fact, the company may want to
set limits on the pounds that may be shipped overseas. This brings up
the need to store household goods while gone. The company should have a
policy on whether household goods may be stored and how much. Given the
high cost of shipping overseas, this may be an economical alternative
for both the company and the employee.
Beyond the question of how
many pounds the employee may ship is the question of the method to be
used to transfer the goods. Air shipment is more expensive and difficult
if there are large items being sent. But the household goods arrive
there in a shorter period of time, and this can save money on temporary
housing. Transit by ship takes longer (30 to 60 days), but is cheaper
and capable of handling large objects. There are likely to be customs
duties to pay upon arrival. The company ordinarily pays these customs
duties. Items such as cameras and jewelry made in a foreign country
should be registered with U.S. customs before leaving to avoid customs
duties when returning. The list of excluded items (discussed earlier)
should be adhered to strictly, and any particular items that are illegal
in the host country should be explained to the employee. For instance,
it is illegal to bring any firearms into Mexico. Employees should also
be aware of the electric power voltage. It is clumsy to take appliances
that operate on a 110 system into a country that operates on a 220
system.
It is useful, particularly
where there are children, to take a box or two of non-essential but
personally valuable items on the airplane, even if this puts the luggage
overweight.
Moving the employee and
family
For most overseas
assignments, the mode of transportation will be airplane. Here you must
make some decisions. First, what grade of ticket is appropriate (such as
coach or business class)? Second, this is likely to be a long trip and
it may be best to have a stopover on the way. Will the company fund this
stopover?
The employee and family
members should have all documents (such as passports and visas) with
them and available for customs and immigration. It is also useful to
have some currency of the host country available upon landing. Last, the
employee and family should be met by a member of the local staff and
guided through the airport to appropriate hotel accommodations.
Settling In
Settling in is a more time
consuming and traumatic process in a foreign country than in a different
state of the union. The cost structure is also different. This leads to
granting expatriates a series of allowances for the difference in living
conditions. These allowances are discussed in Chapter 21.
Home rental
It is assumed that the
employee is going to rent rather than purchase a home for the period of
the overseas assignment. By helping the expatriate find an acceptable
rental, the company can aid in the settlement of the employee so that he
or she can begin to focus on the new job. Timing the arrival of
household goods with the beginning of the rental may be a difficult
task. In general, the quarters will be smaller than those the person is
used to in the United States.
Although the employee is
furnishing the rental, there will probably be a need to rent appliances
since the electrical systems in other countries differ from those in the
United States. There are often advantages to living overseas in terms of
domestic help, and helping the employee find such help and how to best
use the help is important.
Overseas rentals are going
to be more expensive than domestic rentals. Therefore, the expatriate is
usually given a housing allowance that makes up for the difference
between domestic and overseas costs. The methods for doing this are also
discussed in Chapter 21.
Family assistance
The amount of family
assistance required in an overseas assignment is greater than in a
domestic transfer, as well as somewhat different. Spousal assistance is
not likely to be for finding a job, as most countries do not allow
spouses to work. However, there is much aid that can be provided in
terms of orienting the family to the everyday things of living, such as
where to shop and for what. Where the cost of living is higher, your
company may need to provide a cost-of-living allowance so that the
family can purchase items to which it is accustomed.
Schooling is often different
in foreign countries. Expatriate children will most often attend private
schools rather than the public schools of the country. Assistance in
picking and finding these schools can ease the burden of adaptation.
This is another example of the allowances that need to be established
for the expatriate, that of paying the tuition for these schools.
Repatriation
It is a good idea to provide
the employee with a repatriation agreement at least six months before
the end of the foreign assignment. This agreement should notify the
employee of where his or her next assignment will be. In addition, it
should spell out where his or her career path is headed, so the employee
does not feel that the time abroad will be wasted.
Repatriation requires
another adaptation to a different culture. If the employee and family
have had a successful overseas experience, then they will have
acclimated themselves to the foreign culture. Returning to the United
States now requires a new adaptation back to their American life. Often
repatriates can feel like Cinderella after the ball. They return to the
U.S. stripped of many perquisites such as a large house, domestic help,
a car and driver, private schooling for their children, paid vacations
and cost-of-living allowances.
Expatriates also face
culture shock back on the job. Companies do an extremely poor job of
bringing expatriates back to positions that use their newfound skills.
The expatriate sees himself or herself as having gained good experience
that should be rewarded not only financially, but also in a higher level
position. This rarely happens. One of the most common experiences is
that the expatriate has become accustomed to working on his or her own.
Suddenly, the employee is stuck back in a cubicle with a boss down the
hall watching his or her every move.
In order to avoid this,
experts recommend taking five steps.
| 1. |
Provide
the expatriate employee with a mission statement before departure,
so that he or she understands the purpose of the assignment and
how it will benefit both the company and the employee. |
| 2. |
Require
that the expatriate return for home leave at least once a year.
This will keep the employee in the loop and avoid the "out of
sight, out of mind" problem that plagues many expatriates when it
comes to promotions. |
| 3. |
Like
AT&T's HR International program, give each expatriate a mentor in
the home office. This mentor's job it is to keep the expatriate
up-to-date on what's going on in the company. |
| 4. |
Have a
homecoming reception for the employee and family to thank them for
their service. |
| 5. |
Ask the expatriate to
give a presentation to the top executives (especially in global
operations) detailing what he or she has learned abroad. |
These steps will help ensure
that the expatriate does not wind up feeling frustrated, undervalued and
underutilized. They will also prevent the high turnover rate experienced
by expatriates. (Many managers report that 20% of repatriated employees
leave their companies within a year of returning from a foreign
assignment. This number jumps to 50% within three years of the
expatriate's return.)
SUMMARY
Relocations are a necessary
part of business in today's mobile marketplace. One in five families
moves each year, often at the request of employers. Controlling these
costs and assisting employees in moving is necessary if organizations
are to retain needed employees.
Selling the Home
Often companies help with
selling the employee's home. Doing so provides the employee with
incentive to relocate, since he or she will be protected from losing any
money on the sale of a home. Programs include:
Direct reimbursement:
The employee is responsible for selling the home, but the company
arranges a loan to cover selling costs or double mortgage payments (if
the first home sells after the employee buys a second home).
Home purchase plan:
The company sets an amount it will pay for the house. The employee
then tries to sell the home for 30 to 60 days. If an offer is received
during that time the company takes over and sells the home through an
amended value offer, assigned sale transaction, or buyer value option.
Loss on sale: If an
employee sells the home for less than the home's purchase price plus
capital improvements, the company pays the employee a lump sum to make
up the difference.
Advancing equity:
If the old house does not sell quickly, the employer provides the
employee with the cash needed to put down on the new house.
Companies also can help
employees find their new home through visitation trips and data
gathering.
Allowances
If the cost of living is
higher in the new location, the company should provide the employee
economic assistance, at least for a time. This could be through a salary
increase, gradually decreasing cost-of-living allowance or a relocation
bonus.
Relocation bonuses may come in the form of lump sum, tiered payments
(based on the employee's rank and salary) or a cafeteria plan. In
cafeteria plans, the company sets a limit on relocation funds, but the
employee gets to choose how the money is spent.
Moving
Companies should pay for the
transfer of the family and household goods to the new location. This
includes contacting a moving company, paying for the move and shipping
insurance, and paying for the family's transportation and lodging while
in transit.
Mortgage Assistance
Companies also often provide
mortgage assistance to help employees purchase a new home. This can
include:
Buy downs: Lowering
the interest rate for the employee by increasing the size of the down
payment.
Corporate second loans:
An interest-free loan granted to the employee for a limited period of
time.
Shared appreciation
loan: A loan to purchase a new home, where the company is repaid
upon the future sale of that home.
High interest rate
assistance: A temporary subsidization of the employee's mortgage
payment for a limited period of time (3 to 5 years). Here, the company
makes up the difference between the old mortgage payment (which was at
a lower interest rate) and the new mortgage payment (at a higher
rate).
Family Assistance
In addition to helping
employees find new homes, the company can also improve their relocation
experience by helping to locate new schools for their children and new
jobs for their spouses.
Expatriates
The most complex relocation
programs are for expatriates. These employees require special
preparation, including cultural and language training, passports and
permits, and greater financial aid.
The expatriate will most
likely be renting while overseas, so transportation of household goods
should be limited. The company will then want to cover storage fees for
the items left at home.
These employees often face
more culture shock upon their return than their departure. They face
losing many perquisites and not being appreciated for their new
knowledge and expertise. Providing home leaves throughout the
assignment, a homecoming reception and a presentation opportunity for
the expatriate should help to alleviate repatriation problems.
