What are Lump Sums?
Lump sums are becoming an increasingly popular alternative to expense reimbursement across domestic and international mobility programs.
Although companies frequently substitute cash allowances for reimbursement of individual mobility expenditures (such as loss on auto sale), some companies are expanding the definition of what is covered via lumps sums to include key entitlements such as relocation travel, and delivering single lump sums to cover multiple elements. This post will explore why companies use lump sums and when they work best.
Why are Lump Sums becoming more popular?
First, let’s look at why companies are turning toward lump sums. There are two main reasons that companies deliver key benefits to their assignees via cash:
1. Minimize Administrative Costs
It is becoming increasingly cost-efficient for companies to deliver benefits in cash. This is particularly true when there are no tax or other financial advantages to reimbursing or providing a benefit in-kind. For example, the 2018 income tax law changes for the United States have removed the tax advantages for reimbursing relocation and other costs directly, thus removing some of the barriers to a lump sum relocation approach.
2. To enhance the exployee experience
Many companies give cash with the intent of providing assignees with the flexibility to choose how funds are spent. In theory, giving cash and allowing assignees to spend according to their own needs improves their experience. The lump sum provides choice and gives the assignee a measure of ownership in the process.
Of course, minimizing administration also plays a role in improving the employee experience, since the assignee does not have to jump through administrative hoops filling out forms and documenting costs. Lump sums can also minimize the mobility team’s workload, as fewer complaints and exception requests allow teams to focus on more productive areas.
Lump sums can also minimize the mobility team’s workload, as fewer complaints and exception requests allow teams to focus on more productive areas.
Second, let’s look at how lump sums can be used effectively to ensure the two goals above are being met. Lump sums are most effectively used when they are provided to support costs that:
- can be clearly defined
- are not large, recurring, and volatile
- are familiar to the assignee
The importance of clearly defining lump sums:
It is important that a lump sum allowance is clearly defined so that the assignee knows what expenses the lump sum is intended to support. Employees should not only be aware of the specific mobility-related costs covered in the lump sum, they should also have a general understanding of what kind of spending is intended to be covered. If the costs are not clearly defined, the assignee may seek additional funds for items that are covered in the lump sum, or may overspend on other items, leaving insufficient funds to cover their total costs.
For example, advising that the lump sum is to be used for airfare is less clear to the assignee than advising that it is intended to be used for economy, non-refundable airfare. Providing clear guidance on the level of support intended will help the assignee budget the lump sum wisely and minimize push back.
The impact of large, recurring, and volatile costs:
Next, costs should generally be for expenses that are not large, recurring, and volatile. Providing an assignee a lump sum for large, on-going expenditures like rent or education can create administrative issues in cases of mid-assignment failure, as it can be difficult to claw back unused portions of the money and quite costly if not recouped. In the case of housing, rents can be volatile, so assignees renewing their leases may find that their lump sums are not enough if markets have moved significantly since the lump sum was issued. Providing a lump sum for elements such as COLA or utilities presents similar issues, with the additional complication that these elements can fluctuate dramatically over time, leaving the assignee with insufficient funds or unintended windfalls.
Familiar Costs: What are they?
Finally, costs included in the lump sum should be familiar to the assignee. Lump sums for easily-understood items such as airfare, hotels, and meals ensure assignees can spend efficiently without need for assistance from your mobility team or third party service provider. This improves the employee’s experience by allowing them to make personal choices and reasonable trade-offs. For unfamiliar and large expenses, such as sea freight, it may be more effective for the organization to manage these costs directly.
Lump sums for easily-understood items such as airfare, hotels, and meals ensure assignees can spend efficiently without need for assistance from your mobility team or third party service provider.
What mobility provisions can be effectively managed by using Lump Sum Allowances?
An example of a mobility provision which can be effectively managed by a lump sum allowance is home leave. Typical expenses for home leave meet all of the criteria outlined above:
Clearly defined: Airfare, hotel, meals, and transportation depending on policy.
Infrequent and modest relative cost: Typically, 5-7 days of costs per year, mostly purchased ahead of time. Shortfalls will generally be modest or caused by assignee failure to plan properly (e.g. trying to book a week before leaving). While there is some volatility to airfare, this can be mitigated with appropriate planning.
Familiar: Selecting and purchasing flights, hotels, etc. are familiar activities for all assignees.
This is why home leave is one of the entitlements clients typically include in AIRINC’s Lump Sum Calculator. The calculator incorporates AIRINC’s airfare, meals, hotel, and transportation data, so the allowances are up-to-date and ensure the right level of support. The Lump Sum Calculator is easily configured to reflect your company’s specific home leave policy and generates simple reports that can be provided to the assignee along with the lump sum payment:
In addition to home leave, there are a number of other mobility provisions that can be effectively supported via lump sum allowances, such as home finding trips or relocations. The common denominator is that they support clearly defined, familiar, one-time or infrequent expenditures. Well-designed lump sum allowances and supporting information can go a long way toward minimizing your administrative costs and improving the experience of your mobile employees. Click below to start learning more today!
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