Chapter 23: Relocating Employees

Overview: This chapter examines how to design company relocation assistance programs for relocating employees.

Corresponding courses

57 Relocating an Employee Within the United States

93 Global Mobility and the Relocation of an Employee to an International Assignment

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 extensive in relocations to a foreign country. The company's concern for these costs is real in that the effectiveness of employees in their new job is directly related to how well the employee and the family adapt to their 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.¹

DISENGAGING

To employees, a transfer means breaking the ties they have developed both on the job and within their community. This is also true for the transferred employee's spouse and children. The transfer process is time consuming, costly and can be psychologically challenging. The company can make this change easier or more difficult, depending on the demands placed upon the employees and the help provided to them by their employer. With the changing labor market and nature of today's work force, employers are providing more help to transferees than in years past.²

Selling the Home

While their home is the major asset of most employees, it is also commonly the employee's most costly expense. For an employee, being transferred means selling or renting out their home. If they do not own their own home, there is still the task of 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 their 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.³

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 the company's involvement in 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 would depend upon the probable selling price and the amount of equity the employee has 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 a timely manner. 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 guaranteed 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 of the unsold house. 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 their 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 helps 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 the 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 23-1.

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.

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, as well as 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 a major asset of employees, companies sometimes develop programs to alleviate loss in order to convince the employee to move.

The employee's investment 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 can be tricky. If the new house is clearing escrow before the old house sells, 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 or taking a trip to the new location. Sometimes the combination of both informative avenues is necessary for full understanding of what to expect in the new location.

Collecting Data. Much information can be gathered from travel agencies. The Automobile Club and the Internet are also obvious sources in this regard.

One of the most important pieces of information for anyone moving to an area is the cost-of-living, particularly in comparison to where the person is currently located. One of the best sources for this data is ERI's Relocation Assessor®, as shown in Figure 23-2

Prepared For	Housing	Automobiles
Name: Mary Smith	Own	Autos: 2
Earnings: 160,000	Area: 2,331	Value: 36,000
	Family Size: 4	Miles: 25,000

Cost Categories	San Diego, CA.	Redmond, WA.	Difference
Consumables	26,976	29,701	2,725
Transportation	16,203	15,281	-921
Health Services	3,143	3,740	597
Housing/Util/Prop Tax	85,526	81,059	-4,467
Income+Payroll Taxes	24,325	20,600	-3,725
Miscellaneous	3,827	3,827	0
Total Cost of Living	160,000	154,208	-5,792
COL % of Base City	100.0%	96.4%	-3.6%
COL % of U.S. Average	143.4 %	138.2 %
Estimated Home Value	1,058,181	996,153	-62,028
Per Diem Lodging	181	176	-5
Per Diem Food/Other	74	79	5

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.⁴

Salary Increase. It may seem that the easiest way to adjust for an employee's transfer to a higher 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 lower 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? To obtain data on the difference in both salary and cost-of-living levels, use ERI's Geographic Assessor®.

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 ERI Distance Learning Center Course 83: Designing a Geographic Salary Structure.

Relocation Bonus. A second method of adapting to differences in cost-of-living is to provide employees with a lump sum bonus upon moving. The advantage of this is that it provides them with cash at a time when they are 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 family members and their possessions to the new site.

Moving Household Goods

Moving household goods is an expensive proposition. The average cost of a long-distance move is about $5,000. 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.⁵

• 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. The moving company will have a specific list of what they will not transport. There are also "common sense" exclusions like firewood and bricks as these items are uneconomical to transport. Further, perishable items such as plants will be excluded.
• 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:
  1. Should pets be included in moving costs?
  2. How many and what kind of pets will be included?
  3. Will the company pay for temporary boarding or mandatory quarantines?
• 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, what are the specifics?
• Storage. Storage, either at the old site or the new site, is ordinarily paid for by the company until the employee has relocated 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. The specialty items range from fragile artwork and pianos to simply large amounts of china or breakable knickknacks.

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; paring down should be encouraged. The estimate also identifies items that require special handling. The accessibility (stairs vs. elevator, narrow entry doors and such) 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 third-party insurance has been purchased that covers the move, or if the company is willing to self-insure the move.
• Full Value Coverage. If Released Value is not accepted, the mover is required to cover the full replacement value of the items without depreciation. The mover will charge for this higher level of mandatory coverage. This is the most common choice of employers transferring employees. It minimizes bad feelings when there is breakage.

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," meaning in computing their 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 in order 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 their commute times)?
• 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 discussed earlier, a trip to the new site before the transfer is the best way to get this process under way. ERI's Relocation Assessor software can also be of assistance in finding price differentials of a different city. This software contains cost-of-living information, particularly housing costs, which can be compared to one's present location. For most metropolitan areas, the Relocation Assessor software identifies different areas within a city. For instance, if an employee were relocating to downtown Seattle, he or she could review the housing prices of areas within an easy commute to Seattle. In particular, a Relocation Assessor comparison between the Central Seattle area and the lower Puget Sound area shows a $500,000 difference in housing costs. It turns out that it is economically better to move to the lower Puget Sound area than the central Seattle area, despite the higher sales volume in the more densely populated Seattle.

As a further aid in starting to look for a new home, the employee needs to know exactly what they 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 recently sold in the area ; 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 resulting company 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 4.75% to 3.5%. 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 3% for the first year, 3.5% for the next two years, and 4% for the fourth and fifth years. After that, the rate would be 4.5%.

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 $300,000 at 6.5%, and the new mortgage is at 9.75%, then the company would subsidize the payments by $18,637.92 for the three-year period. 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.
• Conveyance. 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 advantages to the company are that the employee settles into their job more quickly and with lowered stress levels.

One major assistance program is called the Spousal Assistance program. The transfer is traumatic, not only to the worker, but to the spouse and family. This is a time when relationships with friends and family are torn up and everything becomes strange.⁶ Further, since many 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 policy statement that treats all possible transferees equally. This next 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 options 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 of the company is likely to be minimized.⁷

Lump Sum Relocation Plans

Probably the simplest possible policy for relocation is to grant a lump sum and allow employees to spend it as they please. 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.⁸

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 monetary allotment and options granted to each category corresponds with the employee's level within 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.⁹

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 complex, companies have chosen 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, who 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.¹⁰

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 very carefully because the possibility of failure is very 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.¹¹

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 also for the family to more comfortably 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. This can be particularly difficult for those who are unaccustomed to the need for learning or speaking a second language. It is also imperative that the entire family be made aware of cultural differences and differing local social expectations, as even simple hand gestures hold various meanings in different countries.

Data Collection. Obtaining information regarding the destination country will help employees know what to expect. This can range from cultural information to economic information. A good resource for this information is the CIA's World Factbook found at www.cia.gov/the-world-factbook/.

Visitation. The best way to get a feel for the new country is to take a preliminary trip there. This also aids in starting the process of finding adequate housing. Being in the country for a visit also 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. The process can be started by accessing travel.state.gov.
• 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 planning to conduct business activity in their 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. Information about suggested inoculations can be obtained at: wwwnc.cdc.gov/travel/destinations/list.

Health Preparation. 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 their eyeglass and medical prescriptions. 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 viable 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 stockbrokers or trustees, regarding how to handle financial transactions while gone.

Automobiles. It is not generally 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 all cars. 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 choose 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. Beyond their material goods, there are many things that need to be recorded in a comprehensive inventory These include the numbers of their bank accounts, credit cards, insurance policies, and safety deposit boxes. This inventory should also list 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 their 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 time period, the employee will probably be renting, and the quarters may be smaller than they are accustomed to. In fact, the company may want to set limits on the weight 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 any restrictions on how much will be allotted for storage. Given the high cost of shipping overseas, storage may be the best 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 is 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 to bring into 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: appliances that operate on a 110 system must have adaptors to be able to use them in a country that operates on a 220 system. Some electrical items do not do well even with adaptors.

It is useful, particularly where there are young 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 and on 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 were discussed in Chapter 22.

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 their 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, and knowing this upfront will help the employee to pack appropriately for their overseas move.

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. Helping the employee find and utilize such help is important.

Overseas rentals are often 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 22.

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 how to use local transportation. 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 their career path is headed, so the employee does not feel that the time abroad has been 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 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. Too many companies do an extremely poor job of bringing expatriates back to positions that use their newfound skills. Expatriates see themselves 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 their own. Suddenly, the employee is stuck back in a cubicle with a boss down the hall watching their every move.

In order to avoid this, experts recommend taking five steps:

1. Provide expatriate employees with a mission statement before departure, so that they understand the purpose of the assignment and how it will benefit both the company and themselves.
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 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.)¹²

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 valuable 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 dual 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 make a down payment 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 greatly improve the relocation experience by helping to locate new schools for the employee's children and new jobs for their spouse.

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 any repatriation concerns.

Footnotes