The Hidden Costs of Relocation
How exactly do we define a “hidden cost” of relocation? It's not a non-disclosed cost buried in the supply chain—although those can be hidden and lead to surprise last-minute expenses if you don't have a relocation services company looking out for your company's best interests.
But the real hidden costs of relocation lie in stressed-out transferees, lost productivity and even transferred employees who leave the company shortly after a relocation.
If you eliminate loss-on-sale benefits for transferred employees who own their own homes, how much stress are you creating for your employees? If you don't offer spousal support, what will that do for the morale of your transferred employee? Stress leads to sick days, personal days and dissatisfied employees—all resulting in lost productivity and lost dollars for your company.
When you limit or eliminate moving expenses as part of a relocation package, how many more days will your employees need to line up moving companies, find the best prices or move themselves? How many days of productivity will this cost your organization?
Studies show a direct correlation between poor retention and changes in corporate relocation policies. It costs much more (in real dollars, employee time and productivity) to hire and train a new employee than it does to retain a quality worker.
In today's workplace, we know that every dollar counts. But before cutting costs by reducing benefits on employee relocation packages, make sure to measure the hidden costs of relocation.
To illustrate, we'll share a story, all too common in today's real estate marketplace and job market.
John Moves Across the Country with a "Bare Bones" Relocation Package
Meet John, a successful product manager for a sporting goods company in a suburb of New York City. John knows how to get the job done. He’s run countless successful product launches in the New York market. But now there's a problem with a product launch in the West Coast office, near Lake Tahoe. Upper management knows John is the man to fix it. But will he accept the assignment?
The executive team makes him an offer for a long-term, possibly permanent, relocation, and John accepts. Problem solved, right? The right man is in the right position to get the new product out without a glitch.
Now John meets with Human Resources to discuss the terms of his relocation. He'll receive reimbursement of all moving costs, a small bonus, and the HR department will connect him with real estate agents to help him sell his home. He's got a sizeable house in a coveted suburb — no one thinks about how long it might take to sell a two-year-old home in an overvalued area in a rapidly depreciating market.
And frankly, the HR department doesn't really know John, or what an important asset he is to the company. They don't realize the executive team wants to keep him on board — and productive — at nearly all costs. They don't realize how important John's productivity is to the company's bottom line, especially with this do-or-die product launch on the horizon.
Now John faces the most important task of his career and the burden of selling a home that is now worth less than he paid for (and less than his mortgage) — and dropping in price each day.
John moves into temporary housing in California while his wife stays behind waiting for the kids to finish out the school year, job hunting on the Internet and trying to sell the house.
John's wife had planned to meet him in California within a month, but now it's closing in on three months, with no bites on the home and a very stressed-out John splitting his attention between real estate sales and the product launch. Every other weekend, John goes home to help his wife pack some more, re-evaluate home sale plans with the real estate agent, host an open house or do work around the house to help raise the value of his home and help it “show” better.
When he returns to work Monday after taking the red eye Sunday night, his mind still isn't on his job or the new product. The executive team in California starts to wonder what East Coast management saw in this “star player.” His head is barely in the project. He misses meetings, forgets important details, and the important product launch is even further behind schedule than it was before. The product is high volume, low margin, which means that every day it's not on the market means lost revenue ... and the holiday season is coming.
When John misses a deadline to finalize an agreement with a major distributor and is locked out of their plan for the next year, the company wonders if it can recover from the estimated $17 million loss in projected profits from the new product, the damaged relationship with the distributor, and the loss of morale across the department.
John, who was supposed to be the shining star, crash landed — and it's nearly impossible to put a price on the damage it did to the company, above and beyond the projected $17 million-plus.
Let's take the scenario one step further. After losing face, failing to sell his home, and living with six months of stress, John moves back to New York, takes his house off the market, and opens an independent consulting firm. Now the sporting goods manufacturer has to hire and train his replacement — more lost money, time and productivity.
A Better Ending for John
Now, let's look at this scenario where the sporting goods manufacturer relies on a relocation services company, rather than the HR department, to negotiate, organize and manage John's moving package.
The relocation company hires the best and brightest real estate agency to take the sale of John's home off his plate. John's company offers to pay a percentage of loss-on-sale if, after 30 days, John can't get the asking price for his home. The company isn't taking on the whole burden, but it's enough that John can afford an equal quality house in the new area and maintain his standard of living. Qualified real estate agents in California help John find a new home he and his wife love.
The relocation company manages all the details of the physical move, leveraging years of industry relationships to hire the best movers at the best prices. John and his family are packed and ready to go the day they close on both houses.
The relocation company also helps John's wife find a job. The company provides a community information package that helps John and his family feel comfortable in the new surroundings, pointing the two professionals to local networking groups, and listing local sports and activities for the kids.
John and his family move together and, after a few days off to unpack and recover from jet lag, John is at the office and ready to turn things around on the new product launch. The product actually releases two weeks before deadline, and sales figures are 20% above projections.
A year later, a happy John cashes a check for his retention bonus, and by that time, is already heavily immersed in the next big launch.
Just Where Are the Hidden Costs?
In our first scenario, we can spot multiple hidden costs:
- Temporary housing
- Multiple trips home for the relocating employee
- Lost productivity, due to travel and stress
- Missed deadlines that cost money
- Lower morale, company-wide—when one company leader is experiencing stress, it can affect a whole department
- Hiring John's replacement
- Training John's replacement
- Lost productivity during the training and acclimation period for the new employee
Today's relocating employees face multiple stressors that employers can help alleviate with the right relocation package and home sale assistance. While packing and moving, uprooting a family, and transferring schools are all stressful, today's most stressful moving issues come from the sale of a home.
Some employees' homes are already “under water,” meaning they owe more on the mortgage than the house is worth. Others simply won't be able to recoup the investment of what they paid for their home in a booming market. Many people wouldn't sell if not for a career opportunity and incentives too good to pass up—or the fear of losing their job if they turn down the relocation package. Since happy employees are more productive than scared, stressed employees, it's in a company's best interests to offer a relocation package that includes:
- Home sale and purchase assistance
- Possible loss-on-sale benefits
- Timely, high-quality, low-stress moving services (for household goods, vehicles and pets)
- Spousal assistance
- Tours of and visits to the new location
- A way for transferred employees to provide honest, objective feedback regarding their satisfaction immediately after the move, and then three and six months later
The Biggest Expenses of an Employee Relocation
Have you ever considered the items that are your biggest employee relocation costs? An employee relocation expense can be broken into one of several categories:
- Household goods and people and pet moving
- Temporary housing
- Scouting/recruiting tours
- Expenses related to spouses, children or elderly parents
- Real estate expenses (buying and selling a home)
- Miscellaneous expenses (utility turn-on, lease-break costs, licensing, etc.)
Real Estate Issues can Bust the Bank
In our experience here at CapRelo, the largest employee relocation expense falls into the real estate category. This is evidenced by the fact that typical employee relocation costs for renters are about $18,000, while they rise to an average of $60,000 for homeowners -- and much more than that if the employee is a top executive with a jumbo mortgage on his home.
Reduce Employee Relocation Costs without Delaying Home Sales
So how can you recruit top talent who may feel tied to their region because of a house they can't sell without taking a loss? Loss-on-sale incentives are one option, but this can backfire and increase your relocation costs while still leaving a frustrated employee if the home takes a long time to sell.
A home sale bonus if the relocating employee uses real estate agents and other professionals, such as home stagers, recommended and approved by your relocation company can expedite the home sale for a low-stress relocation and a faster return-to-productivity.
How To Reduce Relocation Costs
In a tight money environment, cost cutting becomes a way of life in the corporate world. When relocation costs are reduced, the bottom line increases for company shareholders. Relocation expenses can drain other resource spending. Cutting back and controlling these expenses, without compromising the relocating employee’s experience, should be the goal of every human resource department. Unfortunately, this goal remains an enigma for the typical company. Spending on relocation with just the goal of keeping the employee happy has become the ‘de rigour modus operandi’ of many firms. Whereas, simple changes to the relocation policy can equate to substantial savings without compromising morale.
Lay Down Clear Parameters In Your Policy
The first step in reducing costs is to lay down clear parameters in the relocation policy. As you likely are aware, policy ambiguities can result in additional costs for the company. Lay out the relocation policy in easy-to-understand, simple language, and take into consideration what’s needed to facilitate the move smoothly and efficiently, without allowing wiggle room by the employee.
Establish Expense Caps On Some Benefits
The second step is to put expense caps on some relocation benefits, like loss on sale. This may seem like a no-brainer idea, but one would be surprised at how many companies ignore capping expenses like this one. Loss-on-sale clauses for homeowner employees can be a major expense that should be capped. In today’s real estate environment, many homeowners have experienced depreciation of their real estate assets. This fact makes loss reimbursement a major expense for relocating employees. The relocation policy should clearly define exactly how much of a loss, up to a maximum amount, that will be reimbursed. It's also critical to take into consideration capital improvements to the property when calculating value.
Change How Relocation Expenses Are Paid
Lastly, but far from least, changing the way relocation expenses are paid out can result in savings. Using a lump-sum payout method rather than the traditional expense reporting might reduce relocation costs, but damage the employee’s productivity, which impacts expenses negatively.
The average transferee takes 8 to 12 weeks to complete a relocation move. During this time 6 to 8 expense reports are generated by the transferee resulting in time and costs to review, approve and issue funds for each report. Switching to a lump sum method will eliminate the headaches and costs involved with multiple expense reports. Not to mention, potentially save money as the employee knows upfront the funds allocated to relocation costs, rather than an unlimited well of capital at the company.
A Final Word On Managing Relocation Costs
There are many things to consider when employees relocate. Hidden relocation costs and the biggest expenses are among the most common pain points for employers. The secret to reducing costs in relocation is to be sure that everyone in the company—from the chief executive down to the administrators in the Human Resources department—is aware of what’s most important to the transferee. In this way, you can keep costs down while ensuring a faster return to productivity for transferred employees—and their whole department, in many cases.