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.
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