It’s time to revisit your domestic relocation policy

January 10, 2019

Each and every year, thousands of employees from countless organizations are asked to move to different parts of the country due to business needs. However, with a tight talent market and shifting employee values, getting your employees to relocate isn’t always as easy as it used to be, even within the same country.

It turns out there are several factors hindering the popularity of domestic relocations in the US. Recent research has shown that fewer Americans are willing to uproot their lives to seize new job opportunities in other cities or states. The research found that this reluctance was due to numerous reasons, including:

  • Soaring housing costs in many parts of the country.
  • Reluctance to disrupt friendships or routines.
  • Familial responsibilities (e.g.., caring for children or aging parents).
  • Spousal refusal to leave his or her job to accommodate a move with his/her partner.
  • Increasingly competitive job markets offering equitable job opportunities right down the street, without the need to uproot one’s entire life (or the life of family members).

On the other hand, there are also factors impacting an organization’s ability to relocate employees efficiently and effectively, such as, the implications of the Tax Cuts and Jobs Act, signed into law in December 2017. One of the changes this Act introduced was the elimination of exclusions and deductions for many moving expenses, including the shipment of household goods, storage, and final move costs.

As you can see, there are several factors to consider in terms of managing domestic mobility effectively. Together we’ll walk through insights related to these and other prominent mobility issues, all of which have been uncovered by Mercer’s 2018 Domestic Relocation Policy Survey research. You’ll learn about the steps that organizations are taking to adapt to change and how to do what it takes to ensure they keep their workforce, well, moving!

Let’s start by diving deeper into this tax issue.

The Tax Cuts and Jobs Act: How It’s Affecting Relocation Costs

Taxes have always been a significant cost consideration when it comes to domestic relocations. By simply adding a tax assistance (or a gross up) to an employee relocation package, you will increase your costs by an average of 60% due to the tax on that tax. When you take into account that 77% of organizations provide tax assistance to their relocating employees, the financial impact of tax law changes can be huge.

Prior to the Tax Cuts and Jobs Act, companies could exclude some costs related to employee moves from being considered as compensation which would limit the tax impact to the employee. That is no longer the case. Now, everything related to the relocation — from the moving of household goods to the cost of temporary housing and real estate transaction fees — is taxable. In short, virtually all the money that employers give to their employees or to service providers on behalf of the employee now represents taxable income to the employee. Therefore, it’s not a particularly cost-effective approach, at least from a domestic relocation perspective.

So, How Are Companies Reacting to All This?

Research shows that the vast majority of companies seem to be in a sort of “wait-and-see” mode. While a huge amount of survey participants indicated that they had indeed reviewed their domestic relocation policies in the past year (undoubtedly in light of the recent tax reform), the vast majority of participants (92%) said they hadn’t made any actual changes yet.

However, some organizations have found that changing their payment methods to a lump-sum approach — thereby passing more financial responsibility onto the assignees — has been a rather effective way to manage costs. After all, it does make sense, at least from a practical standpoint. If you gave your employee, say, $25,000 to move, then a lump-sum approach means that employee is personally tasked with prioritizing how to best allocate that money for his or her own long-term benefit.

However, a one-size-fits-all lump sum approach is not a cure-all. With executives, in order to persuade them to relocate, you are likely to still need a degree of flexibility and customization to create attractive relocation packages.

Temporary Salary Bumps: A Good Strategy for Domestic Relocations?

Another challenge for mobility managers is the equitable management of base pay when the target location has a higher cost of living. How do you make sure your employee will not endure a financial hardship when transitioning from a moderate city like Portland, Oregon, to a high cost of living city like Los Angeles, California?

Some companies choose to address the discrepancy in cost of living by simply adjusting pay to the guidelines provided within the existing pay structure at the new location. However, at higher job levels, base pay might be set at a national rather than local level. In that case, the employee transitioning to a higher cost of living area might be given a pay adjustment — outside of salary — that’s meant to be temporary. The adjustment in pay then either stops after a period of time or is phased out gradually. Organizations using this approach are looking to provide incentive to employees to move but avoid overly inflating base pay for particular roles due to the local cost of living. (Remember, setting compensation should be based on cost of labor, not cost of living.)

No matter what route you choose to take if you do decide to adjust base pay as a result of relocation, transparency and specificity is critical. That is, you want to spell out the what, how, and duration of the pay modification at the beginning of the discussion with the employees considering relocation. As you can well imagine, establishing this sort of clarity early on will greatly lessen the chances of any unwarranted or unpleasant surprises down the line — and that's true for all parties!

There’s a Lot to Consider. Let Us Help You Address It.

Domestic relocations are an effective talent strategy tool that should always be based on business need. The costs, employee value considerations, and complications that go along with them make your jobs as an HR manager or mobility expert that much more challenging. Mercer has a number of tools available to help you optimize your domestic mobility program and relocation policies:

  • The Domestic Relocation Cost Comparisons Report provides a detailed look at the cost differentials between any two US cities. Identify your employee’s current location and the transfer location, then analyze cost-comparison data across five main areas, including housing, utilities, property tax, and more.
  • Covering 360 companies across five employee segments, the Domestic Relocation Policy Survey addresses key elements of a relocation program and provides you with benchmark data to set fair and competitive policies, whether they are for core policies, core flex policies, or lump-sum policies.
  • Geographic Salary Differentials can help you better determine if and how companies adjust salaries based on geographic location (cost of wages).

As the demand for relocation products and services continues to rise, despite a shrinking pool of talent to pull from (plus unanticipated tax matters), you have to find new and inventive ways to incentivize your employees — and their families — to take on relocation assignments whenever and wherever necessary. It’s a challenge, to be sure, but with the right tools, data, and guidance in place, it’s one that you can certainly overcome.