Many companies, over the years, have turned to the use of Relocation Allowances for the relocation of their employees or recruits. This is a practice that is very common in High-Tech and Construction but may make up some tiers of relocation policies in all manner of companies.
A Relocation Allowance creates a predictable (and frequently lower) cost to relocation, allows the employee to use the allowance as they see fit, but subsequently requires that the employee work harder on their relocation, in trying to find savings, figuring out all that they need to know about global relocation, finding and managing their vendors.
However, during today’s times, being able to use a pre-formed Relocation Allowance of, say, $10,000 or $15,000 is much harder on the employee than it used to be. $10,000 and $15,000 lump sums are classic values created by management to satisfy the business goals (cost predictability and cost reduction) and support a relocating employee or recruit. However, these values are created in a vacuum. They are created to meet the business goals but do not consider the actual cost to relocate. And that was okay for many businesses for a long-time, but this may now put too much of a burden on your relocating employee or recruit.
The Four Reasons Relocation Allowances Got Complicated
Reason #1: Sea freight has become more expensive and prices more volatile.
According to Drewry Supply Chain Advisors, in January 2022, the World Container Index was 82% higher than a year ago.
The average composite index is U$9477 per 40ft container which is U$6,613 higher than the five-year average of U$2,864 per 40ft container.
According to the Freightos Baltic Index, average global freight rates at the beginning of 2022 are U$8,917, 140% higher than last year.
There is much more to be said on the subject (for instance, movers had to go to spot rates (more expensive) from contracted rates, just to get their goods on the ships), but suffice it to say that rates have gone up and continue to go up.
And sea shipments can be volatile. They can change from the date of quotation to the date of shipment, thereby surprising transferees who have already allocated their Relocation Allowance to various needs.
The same rates of price increases cannot be said for overland trucking, but rates have increased, and we should all expect more increases in future.
So, the $10,000 or $15,000 Relocation Allowance created in a vacuum does not go as far as it used to when shipping household goods.
Reason #2: Sea shipment also is experiencing volatility in transit times.
77% of the world’s ports are experiencing abnormally long turnaround times. This can result in a tough time finding space on a ship in the first place, delays in getting out of port (and remember these ships touch multiple ports, which means multiple delays), and delays unloading. Port congestion is a major global problem right now. International Moving accounts for less than 1% of global freight movement annually. Those international movers are, at best, co-loaders with commercial forwarders and other general dry cargo.
Why does this matter? This has a direct impact on the duration required of temporary accommodation. Without furniture to go into that home, it doesn’t matter how quickly the transferee finds a property (with the help of a destination service) because they will have to sleep on the floor when their furniture is still on a ship. You could rent furniture, but that is a new expense also.
Again – the shipping industry and the stress it is under has created a situation in which the old $10,000 – $15,000 Relocation Allowance has more work to do but no more money with which to do it.
Reason #3: Fuel prices create higher Air Fares
While increases in fuel prices do not automatically mean immediately higher airfares because of forward-buying fuel contracts by the airlines, fuel prices will ultimately affect airfare. All Points is already seeing airfares rise for those with flights a couple of months away. And it is not just fuel costs that are driving airfares; it is demand from a world opening up. One of the most basic elements a Relocation Allowance is meant to cover is the final travel trip, including airfare, but now that money does not go as far either.
Reason #4: Inflation
The staggering degree of inflation has been well reported. Still, again, those relocating are getting into cabs, they need to eat food at airports, they need to get temporary accommodation or an Airbnb (both of which have seen their average rents rise in many hot real estate markets). Their dollar is not going as far as it used to. This can be measured in the hundreds of dollars, not thousands, in all likelihood, but still, those $10,000 and $15,000 Relocation Allowances haven’t changed.
How can we solve this?
Solution #1: Get away from the sticky-ness of fives
There is nothing wrong with creating Relocation Allowances of $12,500 or even $17,250. Companies are so used to creating Relocation Allowances in increments of $5,000 that these values have resisted being indexed to increasing relocation costs. Work with your Relocation Management Company for any necessary adjustments that you may have to make.
Solution #2: Start with a Cost Estimate
More and more of All Points’ clients are allowing us to interview their employees about their relocation needs. From that conversation, we can produce a Cost Estimate / Relocation Budget that is relatively accurate. Companies then decide for themselves how to support the employee. If the relocation Cost Estimate comes in at $19,000, the company may decide to support $15,000, but they at least know that the employee is probably investing $4,000 in their relocation. At the very least, this is an excellent opportunity to start educating hiring managers about the cost of relocation. Sometimes, after our interviews, we can even surprise clients on the downside – that relocation will cost less than they originally offered.
Solution #3: Offer some defined benefits with a smaller Relocation Allowance
At least until volatility in pricing calms down and we find our new normal, it may be an idea to offer someone at least: flights at cost, temporary accommodation for 30 days, a sea/land shipment and, then, throw in a Miscellaneous Allowance of a figure of your choosing. It can be as low as $2,500. The company has lost cost predictability, and the cost has probably gone up. Still, at least the employee knows that they are being supported in the relocation with some defined benefits and has some spending money besides that.
All Points has a client that started relocating one of its employees with a $10,000 Relocation Allowance. They wanted a small shipment from Australia, 14 days in temporary accommodation, flights (premium economy) and $2,000 to buy furniture. With the quotation of the move, the whole plan went out the window. The company has turned to defined benefits and realized that this relocation would exceed the original budget.
In these times, with the labour market so tight and with all the price pressures described above, it pays to modify how we use Relocation Allowances and help out employees a little more.
So, no – it is definitely not the end of Relocation Allowances, but some companies may put them on hold for a little while until the volatility dies down, while other companies may adapt them.