January 29, 2015:
On Monday, January 19, Oxfam published a study which concludes that, based on current trends, by 2016 one percent (1%) of the world’s population will own more wealth than the other 99%. What else did the Oxfam study say?
- Oxfam added that the richest 1% would own more than 50% of the world’s wealth by 2016
- Rising inequality is dangerous. It’s bad for both growth and governance.
Whether or not one agrees with the statistics, very few economists dispute that inequality is growing and that this does and will affect economies adversely. And think about your mobility program and Oxfam’s last conclusion: “it’s bad for both growth and governance.”
What is the link to relocation policies?
In many Canadian, North American and even global relocation policies, there remains one legacy benefit that similarly creates inequality: the traditional salary-linked Miscellaneous Allowance.
The Miscellaneous Allowance is one of, if not the, original relocation benefit. It was introduced in the 1960s and 1970s. It was technically the original lump sum program. Most often it was expressed as a percentage of salary or one month of salary. Over time companies added other benefits such as household goods moving or a house hunting trip as defined benefits, while still maintaining the original allowance. With the oil crisis of the 1970s which created home sale challenges, Guarantee Home Sale programs started being added as well as other services. Yet throughout all the changes the Miscellaneous Allowance largely remained untouched.
But what happened since the origin of the salary-linked Miscellaneous Allowance? They say that a picture is worth a thousand words, so let’s have a look at the American Census Bureau’s study below (granted this is the United States, but Canada’s story is not too different, except by degree):
You will see that during the late 1960s and early 1970s incomes in the bottom four quintiles were all relatively close to those in the top 20thpercentile and even in the top 5th percentile. Since the 1970s, however, the top 20th and the top 5th percentiles have pulled away significantly from other income earners. So, if companies continued to link Miscellaneous Allowances to salary, these payouts went along for the ride as well.
Why does this matter to you?
First, it should be stated that many companies have already adjusted their miscellaneous allowances away from salary-linkage to flat rates. However, there are still many Canadian policies that have salary-linked allowances. All Points’ message is that more companies should de-couple Miscellaneous Allowances from salaries and there are good reasons why.
Reason #1: Cost Reduction
When linked to salary, the Miscellaneous Allowance given to those at upper income levels can be a very expensive benefit. For an executive that earns $150,000, the one month Miscellaneous Allowance results in a cost of $12,500. This is more than the cost of a household goods move for a junior level employee with a small apartment. If a company that relocates just 5 executives per year reduced this benefit from salary-linkage to a flat rate of $2,500 this would result in a savings of $50,000 annually.
Reason#2: It is not required
These expensive salary-linked Miscellaneous Allowances cannot be proven to be tied to any distinct need of the upper quintile of income earners. One could argue that the upper quintile does have greater needs and this is a reasonable argument. However, this difference is not drastic and can easily be managed with flat dollar differences between tiers rather than by linking Miscellaneous Allowances to salary.
Reason#3: It has become a de facto bonus and rarely reduces exceptions In many cases, salary-linked Miscellaneous Allowances have become de facto moving bonuses and if this is not the intent of the relocation program then these benefits should be reviewed. If a senior executive requires extra time in temporary living, it is very rare that a request for exception is not granted due to he / she having a Miscellaneous Allowance.
Reason#4: Cost reduction redux! Once companies de-couple Miscellaneous Allowances from salaries, they also find that they also go through an exercise of finding reasonable flat rates for lower income levels in lower tiers. So, while the target of the review may have been allowances to those in the upper income ranges, the result was cost reduction in the lower ranges as well.
Last but not least – Reason #5: Pluck the Goose: Control your policy lest it control you.
What has become a consistent theme in All Points’ advice is that Human Resources should control its company’s relocation practices before it is controlled itself by those relocation practices. Cost reduction strategies should be proactive so that Human Resources can retain the benefits that it knows are most helpful to transferees and assignees when cost cutting demands come from other departments or hiring managers start abandoning policies entirely and arranging side deals. And changing salary-linked Miscellaneous Allowances to flat rates does create meaningful savings without a lot of pain to the transferee.
Jean-Baptiste Colbert was the French Minister of Finances of France from 1665 to 1683, serving under the rule of King Louis XIV. Colbert had to improve the kingdom’s finances and he said (I paraphrase as he was actually speaking of taxation): “The art of [cost containment] consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” For many companies the Miscellaneous Allowance may be a good feather to pluck.
By: Michael Deane
Co-Owner and Vice-President, Client Services