You can leave your heart there for free, but it's going to cost a small fortune to relocate an employee there.
Companies around the world grapple with the complexities and costs of domestic relocation. With dramatically disparate costs of living, high housing costs in certain metropolitan areas, and sometimes a lack of well-defined policies, companies struggle to lure candidates and incentivize existing employees to make a move.
Firms need help in two critical areas. The first is the creation of sound policies that are effective in assisting employees or candidates to relocate without creating undue financial strain on companies. The second issue is establishing an appropriate, affordable level of financial assistance to enable employees to relocate to high-cost locations from lower-cost locales.
A sound policy is possible with the right context.
The domestic relocation dilemma
Consider the following hypothetical example. A financial services company based in Wisconsin launches a division in San Francisco and wants to relocate some internal employees to the new work unit. The difference in housing prices and the cost of goods and services on the West Coast, especially in the Bay Area, are notoriously exorbitant.
A midlevel executive in Wisconsin may have a suburban, four-bedroom home purchased for $250,000, an ample backyard and a 20-minute commute. In San Francisco proper, the same home and property likely will cost $1.5 million. To own a comparable home at a reasonably comparable purchase price, the executive may have to settle well out into the suburbs and drive 90 minutes, each way, to reach his or her office. Along with thousands of others on the road at the same time - for the same reason.
The company has a dilemma. What can be done to help the employee remain financially whole with a similar quality of life? Certainly, additional compensation would help, but may disrupt equity within the organization. Without some financial incentives, however, it's likely that most of those Wisconsin executives are going to remain where they are.
This house is not available in San Francisco.
A company trying to relocate an employee to a high-cost location such as San Francisco, Seattle, Manhattan, or Vancouver is faces tremendous challenges, primarily due to the very high cost of housing.
Dramatic differences require sound approaches
Because of the volume of domestic relocations, most companies are concerned about cost, and many are looking to restructure their domestic relocation policies to make them more cost-effective.
Older approaches are no longer viable solutions. As recently as a decade ago, companies were more likely to offer to buy out an employee's home as part of a relocation package. This strategy was financially costly, as companies ended up taking significant financial hits on the resale of these homes. Selling the home became a similar priority for the company as it was for the realtor. Reducing the sales price put money in the realtors’ pockets, but reduced the actual equity in the home for the seller or the company, depending on the structure of the deal.
One-size-fits-all relocation policies are also no longer a good approach. Companies are adopting tiered policies, offering one type of package for senior executives and a different type for newcomers to the profession. However, even this approach can be fraught with complexity when companies create excessive iterations of a policy without appropriately managing the process.
Policies and methodologies needed
Companies have a significant need to manage cost, given the increasingly high volume of domestic relocations. There's a critical need to have policies that are compelling to candidates and cost-appropriate.
In addition to the necessary policies, companies need a cogent methodology for determining the appropriate packages for relocating employees to high-cost locations. This is an issue not only in North America for businesses: Companies in Latin America, Europe, and some of the major Asian countries are facing similar issues.
To create the right methodology, companies need to calculate an accurate cost-of-living comparison. While there are a number of off-the-shelf or free web-based tools available to help, the assumptions behind these calculators' methodologies tend to be overly simplistic.
Among the questions companies need to answer to create the methodology are the following:
- What factors will be measured? Housing only?
- Should income taxes and property sales be factored in?
- What is the difference in the day-to-day costs of goods and services?
Once those calculations are clear, the company needs to ask the most difficult question: Can the company afford to subsidize the cost involved in helping employees maintain an equivalent standard of living in the new location?
A good policy is one that is beneficial for both the company and the transferee.
The level of relocation support to be provided can be quite controversial in board rooms. Salary increases alone usually are not a viable solution to entice candidates, and the sheer costs cause many C-suite occupants to pause. The situation is like that of global transfers, in which the company must first ascertain how much more the individual would need to be able to maintain a similar standard of living and buy a similar type of property. Then the company must decide whether the amount is affordable for the company, how much of the difference a company is willing to pay, and for how long.
Companies are getting creative. Some offer cost of living assistance or mortgage assistance for a prescribed period (usually three years) at either a flat rate or a gradually reduced schedule.
The need for clarity in these policies is essential. Companies are finding themselves caught flat-footed when, deep into a negotiation with a potential candidate, it is discovered that the provided assistance is inadequate.
The Mercer Solution
Mercer is the world's largest human resources consulting firm. We offer companies a range of expertise and consultative services designed to help companies see the issues with clarity, create customized policies, and keep domestic relocation costs fair and reasonable.
Mercer offers three distinct advantages:
- Access to methodology. We have developed a rich, robust, and effective cost-comparison methodology. Our data provides clients with the right information to develop cogent comparative analyses, that are particularly effective when struggling with high-cost destinations.
- Consulting Expertise With multiple offices in in 40 different countries, our work with thousands of companies has given us a wealth of expertise and insight into domestic relocation and other HR issues. Our services help shape the work experiences of more than 110 million employees worldwide.
- Rich Benchmarking We manage the world's most extensive database of comparative information on relocation policies, helping clients create competitive, cost effective domestic relocation packages.
Mercer’s 2016 Domestic Relocation Policies Surveys for the United States and Canada provide extensive information that is more comprehensive than any other domestic relocation survey. 287 organizations participated in Mercer’s U.S. Survey , with new companies adding information each month. Our surveys cover policies in five different categories of relocating employees, from existing executives to early career new hires.
It's the combination of competitive benchmarking that is the gold standard in the industry, consulting expertise, and cost-comparison methodology that makes Mercer the choice for companies worldwide when it comes to domestic relocation issues.
For more information, please visit Mercer's Domestic Relocation Services page.