In the past five years, lump sum has become the most popular method of relocation expense reimbursement.
Considering how easy it is to administer, and the flexibility it offers to employees, it's not hard to see why so many companies use it.
When a company provides a relocating employee with a lump sum, they're basically giving them a signing bonus that is intended to be used for the relocation process. The company uses whatever means they see fit (normally based on records of previous relocation expenditure within the company) to establish the amount of the lump sum, then they give the decided upon amount to the employee.
The employee doesn't have to use all, or any, of the money for relocation. In fact, the tendency for a lot of relocating employees is to spend as little as possible on their move so that they can pocket some of the lump sum. While there is nothing explicitly wrong with doing this, it tends to have a negative impact on the relocation process. That's why some companies favor capped lump sum plans.
Capped allowance plans are similar to lump sums, and are frequently (though incorrectly) referred to as such. In this case, instead of just giving a set amount of money to the relocating employee, the company will set a maximum amount that the employee can spend.
The company will often have a policy stating what kinds of things the employee can use the money for, and sometimes they’ll even provide them with a counselor to guide them through the process. The big difference between allowance and lump sum, is that if the employee does not reach the maximum amount in an allowance, they do not usually get to keep the remainder.
This type of plan can end up saving the company money, but employee satisfaction is generally less with relocation allowance plans, because it sometimes results in the employee overspending, and having to cover some of the costs themselves. Some companies use a third method of reimbursement because of this issue.