Are you looking to re-focus your company’s operations on your core activity? One solution that can help is outsourcing some of the operations required to keep the company running: logistics, IT, recruitment, payroll, and also incentive compensation - nowadays, more and more services can be safely entrusted to external partners.
Acting as a catalyst for improved performance levels and productivity, outsourcing enables you to re-focus your employees’ workloads on tasks with greater added value, and to delegate the ones they’re less comfortable with. Moreover, going outside the company means obtaining better quality services (often at reduced cost) for the item being outsourced, as your service provider will supply access to specialist tools and skill sets that are out of reach to most companies.
So how and why should you go about handing over calculation of your incentive compensation to a specialist service provider? And how can outsourcing the calculation of bonuses form part of a wider strategic initiative?
In this article, we look at the challenges and objectives of outsourcing the calculation of bonuses, which is less well-known than typical payroll outsourcing, but just as important in strategic terms.
1) CALCULATING ACCURATE BONUSES RIGHT ON SCHEDULE
The priority issue for companies is calculating incentive compensation for their teams with as few errors as possible. This challenge can be addressed by automating certain low-added value tasks, which are often time-consuming and repetitive.
a) A more automated system enables frequent checks
Outsourcing bonus calculations presents a number of advantages for companies. First of all, delegating the calculation of incentive compensation can provide access to a more automated system, if the service provider selected offers specially adapted tools for the task.
These tools can vary in their level of flexibility, and can enable substantial time savings during the calculation process compared to Excel, in which many elements must be processed “by hand.”
An automated system will enable you to concentrate your efforts on the verification of input and output data, and therefore on improving the quality of data instead of doing and redoing the same repetitive tasks: copy-pasting tabs, renaming, rewriting formulae to fit with new settings, etc.
b) Specially adjusted tools are more responsive
The calculation of bonuses can vary on a fairly regular basis, depending on:
- modifications made to incentive compensation plans by sales management
- changes to the company management structure
- changes to HR rules
As such, for the company, gaining access to a more automated and dynamic process can represent a powerful asset.
In large companies, the modification of a bonus calculation rule often requires heavy (and costly) IT modifications. Tools are generally hard-coded, making it difficult to integrate new developments. In addition, the company will need to mobilise other resources, notably including technical project managers, to pinpoint and oversee transformation efforts.
It’s already been observed that the implementation of obligatory annual negotiations (NAO) at a major insurance company can require over 200 man-hours of IT development. The cost of the IT setup, or of simply modifying the processing criteria for a project of this scale, can quickly become gargantuan.
In the pharmaceutical sector, for example, the intrinsic rules for bonus calculations may well change every quarter, notably due to the industry’s level of maturity compared to available market data. This is why the majority of laboratories calculate incentive compensation for all their staff using specially adapted tools, which automate the calculation chain.
The use of pre-adjusted tools enables any update of the calculation rules to be carried out in just a few days. This increased level of responsiveness, offered by certain expert compensation companies, results directly from the nature of the tools they use.
c) Ensuring adherence to your scheduling and timing requirements in terms of internal communications
Proper verification of bonus calculations is essential, and represents an aspect of the process that’s as essential as the initial calculations themselves. As such, verification solutions are found both in calculation systems which are highly automated, as well as in those which are less so (or not at all).
The time saved via automated calculation enables more time to be spent on thorough verification. These checks are extremely important in order to avoid the two greatest pitfalls in incentive compensation: paying incorrect amounts and paying employees their bonuses late.
d) Outsourcing bonus calculations: gains in quality and credibility to reassure your staff
Companies are often judged by their staff on their ability to pay fixed salaries and incentive compensation on time - meaning their credibility is at stake.
They are also judged on their ability to communicate the correct amount of incentive compensation, in adherence with the conditions set prior to the outset of the performance period. Setting and honouring a reasonable payment date, and explaining the factors used to calculate incentive compensation in a clear and transparent manner are essential steps, which Primeum has been helping clients put in place for several years.
Adhering to these criteria is a determining factor in maintaining trust-based relationships between staff and management. Bringing in an external service provider with specialist experience in the field of compensation is a sure-fire way to reassure those involved in the calculation of bonuses within your company - who may sometimes struggle with the technical issues encountered in the management of incentive compensation. These questions, which are often raised by employees who are worried and eager to clearly understand how their incentive compensation is calculated, shouldn’t be left unanswered.
2) REDUCING YOUR HR TEAMS’ INTERNAL WORKLOAD
a) Do away with a recurring task of low added value for your teams
The outsourcing of bonus calculation offers the further advantage of reducing the burden on your HR teams: their working hours can be dedicated to higher-added value tasks, by opting to delegate the recurring task of bonus calculations to an external service provider. In this way, your teams can focus their efforts on the company’s core activity, and contribute to developing your business without wasting precious time and energy on the calculation of incentive compensation.
b) Levels out the workload peaks and troughs linked to the seasonality of bonus calculations.
The period leading up to the bonus calculation process can often be a tense and stressful time for HR staff, who are already busy with their other responsibilities in day-to-day workforce management. By delegating the task of bonus calculations and ironing out these stressful peak workload periods, you can avoid bringing any unnecessary tension upon your HR teams.
3) PROVIDING ACCESS TO SPECIALIST EXPERTISE, ENABLING OPTIMISATION THROUGHOUT THE CALCULATION PROCESS
a) Supporting HR teams in the optimisation of management processes
Support from a service provider can even go beyond straightforward technical assistance with the calculation of incentive compensation. An operator with experience in working with complex calculation processes, providing fresh, expert eyes on the subject can help you to optimise your current compensation management rules.
The complexity inherent in each of the HR rules can even lead to demotivation in certain employees, who learn to “skirt” these rules to one extent or another.
For example, during our analysis of one client’s HR rules for compensation schemes, we found that the staff receiving the highest bonuses were also the most absent. A rule that’s badly designed or incorrectly applied can weaken staff motivation and even lead to you paying bonuses that don't reflect the employee’s performance.
We seek to ensure our clients don't make mistakes when setting, applying and checking their HR management processes. In order to avoid this kind of situation, we carry out an audit of your processing methods and provide and action plan to optimise them in accordance with your internal HR policies.
b) Ensuring continuous improvement in the calculation process
The quality of HR data is one of the key challenges in the calculation of incentive compensation. In a large company, with sales reps active across a wide area, it can be difficult to stay in touch with what’s happening in real time at various locations. As such, when an employee is on sick leave, it can sometimes happen that the HR head office doesn’t find out about it until two weeks after the employee’s absence began.
This lack of immediacy in the transfer of information regarding staff attendance can lead to a number of complications, notably regarding the calculation of bonuses. Indeed, the central office will need to make new calculations the next month in order to apply the corrections. However, there are smart ways to shorten the time it takes to pass along HR information, and thereby to simplify the procedures applied. These procedures become more dynamic, so that information is passed on more rapidly to the department in charge of bonus calculations. The implementation of a workflow can be a relatively simple process, and enables you to distinguish, before the incentive compensation calculation process begins, between active and inactive employees. The sorting process will identify inactive staff, so they can be processed separately using a method that takes their situation into account and avoid having to recalculate their incentive compensation package down the road.
Our expert teams provide this assistance to our clients, allowing them to take a step back so they can develop efficient calculation processes. We place great importance on the way in which we seek out relevant calculation data: for example, when a big insurance company was gathering HR data from over 32 different servers, we helped them simplify their system for harvesting the data needed for bonus calculations. The operational audit of the calculation process being applied, and the formulation of recommendations requiring broad or small-scale changes, are part of the continuous improvement process that we systematically offer to our clients.
4) MONITORING TRACEABILITY AND CONFORMITY OF EACH CALCULATION OVER TIME
a) Year-round access to specialist expertise: your bonus calculations manager being absent is no longer a problem
When your bonus calculations manager or expert is off work or on sick leave, it’s important that incentive compensation calculations still get done. Otherwise, any time the one person capable of doing them is absent, the company can quickly find itself in a sticky situation. Outsourcing is the perfect solution for avoiding the risk that comes with putting all your calculation eggs in one manager’s basket. By outsourcing bonus calculations to an external service provider, you’re guaranteed year-round access to experts with the ability to manage your calculation process without interruptions.
b) Conformity and security in the calculation process: obligatory retention of calculation data (input and output) by the service provider
French law requires that bonus calculation materials be kept on file for a minimum of 5 years. Any service provider overseeing the calculation process is obliged to keep hold of the calculation data they use in accordance with the law. The client, for their part, retains possession of the various HR data processed, which they can then re-process as they wish.
The service provider is duty-bound to apply safeguards in order to ensure that bonus calculation data is saved on secure servers, allowing frequent back-ups given its sensitive nature.
Finally, the service provider must pay particular attention to securing the entire calculation process, notably in the management of changelogs. Carrying out bonus calculations using an Excel sheet is entirely insufficient in this regard, and carries a number of risks. If, after the calculations have been finalized, an individual decides to reopen the file and delete or modify the content of a cell, nobody would ever know that any such modification had been made to a file compiled a year previously. You’d know that someone saved a modification, but would have no more details to go on, meaning that this process is not legally compliant.
