Why do companies consider more and more the outsourcing of the calculation and co-ordination of their incentive compensation ?

While the health crisis linked to the COVID-19 pandemic has required companies to adapt their incentive compensation systems, this also raises questions about their implementation in a context where:

• The budgetary constraints and traceability of calculations are intensifying;
• The ability to make accurate, timely calculations and to communicate them effectively can be challenged given the limited resources and the structural changes in bonus schemes decided on quickly following the events of recent weeks.

WHY IS OUTSOURCING A RESPONSE TO CURRENT BUDGETARY CONSTRAINTS?

Because the management of the calculation process is complex and costly

Calculating bonuses incurs visible costs often incurred by the recurring tasks involved in the incentive compensation calculation process:

• The calculation, adjustment, approval and communication of objectives;
• The calculation of performance and bonuses as well as management rules;
• The creation of progress reports and workflow management etc.

Because some additional costs cannot be anticipated

Structural changes to the rules during the cycle, as the current health context may require, and the management of many special cases may present additional costs that cannot be anticipated. These changes often give rise to:

• Miscalculations, requiring overpayments and underpayments to be processed;
• Problems in the receipt and reliability of source data;
• The management of back-ups, where these exist and aren’t too affected by short-time working, a mechanism which is greatly beneficial to companies in the current period.

Moreover, these actions, which are often managed partly manually or using generalist tools such as Excel, are by their very nature time-consuming and therefore costly.

Outsourcing the calculation to an external service provider is thus a solution to reduce the overall cost by reducing the load thanks to:

• A dedicated software suite allowing full automation of the calculation chain;
• Expertise in the management of such processes as well as the uncertainties inherent in the calculation of bonuses.

WHY DOES OUTSOURCING IMPROVE THE QUALITY OF DELIVERABLES?

Basically, outsourcing makes the calculation more reliable by enabling:

• A precise description of the entire computational process;
• Full automation of the different rules defined;
• An additional check of the calculations by an external actor.

In terms of form, multiple deliverables are built following each bonus calculation allowing:

• The approval of the calculation (Excel verification file, approval workflow, dashboard and electronic signature etc.);
• Communication with the teams (secure web platform, direct mail campaign and Excel summary files etc.);
• Sharing information with other departments (payroll files for the HR department and financial overview for the finance department etc.).

Only a dedicated solution that natively manages all these needs through a single interface can effectively fulfil this ambition and thus communicate all the progress reports in the desired format in a timely manner. Outsourcing is also a solution that allows a company to stick to its schedule, whatever its current situation and whatever the level of resources it is able to allocate to these tasks over a given period.

WHAT OPERATIONAL BENEFITS ARE ASSOCIATED WITH OUTSOURCING THE CALCULATION OF BONUSES?

As the management of recurring calculations is handled by an external service provider, the most immediate benefit of outsourcing is that the teams initially in charge of this calculation can be refocused on projects with higher added value for the company.

Some examples include:

• Help with decision-making involving adjustments to the incentive compensation system to be carried out between each performance cycle, during chaotic periods such as the one we are currently experiencing;
• Monitoring the activity of teams;
• Assistance with the creation and monitoring of the action plan requested of them etc.

In addition, there are technical benefits that cannot be fully provided by generalist calculation tools. For example, it is possible to significantly increase the frequency of performance and bonus management with teams thanks to a software suite designed to automatically process this process, without neglecting the quality controls that are essential after each bonus calculation. This frequency of management is by its very nature a central issue, but will be all the more critical in order to mobilise teams as soon as they can actually ease out of lockdown.

HOW DOES OUTSOURCING ENABLE COMPLIANCE WITH SAFETY AND TRACEABILITY CONSTRAINTS?

The current health situation also illustrates the importance of the traceability of calculations and bonuses distributed. Indeed, many companies choose to guarantee bonuses during the lockdown period.

When calculating this guarantee, it is often necessary to determine the average bonus over the past 12 months for each beneficiary, which requires:

• Detailed knowledge of these bonuses distributed individually;
• A description of the nature of it (quantitative and qualitative bonuses, challenges and competitions etc.);
• Knowledge of the management rules applied to past cycles.

This approach thus gives a concrete example of the interest of reliable archiving and traceability of the calculations made. The external service provider can then provide invaluable help to perform quickly and calmly this recovery of historical information and this ad hoc calculation.