While some companies have been reluctant to outsource their compensation management, other organizations such as Allstate have decided to bring the outsourcing advantage in-house.
As a leading U.S.-based insurer, Northbrook, IL.-based Allstate Corp. faced the competitive pressures of a mature financial services and insurance marketplace. The resulting implications for its HR function included a need to reduce costs while upgrading talent in the compensation function. This required a reduction of non-strategic compensation processes and an increased, more consultative service to Allstate’s business units.
The company had already outsourced a number of its HR functions, according to Harriet Harty, Allstate’s director of compensation and leader of its compensation co-sourcing initiative.
“But we needed more specialized assistance to address our growing compensation needs,” Harty said. “These included managing market data, doing more rigorous, in-depth analysis, guiding overall compensation decisions, and playing a more strategic business-partnership role with the company.”
For Allstate, the solution came in the form of a promising new approach known as compensation management co-sourcing, which combines some of outsourcing’s transactional delegation with an important measure of internal control. Indeed, the outsourcing of various HR functions—from payroll to employee benefits—is a powerful change agent for companies. But for the compensation function, it’s often a different story. Compensation functions serve managers rather than the broader employee population; thus, companies are hesitant to turn these higher-level interactions over to an outsourcing vendor.
That’s why compensation management co-sourcing holds much potential for these organizations. Co-sourcing differs fundamentally from outsourcing. With outsourcing, employers shift straightforward transactional and administrative tasks from HR’s to-do list to an outside vendor. Co-sourcing’s goal is more ambitious: to create a more robust and efficient compensation function—within a single country, regionally, or across the globe—by partnering with a service provider able to augment internal resources any way they’re needed. “Co-sourcing would allow us to better leverage our existing compensation resources,” said Harty.
Allstate defined its need for support in compensation areas such as building an electronic data library from the results of up to 15 surveys a year; completing some 150 ad hoc pricings annually; and updating 300 Allstate benchmark jobs per year. Also included were market data analysis, senior-management presentations on salary management, structure recommendations, and program oversight and analysis.
Partnering with Mercer Human Resource Consulting, Allstate used Mercer’s ePRISM compensation-management and salary-planning tool at the core of the co-sourcing initiative. Its interface supported and enhanced the creation of a custom electronic survey library, data analysis, planning, pricing, and other compensation functions for the Allstate compensation team.
Companies that form co-sourcing partnerships can rely on their partners’ expertise and resources to supplement, complement, or replace internal staff to achieve the right balance of control and delegation in compensation management. It also enhances the function by leveraging efficient external resources that can scale up or down with organizational change; transfer knowledge from service provider to a compensation team (thus reducing any need to “staff up”); and provide technological expertise for existing compensation management systems as well as access additional technology as needed.
Co-sourcing services can be broadly segmented into four tiers—any or all of which may be included in a particular co-sourcing partnership and customized to meet an organization’s unique needs. While some services are one-time activities such as auditing existing compensation programs, others are ongoing such as annual salary survey participation, market pricing, and compensation planning. Here’s what the four tiers of compensation management co-sourcing are designed to address:
• Tier 1: Foundational support. Although different organizations pursue co-sourcing to achieve different goals, all can benefit from attending first to the operating model and infrastructure that serve as the foundation of the compensation function. As a first step to enhancing the function’s foundation, HR and compensation leaders need to work with a service provider to define the current and desired operating model.
Several questions can help an organization arrive at the right answers, for example: What is the mission of the compensation function? What are the function’s current processes, including data and work flows, policies and practices, and quality controls? What talent and technology are available to the function? How scalable are its resources? How does it hope to improve knowledge, competencies, and scalability?
The second step in strengthening the function’s foundation is to conduct a thorough program review. A co-sourcing partner can work with the organization to inventory all existing compensation programs and policies, identifying gaps between the current program design and a desired future state. Such a review would encompass the following:
—Strategic orientation: the role of each compensation element and its measure of success;
—Employee segmentation: appropriate categories of employees in terms of value creators and supporters, business units, and organizational levels;
—Market competitiveness: current positioning by employee segments and compensation element;
—Pay mix: preferred ratio of fixed/base pay to incentive/bonus opportunity at target and superior performance;
—Line of sight: strength of the relationship between performance measures and the degree of influence by the affected employees;
—Governance: how compensation decisions are made and by whom;
—Global variations: how compensation programs differ across geographies, titles, and pay levels.
The third component critical to the success of the function—and the one demanding the most specialized skills—is developing and maintaining fully functional, appropriate compensation management software.
• Tier 2: Transactional support. Once the compensation function has established the right operational and technological infrastructure, it can benefit from partnering with the right vendor to carry out its day-to-day activities such as market pricing, survey management, and job evaluation. These services threaten to consume or overwhelm internal resources. Through co-sourcing, they can be streamlined. There are four ways co-sourcing can help the function with transactional activities:
First, by configuring and managing complex analytic and reporting tools, the co-sourcing partner can simplify the delivery of many of the department’s key services. Second, a co-sourcing partner can offer centralized resources. Third, the function can take advantage of a co-sourcing partner’s investment in market data and other specialized knowledge. Fourth, the co-sourcing arrangement can provide scalable resources.
• Tier 3: Analytical support. It can be difficult, if not impossible, for the compensation function to focus on analytical work until there is a sound infrastructure in place and a solid process for handling day-to-day transactional responsibilities. Compensation management co-sourcing supports the transformation of internal compensation teams from purely transactional to more strategic functions in two ways: by ensuring that basic tasks are performed well and by lending analytical expertise to the organization.
An organization can leverage a provider’s global knowledge of best-practices research and advice on compensation issues and market trends. To obtain valuable analytical assistance with annual compensation planning, organizations might have their co-sourcing partners research and update salary-increase budgets, inflation, and relevant legislative changes; develop recommendations based on competitor and market information, overall pay philosophy and cost, salary-increase budgets, and adjustments to the base pay structure; model merit increases; and support the merit process with supplemental and/or on-site resources.
Finally, a co-sourcing partner can add tremendous value to management reporting by leveraging compensation management technology and expertise to improve the content and recommendations of the reports and significantly reduce the time involved in conducting the necessary analyses. For example, organizations may wish to receive monthly, quarterly, and annual reports from their co-sourcing partners on various employee segments, including market indices, FTE reports, total labor cost analysis, and pay relative to performance. Another advantage of co-sourcing: the analysis can be performed consistently across geographic borders to allow more consistent management of pay globally.
• Tier 4: Strategic support. As the co-sourcing partnership deepens, it can provide a measurable return on the organization’s compensation investment. Strategy support may be provided on a standalone project basis or as an ongoing engagement. It also can be provided at varying levels by geography or by business unit.
There are four key opportunities for co-sourcing support at the strategic level:
—Compensation philosophy and effectiveness. The right partner can augment a compensation function’s ability to develop an effective compensation philosophy
—Base pay program and policy design. Organizations can engage a co-sourcing partner to support the company’s business and compensation needs.
—Incentive plan design. A co-sourcing partner can work closely with a compensation function to assess the effectiveness of existing incentive plans and develop new plans needed to meet business objectives.
—Communication. Finally, a co-sourcing partner can help the compensation function meet its communication goals by establishing self-service, web-based portals accessible to all employees. Such tools can be personalized for each individual and serve as an integrated source for all compensation policies and processes.
In the case of Allstate, co-sourcing ultimately led to the deployment of a true consulting model for the insurer’s compensation function. This enabled the team to transcend legacy roles—such as survey participation and reactive response to client demands—and take on proactive roles. These include more detailed data analysis and total-compensation strategy development.
“We’ve made significant progress toward the business-partner role,” Allstate’s Harty said of the co-sourcing initiative. “Allstate’s business line staff is seeking the input and the engagement of the compensation team now, and we’ve restructured the compensation function to better support our business needs. We’ve also gained the ability to do more with less in terms of pricing more jobs, conducting more detailed analysis, and comprehensive compensation reviews in order to be much more strategic. We’re seeing continuous improvement and growth in the compensation team.”
Steven E. Gross is a worldwide partner with Mercer Human Resource Consulting. He can be reached at firstname.lastname@example.org or 215-982-4257; Thomas W. Jacob is a principal in the Human Capital Product Solutions business of Mercer and can be reached at email@example.com; Susan Haberman is a principal and head of the Chicago Performance, Measurement and Rewards business for Mercer and can be reached at firstname.lastname@example.org or 312-902-7569.