I received this email and would like to share it. It’s simple and seems to be effective. Enjoy!
I received this email and would like to share it. It’s simple and seems to be effective. Enjoy!
Compensation programs are a group of compensation plans that an employee is eligible based on the employee groupings by the company. In essence, the use of compensation program is another way that ECM uses to simplify management of compensation.
We would definitely need to introduce the concept of compensation plans but before that we need to introduce the concept of compensation programs. We will start with the happy path and then dwell into the exceptions in later chapters.
In this chapter, we will define all the core objects that are required to setup ECM. The core objects are compensation areas, compensation program and compensation plans. These components will need to align with the strategy of the company with respect to compensation management. They also need to be defined. Once they are defined, we can then go ahead with more transactional part of ECM.
Compensation Area is an SAP ECM specific term. It is the starting point for compensation administration in ECM. Compensation area groups employees that follow the same compensation process with respect to an area. Compensation area operates on a higher level and hence it is recommended to keep them generic. Eligibility groupings are available later for more specific groupings. Compensation area on a country seems to be the logical choice to group people for this.
Figure 5.1 Compensation Areas
If the employee is in the US, they will have the compensation area of ‘10’ and all the plans that get assigned to this compensation area will be available to the employee. Within SAP 10 is the country code for US. It is very important to note the difference between available and eligibility. If the compensation plan for the US is ‘Annual bonus plan US’, each and every employee in the US can have it but the eligibility criteria on the Annual bonus plan drives who is really eligibility for the plan. Anyone outside of US can’t have this plan.
Figure 5.2 Compensation area assignment
Compensation area can be defined based on other criteria. The list below is a comprehensive list of the fields available. It includes the fields that form the core structures in SAP viz. personnel structure, enterprise structure, organizational structure, pay structure.
Figure 5.3 Compensation area options
The definition for compensation area will also drive the definition of eligibility groupings and guideline groupings later on. They have to be properly aligned for overall eligibility to work.
If this is not sufficient to create the appropriate compensation areas, then ECM also provides with BAdI HRECM00_CARGP. You can use it to create your own compensation areas assignment. It is important to note that you could use the standard feature described above in conjunction with the BAdI. Though once you activate the BAdI, the system will always execute the BAdI, you can still call the standard feature when you want to do that and you can define your logic when you want to do that.
An employee will have a default compensation area they belong to but it is also possible for the employees to belong to multiple compensation areas. For e.g. A US executive will belong to compensation area 10 and also compensation area Z1 (global compensation).
Compensation plan is the key entity and means the same in business terms as well as ECM. Compensation plans like Annual Merit Increase, Annual Bonus plan, etc… are very common. There are also other plans like stock options plan for senior executives. Each plan has it’s own eligibility requirements and award guidelines.
Compensation program grouping
Compensation program grouping defines the employee groupings that need to be worked on. In this step, you maintain first compensation program groupings. Such groupings, which are used in infotype Compensation Program (0758), enable you, in combination with second compensation program groupings, to differentiate employees for compensation purposes on the basis of various attributes. By doing so, you determine whether or not employees belonging to different combinations are eligible for different compensation plans.
Compensation programs of a company need to be mapped within ECM. ECM requires each parameter to be captured and configured into the system for optimum results. There is a lot of work that needs to be done upfront for optimum results. The system is very flexible yet rigid in certain requirements. Though you can have many compensation programs as you want, you have to clearly define them before you can use them in ECM.
It’s important to clearly define the compensation plans. They should line up with the company’s compensation plans. The compensation plans are differentiated based on whether they are one time payments like bonuses or whether they increase the base pay. There are other types of non-monetary plans like stock option plans. The reason for the different kinds of plans is to motivate people at different levels and also to get their commitment for a longer period of time using vesting schedules.
There is a review period when the employees are evaluated against the compensation plans they are eligible for and are awarded their fair share.
Company’s compensation plan
It’s always a good idea to align the SAP system with the existing company’s plan since it will ensure that there is as little confusion as possible. Also it’s a good idea of companies to re-engineer their processes sometime before initiating an ECM project. There are instances where re-engineering is coupled with new system. In this case, it is very important to manage scope changes and scope creeps.
There are 4 types of compensation plans. They are:
Each compensation plan is created in the system along with their types.
Figure 5.4 Compensation Plan
There are different compensation plans with different eligibility requirements, guideline requirements etc… These parameters are attached with the configuration:
Figure 5.5 Compensation Plan attributes assignment
Each plan has eligibility and guideline variants. They are optional. If they are not attached the macro eligibility is used for eligibility and no guidelines for awards are provided. Also rounding rules are optional. Integration with PCP is also optional.
Compensation plans pretty much remain constant e.g. Annual Merit increase, Annual Bonus etc.. but the eligibility, guidelines, awards etc… can change over period of time. This can be accomplished by changing these parameters for different periods.
Figure 5.6 Changing the compensation attributes from 01/01/2009
In the above scenario, we delimit the existing date range and created a new date range from 01/01/2009 and have added a new guideline and rounding rule.
The calculation base is an important attribute of the plan since it’s used when there is a calculation involved. If the merit increase is 3% than the question is 3% of what amount. The calculation base is normally the salary of the employee. ECM provides the flexibility to choose the calculated wage type that you need. In certain cases in the US, you might want to use the ASAL as the calculation base or CSAL as the base.
Figure 5.7 Calculation base
The compensation component provides the wage type that needs to be updated for a specific compensation plan in a specific country. In the screen shot above we have taken the country grouping for MOLGA=10 (US).
The calculation base is ASAL (annual salary) in this case but there are other options that are available depending on the requirement.
ASAL includes the basic salary and CSAL includes basic salary and bonus. They are setup as a part of base wage type setting in personnel administration.
In certain case the calculation base is not a straight forward calculated wage type that we can use. E.g. the calculation base needs to be picked from other infotype. This could be one of the reason to use the BAdI.
Figure 5.8 Calculation base BAdI
Once the compensation area has been decided, the next step begin with the macro eligibility of an employee for a compensation plan. Normally, you would have a broad grouping of employees viz. Executives, salaried, union, that are provided with different compensation plans. The compensation program helps define the compensation plans for that high level of grouping. The compensation program of Salaried employees would include annual merit increase and annual bonus plan. The compensation program of the executive employees would include stock options, annual merit increase and annual bonus plan.
Each employee is grouped using the compensation program assignments. There are 2 such groupings (similar to the older benefits module). Each compensation program is assigned within a compensation area.
In the US, we will create the first grouping that includes all the employees and second grouping that groups the executives and non-executives
Figure 5.9 First Compensation Grouping
The first compensation program grouping is defined based on the compensation areas. The compensation areas have already been grouped by employees in the US(Molga “10”) and the are being defined “All”. We can do this consistently for all the other countries in case of a global implementation.
Figure 5.10 First compensation grouping assignment
In case the first grouping requirements can’t be met with the feature, ECM provides BAdI HRECM00_CP1GP that can be customized. It’s highly unlikely that we would need to use BAdI for such a high level grouping.
Figure 5.11 First compensation grouping BAdI
The second compensation grouping setup is the same as the first. We can drill down on more level and differentiate between Executives and other.
Figure 5.12 Second compensation program grouping
Again, we start with the compensation area that defines the US employees and then create another level of grouping based on the jobs.
Figure 5.13 Second compensation program grouping assignment
There is also the BAdI available for second compensation program grouping if we have very specific criteria that are not available in the feature. For example: if custom infotype is created to define different groups of people.
If the US Executives have a compensation program that includes Executive bonus, restricted stock, Salary increase and Stock options, then ECM compensation program will be defined as follows:
Figure 5.14 Compensation program for Executives
For all the other US employees, regular bonus and Fixed salary adjustments are the only type of compensation plans available.
Figure 5.15 Compensation programs for others
The employee’s Compensation program is stored on infotype 0758. Once the groupings have been setup, the next step is to create the compensation program infotype for each employee. Transaction PECM_CREATE_0758 is executed. The same program is executed using the R/3 or the portal.
Figure 5.16 Creating compensation program infotype
If you leave the compensation area/ 1st program grouping/ 2nd program grouping blank, the system will check the feature and populate the record with one record. Other applicable records need to be created manually.
The record created will be like the one given below.
Figure 5.17 Compensation program record for the employee
Any employee can have multiple compensation program record. It means that the employee can be a part of different compensation programs. Though only one can be defaulted, you can manually create records for the other compensation programs.
Compensation review defines the review cycle in which a group of plans are reviewed together. It can be defined for a specific period of time or can be done anytime.
Review Period: This period is when the compensation review can take place. This will in turn drive what is available for the MSS selection.
Selection Period: The employees are selected from this period. The employees who are hired after 12/31/2007 will not be included.
Figure 5.18 Compensation Review configuration
This means that this compensation review will only be available for the period of 01/01/2008 to 02/29/2008. After that it will not be available to the manager.
Only those compensation reviews will be available that are either Anytime review or the current system date in the Review period.
Figure 5.19 How does compensation plan review dates impact the MSS?
Compensation review items are the actual items that the employee is reviewed on. A compensation review item is defined by a unique combination of compensation plan and compensation review.
Figure 5.20 Defining Compensation Review Item.
In the above example, the review item is Salary review 2008 that is for salary adjustment for the review period of 2008. In case of anytime review, there would not be a need to have yearly review items. Every year a new review item has to be created since the review period is different and needs to be added. The plan can continue to remain the same.
Figure 5.21 Configuration of Compensation Review Item
This is one of the most important configurations for the compensation. It addresses:
Effective date of the award: There are different ways to default it. One is to have a fixed date, second is to have an anniversary date that is picked up from the IT 0041 –Date specification. We can define the range of anniversary dates that can be considered for review.
Eligibility date: The eligibility key date is the key date for evaluating the eligibility of an employee or a group of employees. The evaluation period begin date is used for evaluation of eligibility and the period is used for calculating the pro-ration of the payout amount.
Threshold period: The threshold period field specifies the required minimum length of the program period for an employee to be macro eligible.
The guideline key date: This date determines the effective date for evaluating the guidelines. It can be a fixed date or the current effective date or the program period date. The program period date enables you to set the guideline key date as the end date of a program period, that is, the timeframe needed for calculating a prorated amount and for which an employee is macro eligible for a compensation plan. Use this option to prorate over two periods when, for example, the employee has held two different positions and is eligible for the same compensation plan but with different guideline percentages.
The other key date includes calculation base key date. This date can be kept anything but normally it can be the last effective date of the period. This will ensure that all the salary changes for that year are accounted for. The currency conversion key date is the date on which the currency conversions will be performed.
The processing and activation parameters define the budget type, reason for change and the unit of time.
The types of message defines whether there should be an error message or warning message or information message when there is budget overrun, a guideline overrun or when we are going to make changes to an inactive employee.
Figure 5.22 Budget and Award links
The effective date on the MSS is from the configuration of effective date in the compensation review item.
If the effective date can’t be determined by ‘Fixed date’ or ‘Anniversay date’ then we would need to use the BAdI. For example: if the effective date needs to be first day of the pay period after February.
Figure 5.23 Business add-in to determine the effective date
If there is stock splits that are planned and can’t be handled using the standard stock split mechanism, the BAdI will need to be used.
Figure 5.24 Business add-in to determine stock units
This section has covered the core aspect of compensation programs. We have covered ECM-specific compensation area, compensation plans and compensation programs. It is important to note that these components are a part of the bigger picture. As we go through the subsequent chapters, these components will fit in.
Budgeting is a very useful though optional functionality for compensation management. Budgeting helps in managing and distributing the compensation money across the organization. The compensation specialists compile data, run through different what-if scenarios to come with a budget for a compensation plan. Traditionally, spreadsheets have been used for most of the work but SAP also provides Personnel Cost Planning module to facilitate this process sometimes called funding a plan. Once the funds are approved, they become budget and are loaded in to the system. If there are employee movements after the budget has been approved, the budgets can be reassigned even after they have been released.
These options are provided using the Compensation Budgeting Portal option of Budget maintenance. The compensation specialist would have access to this.
Figure 4.34 Initial Budgeting Screen
By pressing the ‘Create’ button we can start the process of creating a new budget. We can select the budget type, budget period, top organizational unit to begin the budget from and the depth till which the budget should be created. The column ‘Units’ will be used in case we are use stock based rewards. Once all the values are entered and we click save, the budget units are created. Budget units are SAP objects that make budgeting possible. Each budget directly finances the organizational unit it is connected to and any organizational unit under it that doesn’t have a budget unit. In the simplest form, one budget unit can be assigned to the top most organizational unit and the rest of the organizational units will get their allocations deducted from the big pot. If we create budget for each of the organizational unit, we will have the ability to assign budgets to each organizational unit and the hierarchy created automatically forms the budget hierarchy.
Figure 4.35 Creating Budgets
There are 3 steps in budget maintenance
V Creating the budget structure by copying from existing organization structure
Modifying the budget structure
Populating the budget amounts
It’s very easy to create the budget structure. The following information is needed:
Budget type- We have an Annual bonus budget that is going to be used in the year 2008 for the performance in the year 2007.
Budget period- This needs to be clear. It refers to the year when the budget will be used. The plan’s other values like eligibility and awards would be applicable for 2007.
Org unitID- This refers to the highest level of org unit that we want to budget from. If the org unit ID is known, it can be entered otherwise help can be used to search for the org unit ID.
Depth- This is important to understand the impact. If we keep it zero, budget structure will be created for each of the org units in the hierarchy. If we keep it 3, then it will create budget units up to 3 levels from the highest level This is preferred in some companies where the managers at a lower level in the hierarchy don’t have a separate budget but align to a bigger pool from senior managers.
Unit- This is applicable with Long term incentives.
Figure 4.36 Create a budget structure
The output is a complete budget structure financing the organizational structure. The system allows you to add the total budget. The distributable budget at a org unit level is calculated by total budget at the org unit level less the total budget under it’s hierarchy. The budget unit 50039103 is financing the Org unit 00000300 Executive Board-USA. The budgeting works bottom-up. You assign the budget to the lower level budget unit.
Figure 4.37 Budget structure financing the Organizational structure
The budget structure can be modified where we can create/ delete budget units or add/ remove financing relationships.
We can add more budget units to the existing structure. Select the budget unit under which you want to add a sub-budget unit • click ‘Create’ • Provide the name and abbreviation of the budget unit • click ‘Save’. The budget unit will get added and it’s a good idea to click ‘Collapse all’ and then reopen the structure.
Figure 4.38 Modify budget structure to add budget unit
To move another budget unit under ‘Support Service’ budget unit, you have to first ‘Delete Assignment’ and then ‘Assign Budget’ to the ‘Support Service’
Figure 4.39 Reassign budget
This maintenance helps in creating different budget structure than an existing organizational structure. Though it’s not recommended, it might come in handy in case of exceptions.
When creating a org structure automatically, one budget unit is created for each and every org unit. It might not be required in certain cases. Multiple org units can be attached to one budget unit.
Note: Saving the changes
You will always have to click save that is on the top left to save any changes you make to the structure. Though not very intuitive, any change the you see on the portal screen is not committed till you click that save button. It’s like the master save button for any budget structure changes.
Figure 4.40 Assigning multiple org units to one budget unit
The organizational unit of Hospitality and Operations is being financed by the one budget unit of Operations.
Once we have created the budget hierarchy, we can start assigning the budget amounts. You can click on any budget unit and add the budget amounts.
There are multiple ways of adding the budget amounts.
V Manually add the budget amounts using the Portal
Automatically transfer budget amounts from PCP
Figure 4.41 Different options to update the budget amounts
Manually add the budget amounts using the portal
The manual process can work in 2 ways. Each individual manager can enter their own budgets and then we can hit roll-up on the top-level budget unit to create the overall budget.
Figure 4.42 Manually entering the budget amount
The compensation specialist can do different scenario planning using Personnel Cost Planning. PCP is a totally different topic by itself but has this link with ECM to update the budget. There is ‘Import PCP data” option.
Figure 4.43 Using Import PCP data to update the budget amounts
There is also a custom option. It provides a BAdI for companies to write their own custom logic to populate the budget structures.
Using Personnel Cost Planning
Assigning the budget amounts takes place using the ‘Budget Details’ tab. We can import it from PCP, use custom import using the BAdI, Roll-up values or change the existing values with a percentage change.
Figure 4.44 Assign budget amounts
Note: Budgeting in R/3
Though not recommended, you can do Budget maintenance through R/3 too. You can use the transactions HRCMP0011, HRCMP0012 and HRCMP0013 to create, change and display budget structures and budget amounts.
Once the budget amounts have been assigned and before the managers start awarding their people, it’s required that the budget be checked for consistency and then released.
Figure 4.45 Check & Release the budget
Releasing the budget
It’s important to release the budget before allowing the managers to start awarding. If the budget is not released and the managers start awarding then it will cause inconsistency in the database and it’s very difficult to fix the problem. By default, the system doesn’t stop managers from awarding but does give a warning message stating that there is no budget assignment.
When we try to release budget just for the ‘Ft Worth Sales’, the system gives a message that it can’t be done and the entire budget structure has to be released. In our case we have to release it from the Executive Board-US.
Figure 4.46 Releasing the budget for entire structure only
The budget can be reset to planning if the money has not yet been distributed.
Figure 4.47 Reset the budget to planning again
The Budget unit ID 50039053 has been reset along with the budget structure under it.
There are instances when an employee might move from one organization to another before or after the award has been assigned but before it’s been paid out. In this case, it still possible to re-assign the money from one organizational unit to another. This is a requirement in many companies so that the manager of the organizational unit have their budgets reflected correctly. The sending manager gives up the budget for that employee and the receiving manager gets the budget. This helps in ensuring that the receiving manager doesn’t run short of money due to an additional employee under their hierarchy. At the same time, the sending manager doesn’t have extra money since there is one less employee under them.
Figure 4.48 Budget reassignment
Figure 4.49 Budget reassignment process
The budget reassignment process is a 4 step process. First we chose the sending org unit, then we chose the receiving org unit, then we enter the amount that needs to be reassigned, then we review and approve the change.
We will first select the organizational unit (not the budget unit) that the transferring employee belongs to currently. Then we click ‘Next Step’
Figure 4.50 Selecting the sending organizational unit
We will now select the receiving organizational unit that the employee will belong to. Click ‘next step’
Figure 4.51 Selecting the receiving organizational unit
You would then assign the new budget amounts and click ‘Reassign’. You can reassign existing budget or spent budget.
Figure 4.52 Reassign budget
Finally you will see the change that can be saved by click ‘Save’ on the top.
Figure 4.53 Reviewing the change of the budget
All this is happening in the front-end but there are some settings that need to be configured before all these can happen.
In this section we will review the budget configuration. The budget configuration needs to be reviewed every year to ensure that the right budget period is available to carry out the compensation plans.
Figure 4.54 Budgeting Configuration
The budgeting configuration has limited options. Budgeting is more data intensive than configuration intensive. It also provides an add-in to initialize budget values.
This is important to convert data into single reference currency. It is useful when the budget are managed in different currencies but requires conversion into single currency viz currency of corporate HQ. At any given point in time there can only be single reference currency for compensation management.
Figure 4.55 Reference currency
Budget types allow allocation of different budgets to the compensation programs. They are monetary or units based and they might be available for allocation or not. When money has to be distributed, it’s assigned as ‘Monetary Budget”. When number of stocks, options etc… has to be distributed, we will not check this option. When we are ready to start allocation of budget amount/ numbers, ‘Allocation” flag has to be checked. Different budgets are created for different plans. One budget can be assigned to multiple plans but one plan can only be assigned to one budget.
Figure 4.56 Budget types
Global Impact of languages:
The budget types can be translated in multiple languages so that the same can be used in multiple languages. This allows the same type of budget to be used in multiple countries easily.
Figure 4.57 Budget type description in different languages
The critical setting for budget is to setup the budget period. This period defines the period for which a budget is spent. It’s setup in conjunction with the compensation plan and the budget type.
Figure 4.58 Budget Periods
The budget period is the period during which you distribute the salary increases or distribute the bonus/shares.
The key date refers to the date on which you want currency conversion to take place in case you have budgets in multiple currencies. If it’s left blank then the currency conversion will take place when you create the budget units.
System Switches for budgeting
There are 2 system switches for budgeting that is applicable across the system and have to be decided irrespective of compensation plans.
Figure 4.59 System switches for budgeting
VI HRECM- BDGRA- Reassignment of budget allowed after the budget has been spent.
In this field, you determine whether you can reassign budgets or budget amounts.
|‘ ‘ (empty)||If this field is empty, the system checks if any part of this budget has already been spent. If so, you cannot reassign this budget.|
|‘X’||If this field is checked, this means that you can reassign this budget, even if part of it has already been spent.|
VII PCOMP-MGBUD- Budget of line manager. If the budget of the line manager is assigned to org units they belong to
|‘ ‘ (empty)||The budget of the line manager’s organizational unit is used. If there is no budget, the budget of the next highest organizational unit (for which a budget exists), is used. That is, the line manager of the organizational unit must be paid from the same budget as the other employees in the organizational unit.ExampleLine manager 1 executes compensation administration for line manager 2, who has a budget available for his/her organizational unit. The budget for the adjustment amount comes from the organizational unit of line manager 2; that is, budget 2.|
|‘X’||The budget of the next highest organizational unit (for which a budget is available) is used. In other words, the line manager of an organizational unit is paid from a different budget to the other employees in the organizational unit.ExampleLine manager 1 executes compensation administration for line manager 2, who has a budget available for his/her organizational unit. The budget for the adjustment amount comes from line manager 1’s organizational unit; that is, budget 1.|
Business Add-Ins to enable budget load
ECM also provides for business add-ins to upload your enterprise’s initial budget values from another source (for example, spreadsheet or database), into the Budget Values infotype (1520). The values can be amounts for monetary budgets or numbers for stock based budgets.
You need to add your own code changes in order to upload these budget values.
Figure 4.60 BAdI for initializing budget values
The import parameters defines the budget that needs to be updated. The export parameters define the new budget values for the budget.
|begda||Begin date of budget|
|endda||End date of budget|
|kcurr||Monetary budget indicator|
|budot||Object type of budget unit, usually ‘BU’|
|budid||Budget unit id|
|oldam||Old budget amount|
|oldcu||Old budget currency|
|oldno||Old budget number|
|oldsu||Old budget stock unit|
|newam||New budget amount|
|newcu||New budget currency|
|newno||New budget number|
|newsu||New budget stock unit|
If parameter kcurr is set to ‘X’, this is a monetary budget. Therefore you can only return an amount and a currency. If a number or stock unit is returned, SAP will generate an error.
If parameter kcurr is set to ‘ ‘, then it is a non-monetary budget and you can only return a number and a stock unit. If an amount or stock unit is returned, SAP will generate an error. When returning an amount or number, you must also return the currency and the stock unit respectively.
It’s expected that we would use the portal to do everything in ECM. But the underlying structure that’s been used for budgeting is the same one that was used for the old compensation management, we could use R/3 functions for budgeting. This is not the case for Job pricing where it’s not really possible to use R/3 effectively.
In case you want to manage some aspects of budgeting from R/3, use can use the following transaction PECM_GENERATE_BUDGET
Figure 4.61 Creating budget in R/3
We can also use the Transaction PECM_INIT_BUDGET, to initialize the budget from Personnel cost planning.
Figure 4.62 Getting budgets from Personnel Cost Planning
We can use more detailed selection to upload from Personnel Cost Planning.
Figure 4.63 Using different parameters to get the right PCP plan
We can Transaction PECM_DISPLAY_BUDGETS to display the status of the budget planned and budget used.
Figure 4.64 Displaying the budget units with budget & utilization reporting
Sometimes its more helpful to view the budget structure along with the organizational structure they are financing.
Figure 4.65 Displaying the budget units with the attached org units along with budget and utilization.
We can use the Transaction PECM_CHK_BUDGET, to check and release the budget.
Figure 4.66 Checking and releasing budgets from R/3
We can use the Transaction PECM_CONV_BDG_STKUN, to convert the stock units e.g. the conversion might be triggered due to stock split in the company.
Figure 4.67 Converting budget from old stock units to new ones.
In this chapter we covered the different aspects of budgeting. Budgeting is a key process. We reviewed different steps in managing the budget and configuration for budgeting. We also reviewed the flexibility in terms of currencies supported by budgeting.
Budgeting is to make sure that we are within the bounds of what an organization can afford.
The objective of this chapter is to help in funding a compensation plan, creating a budget structure, uploading budget values, understanding the underlying configuration options, working on the exception.
Budgeting is an important part of compensation management. Though it’s an optional thing to have a budget for a plan, it will most certainly be used in most cases because of the value it brings. Budgeting helps in managing the overall money that is available for distribution. If a manager goes above the budget, the system itself might not allow it or at least gives the manager an alert that he/she is going over the budget.
There are different ways that the company might arrive at the budget. There is a lot of survey information that the company can avail themselves of. This market information will assist them in defining the target bonus. The target bonus is a bonus that an employee in a particular job might be eligible for if they have performed at par during the year.
Internally the company can review the payments they have made during the years and do some what-if scenario simulation. If they like one of the scenarios they could transfer that information directly as a budgeting amount.
It’s important to remember that the whole budgeting exercise depends on the organizational structure that the company has adopted. There is one organization structure within SAP that is used for multiple functions. The standard setting for this plan version is ‘01” by default. It is used also for workflow, reporting, position management, linking it to employee records etc…
Job pricing helps us determine the pay structure of each of job in the company. For example: HR manager is the company is paid $60,000 basic pay and $6,000 bonus but on analyzing the comparable job from the market survey’s the company might find that the market average is $70,000 basic pay and $10,000 bonus. Now the company can decide what it wants to do. Does it want to continue to lag the market with lower pay, does it want to make it at par or does it want to lead the market by substantially increasing the salary and bonus.
This whole process with its more detailed steps is laid out in the process figure below.
Figure 4.1 Job pricing process (SAP©)
We will describe each job pricing step in details. Compensation Specialist use Portal screens since it provides comprehensive functionality. It allows you to setup the Provider data, than import their data into the system, followed by matching the jobs in the system to the jobs of the provider, then aging the data to ensure relevancy, combining results from multiple vendors and create a composite result, then make salary structure changes if required.
Figure 4.2 Job pricing launcher
Jobs are created in the system based on the requirements of the company. Also the job descriptions are created to define the job. This is an important task but there is a lot of debate on the how to define the job. One school of thought is to define it to the detailed level that exactly lays down the duties and responsibilities of the job. Another school of thought is to define the job broadly. The reason is that we are in a dynamic environment and jobs should be broad enough to be adaptable to this evolving environment. We will leave this for the HR professionals to figure out. ECM provides the ability to capture it either way.
There are a lot of survey providers. There are survey providers that cater to specific industry or specific location or specific jobs etc… There are also larger providers that provide all kinds of survey. There is a cost associated for buying these surveys and hence it’s important to figure out which ones do you want to buy. There are also special incentives that the survey provider gives if your company participates in the survey itself.
ECM allows us to create and maintain as many survey providers as we want by selecting the ‘Provider Data” link.
Figure 4.3 Create and maintain salary survey providers
The provider data screen displays data as you start clicking on the provider. It builds information based on the selections.
Figure 4.4 More information on the Provider data screen
Survey provider provides you with the survey data. The data can include a lot of information including the date of the survey (normally the year of the survey), the jobs surveyed, and the aggregate pay information from the companies that participated in the survey at 10 percentile, 25 percentile, 50 percentile, 60 percentile, 75 percentile and 90 percentile.
Once we receive the data, we would need to decide which one is still relevant for us to upload into the system. We should validate the data at a high level to ensure that we are loading only what we need.
It requires some basic training to navigate the ECM Portal screens. There is a particular way in which the portal works and need to be understood. It’s very important to remember that till you don’t make the selections, you will not see the subsequent screens. The portal screen ‘builds” up dynamically as you make your selections.
Once we click on Import Data, we must select our Survey provider from our list. We can search all the survey providers by entering ‘*” in the Search for field and hit ‘Go”. All the available survey providers will be displayed and we can click on the one we want.
Figure 4.5 Import survey data selection screen.
Once you click on the left most columns that have the box, the next view adds into the frame. On selecting one of the providers, we will get another screen that will guide us through the subsequent steps.
Figure 4.6 Import salary data upload options
Each provider provides their own proprietary formats to upload the file. There are a couple of parameters to upload the file. We need 3 types of data files to import to complete the process. Before we can start uploading the survey information, we need to setup the Survey catalog and the survey job description.
The survey job catalog allows loading all the jobs related to the survey provider.
The Survey description allows loading all the job descriptions from the survey provider.
The survey market data allows loading all the market survey information from the survey provider.
Each of the file loading activity follows a process
Upload the file
Map the fields from the vendor to SAP
Import the data
Each survey has their job titles. They have to be deliberately matched to the job titles in the company. Same titles don’t guarantee that the jobs are the same. There has to be a due diligence that needs to be done before the mapping exercise is completed and approved. After the data import is complete, the jobs from company are matched to the jobs from the survey.
Figure 4.7 Job Matching
If you try to match the same job to multiple survey jobs, you could get the following error
Figure 4.8 Job matching error
In certain cases you might get a short dump when you try to un-match jobs. There is an SAP note Note 921064 that can help resolve the issue.
Once the jobs have been matched, then next step is to import the job market data. This step ensures that the data is correctly aligned to the actual jobs.
In certain cases, survey data upload doesn’t store the 60th percentile. There is an SAP note Note 886465 that can help resolve the issue.
Figure 4.9 Import Survey market data
Figure 4.10 Field assignments/ mapping
The final step is import the data.
If you had bought a survey a couple of years back and would like to use it today then you need to age it accordingly. The system allows for aging either by market movement rate or age factor.
Figure 4.11 Aging market data
Once you decide that you want to age by market movement rate, you enter the annual rate that the pay might have increased. If the initial survey is 4 years old and the market movement rate is 2%, then when you hit Age Market data, the salary will be adjusted by about 8%.
If you were to use age factor, it would increase the pay by that flat amount.
The data can be collected from various sources but then they can be weighed so that the final result reflects the calculations accurately. For example, you would have collected the base salary for a Sales employee from a survey with the same job and another one from a little less matching job. You can weigh the survey which had the same job higher than the one that had a less matching one. We can also provide the market movement data rate to make a more current comparison.
Figure 4.12 Weighing Data along with aging parameters
Once you decide the right weight, you can click on the Build composite result,
You can choose the appropriate data that you want to use to create a composite structure. In the case below, we have selected the 2 relevant surveys for our job to create a composite. You can also store this information using the ‘Save As’option.
Figure 4.13 Build composite results
This data gets store on the job infotype 1271.
Figure 4.14 Composite Results infotype
You will see that the 60th percentile row field incorrectly displays 0.00. If you see a similar thing, please review the SAP note 886465. This is related to the problem during the ‘Import Data’ step.
These allows us to compare the internal job with the composite result of the external survey. The job is evaluated with all the different percentile.
Figure 4.15 Compare internal and external compensation
In this way, the compensation specialists will determine the market gaps for the jobs they need to make the determination.
The philosophy of the company will drive the route it takes to bridge the gap. If it is lagging behind the market and choses to lag behind, it doesn’t need to take further action. But if it wants to be at par or even lead the market, it will need to make the determination of what the new structure needs to look like.
After reviewing the data, the company will identify the jobs that need to have the salary structures changed.
It is very important to remember that we have been doing job pricing for the job but when it comes to updating, it the salary structure. The salary structure could be used by multiple jobs. It could happen the inadvertently we might update the salary structure thinking we are updating it based on the job analysis, but effectively it might change it for other jobs that we didn’t intend to.
Figure 4.16 Salary adjustment with current salary structure
The composite market data is available.
Figure 4.17 Composite Market data
Now we have seen the existing structure and market structure. We have to decide on the planned structure. The final tab Planned Salary Structure will display a merged result.
Figure 4.18 Merged planned salary structure
Please note that it’s very important to remember that the selections that you make on the previous screen are considered for the proposal. In the market data on the previous screen, we had selected ‘Managers composite’and hence we get this result. If we select something else, the results will change.
Before save this as the new proposed structure, we can view many graphical representation of our data. We can compare the percentage different between the internal salary structure and planned salary structure. The bars show the difference. Where there are no bars, means that there is no difference from the existing internal pay structure.
Figure 4.19 Graphical representation of internal v/s planned salary structure
If needed, you can make arbitrary changes to the structure. This might be required for the purposes of rounding or aligning with company’s internal guidelines. We can overwrite the salary structure as in the case below where we have changed the planned structure for grade GRD01/ level 00 from 26400/38400/50400 to 27000/38400/51000.
Figure 4.20 Changing the proposed structure
We can save different planned salary structures in the system.
Figure 4.21 Saving the planned salary structure.
Once it’s decided that you have a winner, and then the system needs to be updated to reflect the new salary structure.
There is a twist here. All the data is in the production system but salary structure changes are normally done in the development system and transport to production. This is achieved by providing the RFC connectivity.
Once in Development environment, go to Personnel Management • Enterprise Compensation Management • Job Pricing • Pay Grades and Levels • Update Pay Grade Amounts from Market Data. This might need to be done by a configurator rather than the compensation specialist.
Enter all the requisite information and also the RFC destination of the production system from where the Salary Adjustment Version has been retrieved.
Figure 4.22 Update salary structure
Once the new salary structure is retrieved, it can be displayed before a transport is created.
Figure 4.23 Perform salary structure update and create the relevant transport
This ends the compensation specialist process for updating the salary structure. If an employee’s salary needs to be changed, then it will be a part of master data administration separately.
4.1.1. Receiving data from Market Surveys (is captured above)
4.1.2. Sending data for Market Surveys
Many companies take part in market surveys. To facilitate submitting the data for the salary survey, ECM provides extraction report. Execute transaction code PECM_QUERY_SURVEY
Figure 4.24 Sending salary survey data
The salary survey data can be extracted for a particular population using the selection criteria.
The compensation job group is very specific to ECM. It allows the selection to be limited by job groups. It is also important to note that the internal jobs should be mapped to the survey jobs before this report can be run.
Figure 4.25 Salary survey participation details.
SAP provides standard output. You might need to work with your vendor to validate if the output will work for them.
The standard pay categories that are delivered are Base pay, bonus and total compensation. In case you want to add other pay categories, you have to begin with the configuration:
Figure 4.26 Additional configuration for pay categories
Let’s add another pay category ‘Training Cost’. To do that, we will add it using ‘Define Additional Pay Categories’
Figure 4.27 Adding Pay category
We also need to define how we are going to calculate this field using ‘Define Pay Category attributes’
Figure 4.28 Training Cost attributes
The standard survey participation reports also needs to be modified if this information needs to be sent to the external vendors that provide relevant survey data.
Note: Compensation Job groups
Compensation job groups are used to group jobs based on the company’s need. This attribute is one of the newer attributes that is attached to the job using the infotype 5050. The job groups need to be configured first in the IMG for ECM at Job pricing • Define Compensation Job Groups
Figure 4.29 Define Compensation Job Groups
This job groups then need to be assigned to the appropriate jobs. We will use transaction code PP01 • Select a job • create ‘Compensation job groups’ • assign the job group
Figure 4.30 Assign compensation job group to the job
This information can then be used in the salary survey participation data selection criteria.
There is one more aspect that I want to cover here. This is related to Job Evaluation. Internal job evaluations were also very common some time back. Each job was evaluated internally and given points based on its importance. The information can still be captured using the infotype
Figure 4.31 Job evaluation
ECM provides multiple methods to do job evaluation. Different methods might to linked to different vendors.
The results can be points or evaluation group. An Evaluation group is a grouping of jobs that have a similar internal worth.
Figure 4.32 Job Evaluation groups
During an implementation, certain configurations can be realigned to fit the requirements. In the above case, the evaluation methods could be classified as Internal and External and the evaluation groups could be configured as vendors.
All the information of the Job Pricing is stored in tables that begin with T71JPR. There are 42 such tables.
Figure 4.33 Job Pricing tables
Time is of the essence. The efficacy of the reward depends highly on the timing of the reward.
The objective of this chapter is to highlight compensation management process. Why is compensation carried out during the year? How is compensation impacted by financial cycles? What are the dependencies with other business results on compensation? We will review this in details as a prelude to taking up the system perspective.
Compensation process timelines are pretty stable within a country. Most of the companies follow a similar timeline and reward their employees.
Compensation processes include the regular annual review process as well as ad-hoc year round processes like promotion, lateral move etc. that impact employee’s compensation.
Compensation processes and timelines are aligned to financial and employee performance review timelines
Normally the annual review process is aligned with the financial year of the company and the employee performance review. In theUS, most of the companies follow the January to December financial cycle. But in other countries, April to March cycle is common too. The alignment with the financial cycles helps in deciding the budget available for salary increase and bonuses for the employees. Depending on companies’ performance, the employee’s reward could be modified. In bigger companies, the department’s performance might be a factor too.
Some compensation processes have awards that are dependent on the employee performance appraisal. Normally the final appraisal ratings are given after the financial year is over.
Also, the world of business is ever changing and demands for certain people with skills keep changing. To accommodate the changing in compensation for certain skills; compensation department changes the compensation of certain positions to be competitive in the talent marketplace.
The Annual processes include annual bonus and salary increases. These are annual processes that are based on different criteria like performance of employee/ department/ company, aligning with market realities, adjusting for years of services, etc… The year end process provides with a logical time period to review changes and plan for the future.
Annual process happens once a year and is a combination of multiple activities. There is also a need for various kinds of information that becomes a part of the process e.g. persons performance, organization’s performance, company’s performance, previous performances, employee’s movement during the year, partial year calculations, budget implications for the manager, employee’s performance in comparison with their peers, etc…
The Annual process is one of the key processes that the compensation department works hands-on with the line managers. The overall responsibilities of the compensation department are very high in this process.
The performance rating on a person can only be truly determined after the year has ended. The financial performance of the company can only be truly determined after the first month of the following year. Based on these kinds of dependencies, it is very likely that some year end processes have retro-active components in their calculations.
The payout from the year end process happens within the 2/3 months after the year end. This allows for compilation of all the relevant information.
Figure 3.1 Annual Review Cycle
A more encompassing compensation cycle includes the job evaluations and salary structure adjustments.
Figure 3.2 Comprehensive annual compenstion cycle
This process will shift accordingly if the payroll has to be run in June instead of March. Some companies also make their rewards retroactive. Even if they run the payroll in March, they would make the award effectively Febrary 1.
The year round processes include promotion, transfers and other process that impact employee’s compensation.
The year round process is very distributed and is executed by line managers. The distributed process makes it difficult to enforce consistency.
The compensation department and the company as a whole have a vested interest in ensuring that the company policies are enforced consistently to avoid litigation or at least provide a good faith proof.
But now with enabling technologies, any employee movement can be routed to compensation department for consistency check. Even legal and regulatory requirements can be effectively incorporated in each decision. This is not be bog down the process but to build effective checks-and –balances to manage the risk profile of a company. It also has a flip side. Earlier the companies could plead that there is no way they could get information on employee comparision but going forward the information accessibility will be so great, that the risk officer needs to be able to mitigate this risk.
Changing the salary structure is a structural change and can impact many employees whereas changing the employee’s salary is a one-off transaction. The salary structure might need to be changed due to re-evaluation of the job, market pricing of the job, expansion of certain job groups, change in company’s internal evaluation of the job, etc…
The driving force behind this change is to retain talent.
We live in a very dynamic environment. People are changing, their needs are changing, their products are changing, this sometime means that the companies have to change, their products have to change, their people have to change, their people’s job have to change. And compensation department will be responsible to ensure that job changes are made quickly to react to business environments. Not only is the salary structure changing but what people do is changing. Their training requirements are changing.
In summary, compensation processes and timelines for annual processes are dependent on finance and performance management. The year round compensation changes are ad-hoc and dependent on line managers and specific local requirements. The salary structure changes are triggered by skills requirements and managed by the compensation department on as-needed basis. These concepts are very standard and global in nature but the actual impact on the process and timelines vary on a country to country basis.
The key to effective compensation management, is knowing what you need before you set up your plan. In this chapter, we will look at how SAP HCM EnterpriseCompensation can help you achieve your goals effectively.
In this chapter, we will briefly review the alignment of compensation management with ECM. We will touch on the front end and the backend of ECM and highlight the functionality and flexibility of this tool. The objective is also not to regurgitate the information available in the SAP documentation but to put it in the right context and flow so that the reader gets the 360 view of the object we are talking about.
Enterprise Compensation Management provides a lot of functionality, including:
The areas that are not covered by ECM include
SAP ECM Architecture
SAP ECM architecture is driven by user roles. Over the last couple of years, SAP has made provision to have more and more functionality delivered using a user-friendly front-end Portal technology. The backend continues to provide the robust environment for ECM. ECM also integrates tightly with Payroll so that the salary change, bonuses and other compensation are effectively paid out via payroll. ECM data is also aggregated into Business Warehouse for reporting. There are external components like survey providers and bank/brokers who fit into the architecture for providing services outside of SAP. The banks/ brokers integration follows the HRXML consortium standards.
Figure 2.1 ECM Architecture and Integration [From SAP(c) presentation]
The user roles might overlap in certain cases e.g. in some cases the Compensation Specialist and HR Administrator role merges.
The architecture also defines some aspect of implementation.
Though many standard screens are delivered on the frontend, any changes or additions need to be developed by the Portal team. The backend is configured by the functional consultants. The other components are integration items within SAP that need to be worked out by the functional consultants. The external components are interface items outside of SAP that need to be managed by the interface team.
In this section we will talk about each of the functional components that you can use in your compensation plan.
Compensation administration is the core of ECM. It allows to manage compensation in a company. The terminology of ECM is very close to that of the HR compensation community.
The compensation plan refers to the any compensation that will be distributed to a group of people as per specific rules and norms. For example, there can be a merit increase plan for all the salaried population of a company. ECM has 4 compensation categories which it uses for payment standard:
The compensation program refers to a set of compensation plans grouped together for certain groups of employees. For example: Salaried Compensation Program includes merit increase plan, annual bonus plan, and spot bonus plan for all the salaried employees.
The compensation review defines that set of compensation plans that are reviewed within a specific timeframe. For example: Annual compensation review would include merit increase plan and annual bonus plan.
The compensation review item defines a unique combination of compensation plan and compensation review for administration. ECM supports unlimited number of plans that support complex business rules and time dependencies. All the compensation plans and related reviews/ review items can be configured together.
The eligibility to the plans can be defined at the compensation program level as well as at the compensation plan level. The compensation program level eligibility is also referred to as macro-eligibility and compensation plan level eligibility is referred to as micro-eligibility. All salaried employees are a part of the annual review program that includes annual merit increase and annual bonus plan. But only those employees who have performed above par might be eligible for the annual bonus plan. Eligibility can be defined on the basis of the specific employee group an employee belongs to, performance review attributes, salary criteria, length of service, etc… There is also eligibility override function available. This can be used in case when there is an expatriate that just got transferred who doesn’t fulfill the requirement of waiting period. The expat employee can be made eligible for the plan by using the eligibility override infotype 0760. This is done at an employee level.
The eligibility configuration provides standard configuration option as well as BAdI for requirements that can’t be met with the standard configuration.
With guideline functionality, managers are suggested the default award that the employee should get based on a per-determined formula. The default can be number or a percentage or a flat amount. It also provide a minimum and maximum award around the default award that allows manager discretion. The guidelines are determined by the compensation department and the company’s senior management. The guideline can be based on a multi-dimensional matrix eg. Based on service, my performance and my compa-ratio, the guidelines are created. The guidelines helps in taking out the guesswork and facilitates the manager in disbursing the available budget effectively.
The guideline also considers proration. If an employee had been in a position for sometime in the year and the got promoted to another position during the year, then the default award calculated will be prorated on the parameters for part of the time they are in the first position and part of the time they are in the second position. The proration can based on months or days in a position. The system also provides flexibility of different kinds of rounding rules for the calculation.
The guideline configuration provides with all the different options. Especially the configuration of the matrix guidelines is extensive and can satisfy many complex guideline requirements.
Once the manager decides on the award, it can be routed through an approval cycle. Once the higher level manager approves it, the records remain in the approved status. The next step is to create records relevant to payroll or also known as activation. The HR administrator has to be cognizant of the fact that there are other activities going on for the employee and time the activation to avoids any data issue. The compensation awards are transferred to the payroll seamlessly.
The payroll data needs to be specified in advance and during the compensation plan creation process. This information can’t be changed once it’s been setup.
Total Compensation Statement
Compensation review statement containing the details for their awards can be printed and then communicated to the employees. On the other hand, a Total Compensation Statement can also be made available on the Employee Self Service that can be directly accessed by the employee. The total compensation statement though has more information than just the compensation review amount. It also includes the benefit cost, learning/ development cost etc…
ECM allows configuring the data requirements that needs to be in the Compensation statement. It also allows for country specific information to be configured.
Long term incentive (LTI) is used for stock based compensation. Incentive finally is in terms of money but how much money is determined by the stock market. Most CEOs are granted LTI so as to motivate them to make their companies perform better which in turn will lead to higher stock prices, that in turn will lead to a larger appreciation of their stock and hence they would make more profit. There are many assumptions in the above rationale. Stocks are a vehicle of ownership of the company. Stock plans like Stock options, restricted stock grants, etc… can be managed by LTI. The monetary plans are normally disbursed within a couple of months after the end of the year. Though LTI are granted in a similar timeframe, they might not get monetized for a longer period of time. The LTI is linked more to the market price of the stock and the gains are realized only if the market price. LTI are considered long term since the monetary values is not realized immediately. It can take a lot of time before the value is realized. Some companies might provide stock as an incentive when they can’t offer cash or if they feel that the employees might be more committed to the overall growth of the company if they own a piece of the company. There are a lot of tax implications, additional maintenance of stock information, different kinds of eligibility, long time frames like 2 year, 5 years etc… before an employee can exercise their right to sale their stock to realize a profit.
The LTI administration is done through the standard process of ECM compensation administration described in section 2.1.1
After the LTI has been granted, the employees have to wait till they are vested. The vesting schedule defines how the vesting will take place e.g. the vesting schedule can be 100% after 5 years, or it can be 30% after 3 years, 30% after the 4th year and final 40% after the 5th year. There can also be life events that can impact the vesting e.g. the employee might vest if they get married.
Once the grants are vested, they can be exercised. Exercise means that the grants can now bring in hard cash for the employee.
There are other things that can also happen to the grant.
The grants can get cancelled e.g. the grant can also get cancelled if the employee leaves the company.
The grant can get forfeited if it’s not exercised in a timely fashion. This can happen if an employee leaves a company, they might be obligated to exercise their grants that have vested, within one month of their departure. If they don’t exercise it, the grant is forfeited.
Sometime there are exercise windows that might also need to be defined for senior executives. They might not be allowed to exercise their grant at the end of the quarter when the financial results are being declared.
The LTI grant information needs to be sent to the broker since only brokers can help exercise the grant and sell them in the stock market. Once they make the sale, all the exercising data including the sale price, is sent back to the company. This information is feed to the payroll for taxation purposes. The actual money can be transferred to the employee bank directly. Currently the taxation part is only available for US andGermany.
The LTI specific configuration can be done under the Long Term Incentive Plans. The configuration deals with LTI vesting, exercising, life events and integration with banks/ brokers. They will be discussed in details in the subsequent chapters.
Compensation Budgeting helps in managing the award budget across the whole organization. The budgets are aligned to the organization structure as represented by Organization Management module. The budgets can be monetary in cases like annual salary increases where money is distributed. On the other hand, if stock options are distributed, they will be defined as non-monetary numbers.
ECM supports multiple countries implementation and global plans. This makes it imperative to support multiple currencies. The budgets can be maintained in multiple currencies and viewed in a single reference currency as needed. The maintenance of currency conversions is required to maximize the use of multi-currency environment.
The business environment is dynamic. People are promoted, relocated, lateral assigned etc… all around the year. They could move during the compensation cycle. Their compensation budget can also be reassigned so that the organization where the employee is redeployed is not adversely impact by the higher cost. This can be done almost at any time during the compensation cycle. In earlier versions this functionality was sorely lacking and it’s good to see that ECM has this as a part of the standard functionality now.
Though a budget can be assigned to a manager, it’s equally important to monitor the progress. ECM provides real-time information on how the budget is being spent. Each manager can view how the budget is being spent within their span of control. They have access to view what their subordinate managers are allocating. ECM can also be configured to disallow any budget spending over the limit provided. This kind of strict system based control comes in handy during tough economic times when the discretionary spending power of the managers is severely reduced.
ECM provides bottom-up budgeting as well as top-down budgeting. Each manager can enter their own budget requirement during the planning phase. The senior manager along with the compensation specialist can finalize the planned budget and release the budget. Once the budget is released, no changes are allowed. It is also possible that the compensation specialist enters all the budgets manually. ECM provides better options that are much more automatic. You can use the Personnel Cost Planning module to update the budget automatically. There is even a Business Add-In to provide custom options to load the budget. We can use external spreadsheets to load the data into the budget structure.
The budgeting configuration allows for defining different types of budgets and the budget period. The configuration is limited but maintenance of the budget structures involves a lot of maintenance.
It is very difficult to price a job. What should a Chief Executive Officer be paid? What should a Vice President of Sales be paid? What should an HR Manager be paid? What are the parameters that should drive the decision? Should it be the size of the company? Should it be the job duties and responsibilities?
The compensation department pursues different ways to come with job pricing that would attract and retain employees. The jobs can be evaluated internally. One of the techniques that is used is Hay Points. They rank and award points to each job in the company based on different parameters like Know How, Problem Solving and Accountability. The ranking of jobs is used to align the pay too. The more points a job has, the more its worth and the more it’s paid.
SAP Job Pricing allows you to get data from different salary survey providers. It also allows you to export data for participation in salary surveys. The incentive for many companies to participate in the salary surveys is to get salary survey results free of charge or at a discounted rate. It is a kind of a symbiotic relationship where as more companies participate in a survey, they all benefit from the resultant data. The salary survey provider benefits from the fact that they can sell it to other companies. The same job could have salary survey information from multiple providers. In this case, we have to create a market composite result. The data can also weighed differently from different providers. There are times when a company stops to participate in a particular survey and all they have is old data. In this case, if they plan to continue it’s use, they can age that data and reduce it’s impact of the overall result.
The salary survey information should be reviewed with caution. Sometimes it’s possible that the data collected could have errors, there could also be mapping errors where the survey job might not be exactly aligned to a company’s job description, etc…
The final goal is to adjust the salary structure if required. ECM provides the ability to compare the composite salary structure with the actual salary structure.
The Job pricing configuration is grouped by External job pricing using the Salary Survey section, Internal job pricing using the job evaluation data section and creating a new salary structure based on the information analysed by external and internal job pricing using the Pay Grades and levels section.
The most important shift in HR is happening due to the advent of delivering technology. These technologies support the direct involvement of employees and managers into the HR processes. There is no need to have dedicated people in HR who would need do duplicate work. E.g. Employee requests a change of name, they can fill up the form on-line, it get reviewed and updated in the system seamlessly. Earlier there would have been a paper form that the employee would fill up and the need of a person in the HR department to update it into the HR information system.
The delivery technology is very user-friendly. They are generally web-based and web-enabled. They provide similar look-and-feel like an internet websites and is also very similar in the end-to-end process.
SAP provides different technologies to choose from. There are BSP (Business Server Pages) or newer Web-dynpro. It will depend on each company to decide which technology to choose.
ESS is available to all the employees and provides many functionality. The one that is of interest to us is the Total compensation statement that is in the Benefits and payments section. The Total compensation statement is configured as a part of ECM configuration.
Manager Self Service (MSS) is the jewel in the crown. The internet-style navigation of MSS has made it possible for companies to even think about making their managers use the self-service model. ECM provides the MSS services for compensation planning and approvals for the managers.
This functionality helps in a huge process improvement within an integrated system like SAP. Traditionally the compensation specialist created spreadsheets for the managers. Then the managers used to determine the reward off-line. The approving senior executives didn’t have a consolidated real-time picture till all the spreadsheets from the managers were received. With ECM, the whole process is driven by the line managers in real-time with the senior executives knowing the exact progress of the process and budget utilized.
The MSS screens can be customized to include a lot of things like logo, custom color schemes etc…, we will review the standard delivered screens in this book.
MSS users are provided with hyperlinks and information throughout their process to help them make decisions.
The screen provides a list of the employees along with there salary information and eligibility status for the specific plan.
If you click on the employee’s name, it will bring up a complete compensation profile consisting of all their relevant personal data, pay information, plan information etc…
If you click on Display in the Overview column, it will bring details about the plan and relevant aggregate reports from BI.
Most of the MSS screens provide with „Personlize“ feature that allows managers some flexibility on the look and feel of the screen.
The configuration, the portal development and the ABAP development all have to come together to provide the total functionality required by the business. The following screen is the most important part of the process. It allows for decentralized (where manager are responsible) awards and centralized budgeting (Senior management sets up the budget with the help of compensation specialists).
In ECM, most of the R/3 backend functionality for the users has been migrated to the Portal frontend. The complete compensation budgeting functionality is available too. The figure below represents the standard portal screen for budgeting.
The essential difference for the users between R/3 and Portal is that the portal screens are user-friendly with better layout, more helpful context-sensitive information and commonly used internet-style navigation.
Compensation Management v/s EnterpriseCompensation Management
Compensation management is old andEnterprisecompensation management is new. Both can co-exist at the same time except only one can use LTI at a given point in time. The usage is defined by the activation switch in the configuration. For more information, refer to SAP Note 879720- FAQ Enterprise Compensation Management
SAP also provides most of the functionality via the Portal. The compensation specialist is able to do most of the functions that till now they had to do through R/3.
The compensation specialist will find some screens very much improved like in the case of budgeting and R/3 like screens in cases of managing compensation records.
Job pricing has been greatly enhanced and provides all the functionality required by the compensation specialist to work on job pricing. Each of the steps of job pricing has been laid out.
SAP provides many ways to configure and customize the system. It’s always advisable to use configuration wherever possible. Customization should only be approved for critical requirements only.
All ECM configurations are done at transaction SPRO • click Reference IMG •
Personnel Management •EnterpriseCompensation Management.
In some cases if you don’t see the Enterprise Compensation Management, it might be due to the fact that the HR Extension Set has not been installed. You need to talk to your Basis team about it.
The following are the main configuration nodes under ECM. The subsequent chapters will explore each one in further details.
We will review the global settings here.
SAP supports the newer ECM and older Compensation Management. Once it is decided that the newer version will be used, the global setting has to be changed
There is no automatic transfer of data between old compensation management to new ECM. Any transition needs to be done manually.
The other global setting is related to stock units for Long Term Incentive (LTI).
The stock units are captured along with the security ID number. Also the post-split stock unit can be captured.
The split ratio is provided along with the rounding rules for exercising amount and exercising quatity. This allows managing multiple stock units and their related conversion after a split.
The rest of the configuration will be covered in each chapter individually.
ECM provides many functionality enhancements using BAdI. If we want to use the standard feature in most cases but for only use custom enhancement for limited case, we can do that by appropriate selection of within the BAdI. In this case, even though BAdI will always be executed, it will get routed to the standard feature when the custom enhancement is not available.
The following are available. We will discuss each BAdI in the appropriate chapter.
|BAdI Name||BAdI Description||Business drivers|
|HRECM00_ACTIVATION||Replace activation procedure or new infotype determination||If the company wants to update infotype 0000 Actions when it updates other pay infotypes, then this BAdI will help in implementing this requirement|
|HRECM00_CACLBASE||Replace determination of calculation base salary||If the company wants to use different calculation base for different employees or wants to use more than just the calculated wage types, then this will help in determination of the calculation base|
|HRECM00_CARGP||Replace evaluation of compensation area||If the company want to use values that are not a part of the standard list of fields available of the determination of compensation area, then this BAdI will be required. If the determination is based on custom infotype, then this BAdi needs to be used|
|HRECM00_CP1GP||Replace evaluation of first compensation program grouping||If the company wants to create groupings based on parameter other than the standard ones, this BAdI will be required.|
|HRECM00_CP2GP||Replace evaluation of second compensation program grouping||If the company wants to create groupings based on parameter other than the standard ones, this BAdI will be required.|
|HRECM00_EFFDATE||Replace increase or award effective date||If the company wants to syncrhonize the effective date to the payroll date, then it will need to be use this BAdI since that is not a part of the standard delivery.|
|HRECM00_ELIGIBILITY||Replace or extend eligibility check||If the company wants to check eligibility based on job function which is a custom object, then they would have to use this BAdI to incorporate the custom requirement|
|HRECM00_ELIGP||Replace evaluation of eligibility group||If there are certain groups that can’t be defined by standard fields, then we would need to use this BAdI.|
|HRECM00_GDEGP||Replace evaluation of guideline grouping||If there are certain groups that can’t be defined by standard fields, then we would need to use this BAdI.|
|HRECM00_GUIDELINE||Replace or extend guideline evaluation||If there are certain evalutions that can’t be defined by standard fields, then we would need to use this BAdI.|
|HRECM00_MATRIX_SEGM||Define axis for matrix guideline||If it’s required to define an axis that uses company’s performance to evaluate a guideline, then we would need to use this BAdI|
|HRECM00_SALARY||Replace evaluation of salary and salary related quantities|
We have briefly described the different functionality of ECM including Compensation administration, Budgeting, Long Term Incentives, Job pricing, Manager self-service, and Business Add-Ins. These concepts form the basis of subsequent chapter where we will drill down to details.
Change is the only constant thing.
This has become a corporate mantra. Compensation has been evolving to address the changing needs or recognition of different needs of the employees.
The objective of this chapter is to review the general practices and principles of compensation management. We’ll briefly review new trends in compensation management, the common offerings, and explore what the future holds.
Understanding compensation is a key to understanding compensation management. The compensation policies are driven by each company’s philosophy of how best to compensate their people. The complexity of compensation programs drive the complexity of compensation management and in turn drives the compensation systems. Compensation management and compensation administration are used synonymously in this book.
What is compensation?
The dictionary defines compensation as, “Something, such as money, given or received as payment or reparation, as for a service (or loss). “ So for the purposes of the book, we’ll assume that an employee works for an employer by providing a service (their job), and the employer, in turn, compensates the employee.
Compensation is sensitive to everything that affects businesses. For example, there are a number of global issues today that can affect jobs and, therefore, the compensation related to those jobs.
There are a number of basic principles of compensation management that you should understand in order to get the most out of this book. Everything around us impacts our compensation. It’s like the butterfly effect. Butterfly effect refers to the idea that a butterfly’s wings might create tiny changes in the atmosphere that ultimately cause a tornado to appear (or prevent a tornado from appearing). The flapping wing represents a small change in the initial condition of the system, which causes a chain of events leading to large-scale phenomena. Had the butterfly not flapped its wings, the trajectory of the system might have been vastly different. A small change in the employee’s work environment can significantly impact compensation. The figure represents an employee’s work environment.
Figure 1.1 The World of the Employee
The work environment factors can be grouped into different categories and their impact can be understood in parts.
There are also more localized issues that can affect compensation.
These are just a few examples which might impact the overall compensation of an employee.
It feels like the world is becoming smaller due to technological advances, workers are more aware of things that are happening around them.
They can see what is happening in other countries and how things can impact them. Many of them have come to an understanding that jobs are not constant and they might have to keep updating their skills to remain competitive in the job market.
The majority of the workforce is becoming knowledge based, which means workers are using their brains more than their physical faculties. So, it has become more difficult to measure the work done by a knowledge worker as compared to a manufacturing worker. Not only does this shift affect how to evaluate employees, it also affects how to compensate them. Knowledge workers have different motivation factors than physical workers (assuming some statement like this is true).
There are many theories related to employee motivation. Companies adopt compensation practices that they think will work for their workforce. Some of the significant theories that directly or indirectly impact compensation practices are:
Figure 1.2 Some of the Motivation Theories
The overall gist of the matter is that a person will move from left to right as shown in the chart in Figure 1.2. For example, once the physiological needs are met, the person will strive to meet safety and security needs, and so on. Although each person is different, so a sales person might be more motivated if their compensation has larger commission incentives, while an administrative assistant might be more motivated if they are given a larger salary. The compensation programs are designed with different components and each has a target that is applicable for an employee who has at-par performance:
The employees could earn more for better performance. If the company has performed very well, it could benefit everyone by company increasing the compensation by 10% to what they would get.
Compensation Management encompasses designing, implementing, and administering compensation to attract and motivate employees to be productive in achieving company’s vision, objectives and goals.
Compensation management is differentiated into 3 parts as shown in Table 1.1.
|Compensation Strategy||How to attract and retain employees that will help the company achieve business results. HR practices vary across the world. In US, employment-at-will is the de facto norm where in European and Asia-Pacific countries, employee protection is a norm. In some countries, employee needs to be given 6 months notice period before they are let go. There are some countries where 13 month pay is a norm. In other countries, if a particular bonus payment is made for more than 2 consecutive years, it becomes an entitlement that can’t be taken away later. Compensation strategy can be defined at a global level but local compensation plans need to tailor on local drivers.|
|Tactical||Creating local compensation plans to implement the compensation strategy.|
|Administrative||Administer the compensation plans on a day-to-day basis|
In recent years, compensation management has evolved into a broader approach known as total rewards management. Compensation management deals with direct compensation provided to the employee. There is also a significant portion of reward the employee is provided in the form of health benefits, paid holidays, company cars, education allowance, training, and so on.
The essentials of compensation management include the following kinds of compensation:
Globally compensation is essentially similar, although there are differences due to a number of factors, including:
Compensation system is the backbone of compensation management. It needs to be flexible as well as reliable to deliver the needs of an organization.
There has been a great deal of evolution is compensation system. Largely many of the computer systems were based on spreadsheets. The spreadsheet based systems are easy to start-up but have a high degree of maintenance and are not as flexible as one would expect. The employee data is not real-time i.e. the employee who just left might still continue to appear of spreadsheet till someone either notices it or updated ones are distributed again. The spreadsheet systems are difficult to replace since a lot of time and effort has already been spent by the compensation team and they don’t want to let go of it to create a new one.
There are a whole host of advantages to having a compensation system that is integrated with your HR systems. Some of these include:
Compensation management provides the eligible employee population with guidelines on what they should be awarded and a mechanism for the managers to award and approve. The actual payment is executed by Payroll Department, however, so it’s very important to ensure that your compensation and payroll processes are aligned.
Administration of compensation packages will become more and more critical. There will be different kind of packages that will be required to provide for the differentiation. The compensation packages could change regularly. Also the jobs are more dynamic and they will change more often. This will make it a necessity that the administration be easy and flexible.
Stock options have been very popular form of compensation and employees have reaped the benefits of this. This type of compensation has been very effective for growth companies since there is a lot of potential for the stock price to raise and in turn give employee a windfall. These are classified as long-term incentives since there is no immediate gain but can have a substantial future value.
Approval of compensation is also one of the big items. Depending on a company culture, more decentralized the company the greater authority is given to the manager. Also the levels of approvals are limited. In certain cases, multiple approvals are needed. With current issues with executive compensation, management boards are actively involved in approving executive compensation.
Figure 1.3 Cause and Effect Diagram
Compensation management has evolved in conjunction with human resource management. What should an employee be paid? The jobs are internally assigned points based on the authority and responsibility that they carry. The higher the points, more is the compensation.
Market pricing came along with similar jobs being compared across an industry, sector or geographic location. There is a bell-curve. There are some jobs that have less impact due to compensation management. On one end of the spectrum are jobs with collective bargaining agreements where compensation is pretty much locked down. On the other end of the spectrum are CEO salaries that have been widely publicized recently as being overboard and excessive. But the majority of the employee population under the bell curve fall under the merit based compensation. This is true in most of the countries with some exceptions where life-time employment, loyalty, long services, seniority still play a huge role.
Compensation management has traditionally been a manual process and until recently was based on spreadsheets. There are many companies that provide comparative data for each job in a company. The awards are calculated and information is passed to the payroll providers.
Annual bonus is a type of incentive plan that is offered by most of the companies that pay for performance.
HR outsourcing has become more prevalent as HR departments want to focus on strategic aspects and leave the administration to third parties. HR wants to focus on their core competency and outsource administrative chores to vendors who specialize in it.
The outsourcing phenomenon forces to companies to document their processes and also assimilate disparate systems. Internal systems have more flexibility but this also is a bane since systems proliferate. All the additional functionalities have to go through a more thorough cost-benefit analysis.
HR outsourcing will make the compensation management will need to balanced between flexibility and more streamlined processing.
Globalization has brought in many different aspects. There is a greater need to standardize compensation practices and also carefully ensuring that local practices are followed to attract and retain talented employees.
Globalization also brings to fore the differences in compensation systems and need to harmonize them to be able to standardize and report in real-time.
Globalization also means that there might be more people moving from one country to another and their compensation needs to be adjusted accordingly. Global leaders of the future will need this kind of exposure to lead global companies.
Globalization means that compensation department will need to reach out to their peers across the world to come up with effective strategies to keep the company competitive.
Compensation management continues to evolve. As we continue to develop new theories about what motivates employees we‘ll continue to see new approaches to compensation.
The key intent of compensation and compensation management is to attract and retain talent. Of course, money is always considered a primary motivator, but the debate continues over just how much. Monetary compensation definitely has some effect but according to most studies, it varies among different types of workers. Some groups thrive on just commissions such as sales representatives; some prefer a fixed salary such as manufacturing workers, while others prefer a fixed salary plus an incentive plan, particularly management. There is a limit, however after which increasing pay doesn’t give proportionately increasing returns.
Based on this, tactical compensation programs are created. The plans are designed to deliver the maximum impact. Compensation packages are developed to include different compensation programs to entice employees and reward them appropriately. Depending on the environment, compensation packages are developed to attract and retain talented employees. There is no direct way to measure what an individual would like but compensation packages typically include:
There are other compensation types that we will not cover in this books:
Compensation is not the only motivation that was previously believed. Motivation also comes from growth opportunities, acceptance and recognition, opportunity to international travel, etc… With globalization, blending different kinds of compensation packages has become more art than science. Instead of compensation, many companies are now addressing it as total rewards and in future it might even become “Motivation Packages”.
Executive compensation is a field in itself. This population though small is also very critical. The administration of this small group is critical and sometimes requires a lot of exception handling. They impact all aspects of compensation and payroll.
The concept of broad banding has been adopted by many large companies to avoid proliferation to multiple ranges. It also provides managers with the flexibility.
Each chapter needs to be its own document and it should end with a Summary
A lot of effort goes into developing compensation programs that helps in achieving the goal of attracting and retaining people. Various factors impact compensation and managing compensation can be complex based on an organization’s philosophy. In any case, compensation systems needs to effectively and efficiently support the management of these compensation programs.