3- Compensation Process Timelines and Dependencies
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.
3.1 Year End Process
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.
3.2 Year Round Process
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.
3.3 Changing the Salary Structures
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.