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Archive for the month “May, 2012”

11- How to manage Year-Round Basic Pay increase

There are changes to compensation an employee receives round the year. Manage year-round basic pay increase with the same rigor and process that goes with year-end processes.

The objective of this chapter is to go further away from the traditional approach to compensation into the new approaches to compensation. The traditional approach to compensation includes the year-end processes only but we will also include the year round basic pay increases. This will give the framework of maintaining different components of an increase much more organized and not losing the line items of an increase.

The year round basic pay increases include promotion, transfers, equity adjustments etc… These processes are traditionally managed by the HR specialist unlike the comp processes that are managed by Compensation Specialist. As systems become more integrated, they offer an opportunity for compensation specialist to become a part of all compensation processes. As compensation processes get integrated, it will also impact the budgeting process. The year-end processes budget and year-round processes budget might become integrated too. During a tough economy it might be required to cut down on bonus and year-end merit increase but we might need to continue with other employee movements like promotion, etc. as a part of talent management processes. On the other hand, in a good economy, it might be required to have higher bonuses and merit increase just to keep the existing staff and be aggressive in promoting people along with talent management processes.

I am taking a more holistic approach to compensation that focused on administration of that pot of gold. Whether it’s spent during the year or at the end of year, compensation will be accountable for it. The role of HR generalist is going to transform into more strategic role and compensation will have to pick the slack on year around compensation impacting processes.

We will setup one budget for pay changes dues to movements. There is always the opposing side about why should we do this. The thing is why we shouldn’t do this. We have excellent compensation functionality to really capture the details that would otherwise not be possible to capture with standard SAP infotypes. We can capture the line items of the increase on the compensation side and give the overall increase in IT 0008. We can only update 0008 once a day or basically override anything that has the same begin date. Hence we really can’t have 2 pay increases in the same day. The pay increase could be promotional increase and equity adjustment. Compensation captures these 2 and IT 0008 captures the total one time increase.

11.1   Setup the budget

We will setup a specific budget for year-round pay increases. This will help in keeping a tab on all the year-round pay increases.

 

Figure 11.1   Setup year-round budget type

We don’t need to specifically create new budget periods if we can use the existing ones.

 

Figure 11.2   Use the existing budget period

This is the basic configuration for budgeting. We will come back to more transaction budgeting need later.

11.2   Setup the Compensation program

We will create a new compensation plan for Pay increase that is of ‘Salary adjustment’ category. Also note that we will create a similar compensation plan for any other year round award that we want to capture separately. We will create one for Equity Increase.

 

Figure 11.3   Setup compensation plan

The pay increase can happen anytime. Hence we will create an anytime pay increase review.

 

Figure 11.4   Setup an anytime compensation review

We will create a compensation review item ‘Pay increase’ using the compensation plan ‘Pay increase’ and the anytime compensation review ‘PAYI’. We will similarly create compensation review item for Equity adjustment as shown in Figure 11.5

 

Figure 11.5   Setup the compensation review items

Figure 11.6 defines the compensation review item attributes for Pay increase.

 

Figure 11.6   Setup pay increase compensation review item

We will also setup the compensation review item for equity adjustment. The important thing to note is that we will use the same budget. What it would mean is that whether we give an employee a pay increase or equity adjustment, they will added to the same budget.

 

Figure 11.7   Setup equity compensation plan review item

11.3   Setup the eligibility

We will now setup the eligibility rules using the variant for pay increase along with the eligibility grouping that has already been setup for this compensation area.

 

Figure 11.8   Setup eligibility rules

The executives have to wait for 1 year before they become eligible for pay increase and the salaried employees have to wait for 2 years before they become eligible for a pay increase. The executive eligibility is shown in Figure 11.9.

 

Figure 11.9   Eligibility rule for executives for pay increase

The eligibility for other groups of employees including the Salaried and others is set to 2 years.

 

Figure 11.10   Eligibility rule for salaried employees for pay increase

This lays out simple eligibility rules. We can make them as complex as we want using all the available options.

11.4   Setup the guidelines

Each compensation plan can have separate guidelines.

 

Figure 11.11   Setup guideline variant for pay increase

We already have the guideline groupings defined for the compensation area. We have to use them.

 

Figure 11.12   Using existing guideline groupings

We would continue to use the guideline groupings based on the decision tree.

 

Figure 11.13   Using the existing guideline grouping feature

11.5   Setup the award for Basic Pay (IT 0008)

We will define the compensation plan attributes with align the eligibility variant and guideline variant that we have already created.

 

Figure 11.14   Compensation plan attributes for pay increase

We will do the same for equity increase. In this case, we would choose to use the same eligibility variant and guideline variant as we have used for pay increase.

 

Figure 11.15   Compensation plan attributes for equity increase

We will also setup the compensation plan payroll data to calculate on the basis of ASAL (calculated wage type for annual salary)

 

Figure 11.16   Compensation payroll data

It is also important to include this plan as a part of compensation program. It will make all the employees defined in the compensation program eligible.

 

Figure 11.17   Compensation program includes Pay increase and Equity increase

The first step will be to create the common budget for pay increase and equity increase plan. The budget will be created for just one level meaning that there is only one budget unit. All the awards will be assigned to just pot of money. This is unlike what we have created for year-end plans where each manager was managing towards a budget.

 

Figure 11.18   Create budget for pay increase

With just one budget unit, it will be easy to allocate the money.

 

Figure 11.19   Budget units for pay increase

We will assign a common budget amount of $1,000,000 for the complete organizational hierarchy under Executive Board US. We can also change the name of the budget unit to ‘Pay increase budget for theUS’.

 

Figure 11.20   Budget set for the organization

Awarding the employees

The manager comes in to do the pay increase and can pick a view to see only the directly subordinate employees.

 

Figure 11.21   Selection for employees

The manager gives an equity adjustment of 4% ($21,120) and then moves to the pay increase. The screen Figure 11.22 shows the budget used and the new salary.

 

Figure 11.22   After equity increase

Now the manager gives a pay increase of 5% ($26,400) bringing up the new salary to 575,520 and reducing the common budget.

 

Figure 11.23   Pay increase

Review the award after making both the adjustments. The percentage increase in both the cases is applied to the base amount of 528,000 and is not on the cumulative new salary. The total amount is deducted from the same budget as planned.

 

Figure 11.24   Reviewing the award

This award will follow the approval cycle as setup in the system. Once approvers approve the award, the compensation specialist will need to change the status from ‘approved’ to ‘active’.

 

Figure 11.25   Activating the award

The message in screen Figure 11.26 comes up with successful changes after the program runs.

 

Figure 11.26   Message after a successful activation

The employee’s basic pay before the award is shown in Figure 11.27

 

Figure 11.27   Basic pay before the award activated.

After the award is activated, the basic pay of the employee reflects the change as shown in Figure 11.28

 

Figure 11.28  Basic pay changed after the activation

11.6   Enhancement to update Actions (IT 0000)

If there is a need to update any other infotype, activate routine BAdI HRECM00_ACTIVATIO.

11.7   Summary

Many SAP HR practitioners are very aware and familiar with basic pay infotype not being able to record multiple changes that happen on the same day. The first change will be overwritten by the second change and there is no automatically add-on to the existing change on the same day. In some cases, the solution is not to create 2 increase in the same day but to make them a day apart to save some history. ECM approach can address this kind of problems. We can have as many changes as we need and capture them on the compensation side and only the final change goes to basic pay infotype. If someone wants more information and details they can check the infotype 0759.

In this chapter we have presented a different way of handling year around pay increases. We have also seen how multiple plans can use a common budget. We have also provided with the solution to capture multiple basic pay changes on the same day.

10- Managing Year-End Annual Merit and Bonus Cycle

Annual review is one of the anticipated activities for the employee to review the work done, plan for the future and reward for the present

The objective of this chapter is to work the details around the Annual merit cycle that all the companies follow. It would normally include the merit increase and bonus increase. We will further define the stock options plan in the later chapter and build on the existing plan that we define here. I will also include some of the important SAP notes so that the practitioners can refer.  Here I will also explain the configurations that are not initially covered in the earlier chapters.

10.1   Setup the budget

The first thing to start with is a budget for the annual merit and bonus. We will define 2 different budget types. We will define to budget types, AMER and ABON. This should already be available to the compensation specialist before they begin the compensation exercise. The budget types are configured once and used ever after. These budgets are monetary and available for allocation. The budget types don’t have any date based dependencies.

 

Figure 10.1   Setting up the budget type

Either every year a budget period is added and transported or they can be created all  in advance. The budget period defines the timeframe where the budget amount is used for.

 

Figure 10.2   Setting up the budget period

The annual merit and annual bonus plans budget types will both use the same period.

Each of these plans will have their own budgets. We will enter them manually.

First we will setup the budget structure for annual merit increase. We will click “Create”. We will then define the budget type, period and the organizational units which are allocated this budget. The Org unit ID column refers to the starting point in the budget structure. The depth 0 indicates all the organizational units under the org unit 00000300 should have a corresponding budget unit. The depth can be changed to create only higher level org units being financed using the budget unit. The units’ column is applicable only for non-monetary budgets like stock options. Once everything is entered, we will click “Save”.

 

Figure 10.3   Annual merit increase budget setup

Similarly we will setup the annual bonus budget structure.

 

Figure 10.4   Annual bonus budget setup

The overall budget structure will look like what’s given below:

 

Figure 10.5   Budget structure for Annual merit increase

The budget unit 50038446 finances the org unit 00000300 and so on. What that means is that if any employee in org unit 00000300 is awarded an annual merit increase, it will use the budget available from 50038466 and correspondingly cut the available budget.

Now let’s populate the budget with some amounts. We have a total budget of 145,000 and we plan to distribute 10,000 for each of the higher org units. Then we can continue to distribute it to the org units below. This is a top-down approach to budget management.

 

Figure 10.6   Top-down budget distribution

The Total budget available appears in the column „Total Budget“. The distributable budget means that it is still available for distribution. E.g. out of the total 125,000 the amount distribute to the budget units below is 80,000 and 45,000 is still available. The spend amount show 0 since no employee has been awarded the money yet.

Also note that now we are just planning hence the budget status is „planned“.

 

Figure 10.7   Planned budget

The detailed distribution can be like below:

 

Figure 10.8   Detailed budget distribution

If the budget needs proportional adjustment, we can use the percentage increase option.

 

Figure 10.9   Mass change percentage

Once we apply the percentage changes, all the values are updated.

 

Figure 10.10   Updated budget

We will create the bonus budget based on the bottom up logic. Each manager will enter their own expectation of the bonus budget they should get. In the example below, we have taken on branch of the organizational hierarchy. We would have each manager indicating the budget they want for their organization.

 

Figure 10.11   Bottom-up budgeting

Manager of Hospitality wants $5,000 for his/her org unit, manager of Operations wants $20,000 for his/her org unit excluding what the organization wants under it. Also temporarily ignore the values of the „Distributable“ column.

Once all managers have given their individual estimates, we can click on „Roll-up value“.

 

Figure 10.12   Roll-up budget values

What happens when we hit roll-up is that the manager’s required budget becomes their distributable budget and the total budget is aligned accordingly. This essentially means that the Manager of the executive board-usa has $100,000 to spend on their organizational unit and the total budget has been adjusted to include the overall budget.

Note

It is important to wait for all the managers to give their input so that when we click „Roll up“, all the values are included in the calculation. It is also important to note that if you accidentally pressed the ‘Roll up’ again, it will again move the Total budget values in the Distributable column and would distort the budget.

 

Figure 10.13   Rolling up the budget

Now let’s release the budget for awards.

 

Figure 10.14   Release Merit budget

Your will receive a message on the top if the release was successful. Sometime you might get an error message if the budget unit is locked by other users performing other activities.

 

Figure 10.15   Released merit budget

Each budget is released individually. We release the merit budget in Figure 10.15. The Figure 10.16 shows the release budget for annual bonus.

 

Figure 10.16   Released the annual bonus budget

There are times that you would like to reset the budget back to planning. This is only allowed it you have not allocated awards and used the budgets. The ‘Reset to planning’ allows you to reset the status to ‘Planned’ that in turn allows you to maintain the budget again.

There is a function to check values before you release the budget. This process helps flush out any inconsistencies in the budget amounts. It’s a good practice to check values before releasing the budgets.

 

Figure 10.17   Budget functions

10.2   Setup the Compensation program

All active employees of the company are a part of the annual review program. The annual review program comprises of annual merit plan and annual bonus plans.

We will first define the compensation program grouping. The first grouping is to group them by the country they belong to. Even if the company is just in one country, we can use country as the first grouping. We will have other opportunities to distinguish population more granular in later functionality.

There are 2 compensation groupings provided to assign compensation programs. The first compensation grouping is based on the compensation area. The compensation area is in turn defined based on the country.

 

Figure 10.18   First Compensation Program Grouping

The second compensation grouping will also be defined for the country since we are working on a just the US based employees.

 

Figure 10.19   Second Compensation Program Grouping

Once the program groupings is defined, we will now define the plans that are part of this program.

If you belong to the compensation area 10 (which is for the US), and you belong to first compensation program grouping ALL and second program grouping ALL, then you are assigned Merit Plan and Bonus Plan. It is also called macro-eligibility for merit plan and bonus plan.

 

Figure 10.20   Compensation plans in a compensation program

10.3   Setup the eligibility

The macro and micro eligibility requirements is established based on the compensation plans. If there is someone who isn’t eligible by normal plan definition but needs to be added due as exception, use override functionality.

This is configured but it also needs to be on each employee who satisfies this criteria. The infotype on employee is referred to IT 758 Compensation Program. This is done by executing the program:

Each eligible employee will now have a relevant IT 0758 record created.

 

Figure 10.21   IT 758 record for employee

An employee can have multiple compensation program records.

Once the ground rules are established we will move on to make sure that the other aspects of the plan have been properly setup.

We will now setup the micro eligibility or just eligibility of the plan. Feature CELGP setups up Eligibility grouping. The eligibility grouping is determined at runtime and is not stored in the system for each employee. For each employee in the US determined by the compensation area, based on the pay scale group, they are classified as EXEC, SALD, HRLY and OTHS.

 

Figure 10.22   Eligibility grouping

Each of the 4 groupings is set up with their unique eligibility requirements. They are setup using the eligibility variant.

Executives are setup with eligibility requirement that they should wait for 1 month before they become eligible for merit increase. They also should have fulfilled the performance requirement.

 

Figure 10.23   Merit increase eligibility for Executives

The Executive should have had a performance evaluation of 2 to 8 to be eligible as defined in the appraisal rule.

 

Figure 10.24   Performance rule for eligibility

For the salaried employees, the eligibility rule is that they have 3 months waiting period as compared to 1 month for the executives. This difference can be made when defining the eligibility for the salaried employees within the as same eligibility variant.

 

Figure 10.25   Eligibility for salaried employees

The hourly and others are not eligible for the merit increase. This is defined for each of them separately by flagging the ‘Not Eligible’ flag.

 

Figure 10.26   Eligibility for hourly employees

Note: Eligibility Override

It can also happen that some employees can be marked ineligible by the rules above but you want to mark them eligible e.g. an expatriate moving to a new host country or an hourly employee being made a salaried employee in the last month. Instead of making rule changes, Infotype 760 has been provided to handle exceptions. This has to be done at an employee level so that no other change is mandated in the configuration of the system. The override takes place directly at the plan level.

 

Figure 10.27   Eligibility Override

The eligibility rule based on the eligibility variant E-ME is assigned to the merit plan P-ME.

10.4   Setup the guidelines

The guidelines include many options. We will use the guideline matrix. The good part of this is that they can be changed in the production environment without the need for transports.

The guideline for the award is based on 2 aspects. One is how good the employee has done as determined by the appraisal rating they get and two is where their salary is on the salary band. If they are higher in the salary range, they would get lesser increase as compared to if they were on the lower side. This is done to keep the employees within the salary range for their current jobs. Their hard work might be rewarded with a better bonus or promotions.

 

Figure 10.28   Guideline setup

The guideline is set up to propose a percent increase using the default percentage column where the minimum and maximum percent allows for giving warning to the manager if they are going below or above the range. We will first setup the matrix segment.

 

Figure 10.29   Appraisal rating segment

The next is to setup the compa-ratio segments

 

Figure 10.30   Compa-ratio segment

Note: Values

The range is inclusive means that the minimum and maximum are included. If we were to say that ‘unsatisfactory’ is if you get any number from 0 to 3 and below average is from 3 to 6, the system would give an error saying that the dimension can’t overlap. The value of 3 could be considered as both ‘unsatisfactory’ or ‘below average’ since the ranges is considered inclusive. Hence it’s very important to define clearly distinct range with no overlap. Hence the ranges are defined as 0 – 2.999 and 3 – 5.999

Finally we will setup the matrix that considers the increase determined together. If the employee has an appraisal rating between 7 and 8.999 then their segment is ‘Above average’ and if their compa-ratio is between 1.201 to 3.000 then their segment is ‘Above Midpoint’, then the guideline percentage will be the at segment 4 and 3, i.e. 2.5%.

 

Figure 10.31   Guideline matrix for Merit Increase

Guideline setup is the last step. A guideline is the combination of guideline variant and guideline grouping for a particular compensation area.

 

Figure 10.32   Guideline defined

For the same plan, the guidelines can be different for the executives and salaried employees. In our case, we have different proration rules that go along with them, the executive amounts will be rounded up the nearest 1000 and that of the salaried employees will be rounded up the nearest 100.

The Figure 1.33 shows the guideline for the Executives.

 

Figure 10.33   Guideline for executives

The Figure 10.34 shows the guidelines for the salaried employees.

 

Figure 10.34   Guideline for salaried employees.

The proration for executives is configured to round up the amounts to the nearest $1000. The proration will be based on the months hence if the employee has one guideline for 3 months and 16 days, it will be considered 4 months.

 

Figure 10.35   Proration definition

For bonus plan, we will define a bonus based on their performance only. Hence the guideline will have only one dimension in the guideline matrix.

 

Figure 10.36   Bonus guideline matrix for Executives

The Figure 10.37 shows the bonus guideline.

 

Figure 10.37   Bonus guidelines

The executive bonus guideline with the proration rule is seen in Figure 10.38.

 

Figure 10.38   Bonus guideline for executives

10.5   Setup the award for Basic Pay (IT 0008) and Bonus (IT 0015)

We will setup the plans first so that we can start the award process. The merit plan is setup as shown in Figure 10.39.

 

Figure 10.39   Merit plan setup

The bonus plan is setup as shown in Figure 10.40

 

Figure 10.40   Bonus plan setup

The payroll data is set up with the calculation based as the annual salary. There is no need to define the compensation component since the system will use the one that is already in the infotype 0008.

 

Figure 10.41   Merit plan calculation base and compensation component

The payroll data is set up with the calculation based on annual salary. It is required to specify the compensation component since there are multiple values that can be assigned.

 

Figure 10.42   Bonus plan calculation base and compensation component

Now let’s see how the award process works. The manager can view their own org structure.

Who is the manager?

The employee’s manager could have changed over the period of the plan. The manager, who is displayed as the manager of the employee, is the one who is the manager of the employee on the last day of the plan.

There are different reasons why employees show up as ineligible. Some are due to the eligibility grouping; some are due to eligibility rule and some due to eligibility override.

The budget refers the 2 budgets that will get impacted. They are referred to by numbers 01 and 02.

 

Figure 10.43   My MSS view

The manager can see all the of his/ her subordinates.

 

Figure 10.44   Planning

You will see 2 tabs per our Annual review process. One is Merit and other one is Bonus plan. The eligible employees have their amount fields open for entry. The rest is ineligible for some reason. The budget is also displayed on the top. Once we start the allocation it will cut.

 

Figure 10.45  Apply Guidelines

We can apply guidelines by first selecting the employee population and then clicking the ‘Apply Guidelines’. We can also override any of those values as show in Figure 10.46. The numbers will not be updated till you hit enter. The effective date can also be changed if needed. The manager can also add notes for each employee.

 

Figure 10.46   Override the guidelines

Any time the budget is exceeded; there is a warning message by default. It can be configured to be information or error message. The Figure 10.47 shows the warning message when the bonus plan has exceeded the budget.

 

Figure 10.47   Bonus Plan

In Figure 10.48, the message starting with a yellow triangle is a warning message and the message starting with red hexagon is an error messaged.

 

Figure 10.48   Error and Warning messages

The message can be configured as error or warning as shown in Figure 10.49

 

Figure 10.49   Changing the message type

Those awards will be submitted for approvals that don’t have any errors related to them. In Figure 10.50, the Merit plan award is not submitted because there is an error. The bonus plan award is submitted since there were no errors on it.

 

Figure 10.50   Submitting the plan

The approver of the compensation accesses the relevant employee together through the team viewer or can search for a particular employee as in Figure 10.51.

 

Figure 10.51   Search for an employee if it doesn’t show up in your team viewer

The approver would be able to see all the related information about the compensation award. They can approve or reject the request. The approver can navigate to previous step, approve all or reject all.

 

Figure 10.52   Approval Screen

Once you click the ‘Review’ button on Figure 10.52, it will change the status of the record to Approved. To reiterate, if you go to the R/3 system at this time, the infotype 0759 will show ‘Approved’ status.

 

Figure 10.53   Review and approve

The approved status still doesn’t mean the employee is going to get paid.

The employee’s infotype 0759 will show the compensation plans in their statuses.

 

Figure 10.54   Employee’s Compensation process infotype

The employee’s approved annual bonus is on infotype 759.

 

Figure 10.55   Annual bonus plan- infotype 0759 details

The annual merit increase that the employee has ‘in planned’ status is available in infotype 759.

 

Figure 10.56   Annual Merit Review- infotype  0759 Details

Compensation specialist can execute transaction for a group of people or for a specific person.

 

Figure 10.57   Process to activate the award

It will not allow you to change the status on the infotype 0759 to Active.

 

Figure 10.58   Change to Active not allowed on infotype 0759

Now let’s come back to approving the merit increase plan. The approver receives the merit increase plan to review. When it’s submitted, you will find that the previously activated record also appears. Basically all the plans with that review will come irrespective of their status. The merit plan award is submitted to the approver.

 

Figure 10.59   Submitting merit changes

The approver follows the same process as the one done for bonus plan award approval. The approver can also give comments. The status is “submitted” when the approver is deciding.

 

Figure 10.60   Approving merit increase

Once the approver decides to approve the award, the preview screen will be like Figure 10.61.

 

Figure 10.61   Approving merit changes

Once the approver clicks ‘Send’ does the status changes to ‘Approved’ as seen in Figure 10.62. Also note that on the top that you have reached the fourth and the last step “Completed”.

 

Figure 10.62   Final merit changes

The basic pay infotype at this stage will be as shown in Figure 10.63.

 

Figure 10.63   Before receiving the merit  award

When the compensation specialist activates this award, the basic pay will change to the new salary as shown in Figure 10.64

 

Figure 10.64   Updated Basic Pay

This completes the annual review cycle for merit increase and bonus. Each company will have other requirements that need to be worked into this solution. We will continue to explore more options in later chapters. But this process forms the core that needs to be built upon.

10.6   Enhancement to update Actions (IT 0000)

Many times there is a requirement to update the IT 0000 along with the awarding process. My companies like to have the annual review changes to be recorded in action infotype 0000. This can be accomplished by enhancing the BAdI. For other changes we can continue to follow the standard activation routine.

 

Figure 10.65   Changing the activation routine

10.7   Summary

We have covered all the aspects of the creating a budget, planning the award, submitting the award, approving the award and activating the award. Each of them can be made to align with the requirements that very specific to the company’s compensation plans and policies. There is one area that we have to customize and that is the workflow process related the approver. This process is very specific to each company and needs to be customized accordingly. The SAP note highlight some approaches.

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