Chapter 5- Defining Compensation Programs

Compensation programs are 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.

5      Defining Compensation Programs

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

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

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.

5.1      Mapping Compensation programs to SAP ECM

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 has many compensation programs as you want, you have to clearly define them before you can use them in ECM.

5.2      Configuration

5.2.1       Plan Name

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:

§   Basic pay changes like merit increase

§   Additional payments like performance bonus

§   Off cycle increase like recognition rewards

§   Long Term Incentives like stock options

Each compensation plan is created in the system along with their types.

Figure 5.4   Compensation Plan

5.2.2       Plan Attributes Periods

 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 increae, 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.

5.2.3       Setting up the Calculation Base

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

5.3      Compensation program

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 criterias 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

5.4      Technical Points

5.4.1       Object/ Infotype details

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.

5.4.2       Limitations

5.5      Defining Compensation Review

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?

5.6      Defining compensation review items

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:

a.       When the award should be paid- Effective date

b.      What is the eligibility period

c.       What is the date for the guidelines

d.      What is the date for the base calculation

e.       What is the currency conversion key date

f.       What is the budget type that should be impacted?

g.       What is the reason for the change?

h.      What is the frequency of awards?

i.        What are the messages that should be given in case errors?

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 proration 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 are 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

5.7      Summary

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 bit in.