Annual review is one of the anticipated activities for the employee since it reviewing what was done, planning 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 subsequent chapter and build on the exisiting plan that we define here. I will also include some of the important SAP notes so that the practioners can refer it Here I will also explain the nauces of configurations that are not initially covered in the earlier chapters.
10 Managing Year-End Annual Merit and Bonus Cycle
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 need to be configured once and can be used ever after. These budgets are monetary and should be available for allocation. The budget types don’t have any date based dependenices.
Figure 10.1 Setting up the budget type
Either every year a budget period can be added and transported or they can be created all in advance. The budget period defines the timeframe where the budget amount should be 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 has been 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 similar to 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 reduce 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 disbributable budget means that it is still available for distubution. 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 currently 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 to be adjusted proportionately, we can use the percentage increase option.
Figure 10.9 Mass change percentage
Once we apply the percentage changes, all the values will be 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 provide 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 so that it can be used 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.
Each budget have to be released individually. We release the merit budget in Figure 10.15. The Figure 10.16 shows the release budget for annual bonus.
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 granularly in subsequent 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
Figure 10.19 Second Compensation Program Grouping
Once the program groupings have been 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 need to be established based on the compensation plans. If there is someone who doesn’t fit into the plan but is required to be included then override functionality is used.
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 have been established we will move on to ensure that the other aspects of the plan have been properly setup.
We will now setup the micro eligibility or just eligibility of the plan. Eligibility grouping is set using the feature CELGP. The eligibility grouping is determined at runtime and is not stored in the system for each employee. For each employee in the US
Figure 10.22 Eligibility grouping
Each of the 4 groupings is setup 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 can be defined for each of them separately by flagging the ‘Not Eligible’ flag.
Figure 10.26 Eligibility for hourly employees
Note: Eligiblity 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 setup 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 segment of the matrix.
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
The final step is to be the guideline. 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 10.33 shows the guideline for the Executives.
The Figure 10.34 shows the guidelines for the 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.
The executive bonus guideline with the proration rule is seen in Figure 10.38.
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.
The bonus plan is setup as shown in Figure 10.40
The payroll data is setup 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 setup 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 as 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 are ineligible for some reason. The budget is also displayed on the top. Once we start the allocation it will reduce.
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.
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.
In Figure 10.48, the message starting with a yellow triangle is a warning message whereas the message starting with red hexagon is an error messaged.
The message can be configured as error or warning as shown in Figure 10.49
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.
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.
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.
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 annual bonus that the employee has been approved to get is available in 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 merit increase needs to be sent to review to the approver. 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 provide with 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.
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”.
The basic pay infotype at this stage will be as shown in Figure 10.63.
When the compensation specialist activates this award, the basic pay will change to the new salary as shown in Figure 10.64
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 subsequent 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 highlights some approaches.
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