Chapter 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.

3      Compensation Process Timelines and Dependencies

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 the US, 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.

3.4      Summary

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.

Chapter 2- Introduction to SAP ERP HCM Enterprise Compensation Management

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 ERP HCM Enterprise Compensation can help you achieve your goals effectively.

2      Introduction to SAP ERP HCM Enterprise Compensation Management

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:

§   Configuration of complex and global compensation plans including multiple currencies

§   Enabling line managers to take direct control for compensation planning and approval of comensation awards and removing the HR people from mundane administration

§   Providing decision makers with dynamic multi-source market data for benchmark jobs.

§   Providing compensation tools for effective management of budgets

§   Providing Total Compensation Statements for employees for effective communication

The areas that are not covered by ECM include

1.      In-direct cash compensation like Medical benefits

2.      Perquisites- Company car

3.      Education reimbursements

4.      Sales Incentive Programs (that are based on actual sales figures)

5.      Step Increase for union/ hourly workers.

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

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.

1.      The user roles are defined by the business requirements. Employee, manager, HR Admin, Compensation specialist and HR Executives are some of the most common ones.

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.

2.1      Introduction to SAP ECM Functional Components

In this section we will talk about each of the functional components that you can use in your compensation plan.

2.1.1       SAP Compensation Administration

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:

§   Salary adjustment- Infotype Basic Pay   (0008) is generated accordingly. This is used in cases like merit increase plan

§   Regular bonus- Infotype Additional Payments (0015) is generated accordingly. This is used in cases like annual bonus

§   Off-cycle bonus - Infotype Additional off-cycle bonus (0267) is generated accordingly. This is used in cases like spot bonus.

§   LTI grant- Infotype LTI grant (0761) is generated accordingly. This is used in cases like Stock options.

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.

Figure 2.2   Compensation Plans configuration

Eligibility

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.

Figure 2.3    Eligibility Configuration

Guidelines

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.

Figure 2.4   Guideline configuration

Award

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.

Figure 2.4 Compensation Plan and Payroll configuration

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.

Figure 2.5   Compensation statement design

2.1.2       SAP Long Term Incentive

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 1.1.1

Vesting

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 4^th year and final 40% after the 5^th 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.

Cancellation

The grants can get cancelled e.g. the grant can also get cancelled if the employee leaves the company.

Forfeiture

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.

Exercise Window

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.

Exercising

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 and Germany.

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.

Figure 2.7   LTI Configuration

2.1.3       SAP Budgeting

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.

Figure 2.8   Budgeting configuration

2.1.4       SAP Job Pricing

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.

Figure 2.9   Job pricing configuration

2.2      Introduction to SAP ECM Delivery Technology

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.

2.2.1       Employee Self Service

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.

Figure 2.10 Total Compensation Statement configuration  

2.2.2       Manger Self Service

I consider Manager Self Service (MSS) as 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.

 Figure 2.11   Manager’s entry point to Compensation services on MSS

MSS users are provided with hyperlinks and information throughout their process to help them make decisions.

Figure 2.12   ECM Portal Screen for managers

The screen provides a list of the employees along with there salary information and eligibility status for the specific plan.

Figure 2.13   MSS for ECM

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).

2.2.3       Compensation Specialist Self Service

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.

Figure 2.14   ECM Budgeting using BSP

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 Enterprise Compensation Management

Compensation management is old and Enterprise compensation 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.

 Figure 2.15  ECM Portal Screen for Compensation Specialist

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.



Figure 2.16   Job Pricing for compensation specialist

2.3      Introduction to SAP ECM Configuration Technology

2.3.1       Standard Configuration

All ECM configurations are done at transaction SPRO • click Reference IMG •

Personnel Management • Enterprise Compensation Management.

Figure 2.17   ECM on the IMG structure

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.


Figure 2.18   ECM’s main configuration nodes

We will review the global settings here.

Figure 2.19   Global Settings in ECM

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

Figure 2.20   Activating ECM

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.

Figure 2.21   Creating different types of stock units

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.

Figure 2.22   Stock split conversion

The rest of the configuration will be covered in each chapter individually.

2.3.2       Enhancements using BADIs

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_BDG0001	EC budgeting
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

2.4      Summary

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.