Chapter 13- Managing Stock Programs or SAP Long Term Incentive Programs

Future expectation of the company stock drives

The objective of this chapter is to focus on the differences between a monetary plan and a stock plan. It will highlight the different infotypes that are related to LTI. It will also deal with some of the constraints of this new functionality like certain functions are only available for US and Germany. We will build this as a part of the annual cycle and see how it fits into the grand scheme of things. Again the front end will also play an important role in its usage.

13   Managing Stock Programs or SAP Long Term Incentive Programs

Stock and stock options grants are handled using the ECM Long Term Incentive category of compensation plans.

13.1   Setup the budget (Non-monetary)

For LTI, we need to create the stock unit first. It is necessary to do this step first since within a company there might we different kinds of LTI instruments used e.g. Restricted stock, stock option, etc…

We will define a stock options unit ‘SOPT’ as shown in Figure 13.1.

Figure 13.1   Create Stock options unit

We will now create the budget unit that is non-monetary. The budget type is not defined based on the stock unit.

Figure 13.2   Budget unit as non-monetary

We will continue to use the existing budget period. There is absolutely no constraint in creating new budget period if the key date is different or if the budget start and end dates are different. This can happen if the budget periods are aligned to financial calendar in a country. In many countries the financial year starts on April 1 and ends on March 31. In this case, it might be necessary to create different budget periods.

Figure 13.3   Using existing budget period

We will now create a new compensation plan with the compensation category ‘LTI Grant’ as shown in Figure 13.4.

Figure 13.4   Create a stock options plan

We will add it to an existing Annual Review process. This will ensure that this plan comes up as another tab during the Annual review.

Figure 13.5   Adding stock options review item to Annual review process

We will setup the compensation review item attributes for the Stock options as shown in Figure 13.6

Figure 13.6   Stock options review item details

13.2   Setup the Compensation program

13.3   Setup the eligibility

We will setup the eligibility for the stock options plans by creating a separate stock option variant.

Figure 13.7   Setup stock options eligibility

We will need to use the eligibility grouping that has already been defined for the compensation area.

Figure 13.8   Compensation area based eligibility groupings

The executives are eligible for stock options if they have a performance appraisal between 4 and 8 points. This is setup as shown in Figure 13.9. The Appraisal  rule ‘BONS’ is setup to include the condition of appraisal between 5 and 8.

Figure 13.9   Executives eligible for stock options

Since no other group is eligible, it’s recommended that they be assigned as ‘Not Eligible’ in the eligibility rule.

Figure 13.10   Setting other groupings as ‘Not Eligible’

The overall eligibility variant is shown in Figure 13.11

Figure 13.11   Overall eligibility variant

13.4   Setup the guidelines

We will now setup the guidelines for the stock options plan. We will create a separate guideline variant for stock options.

Figure 13.12   Defining the Stock options plan guideline

We can use the ‘EXEC’ proration rule by including the rounding rule for the stock options unit ‘SOPT’. We will have to create different proration rules in case there are other stock units used. We are rounding up the stock option to the nearest 1000 for the executives.

Figure 13.13   Update rounding rules for stock options

Now we will setup the compensation matrix dimension segment. The Figure 13.14 shows how the 5 segments are created based on the performance ratings from 1 to 8.

Figure 13.14   Segment definition

The guideline provides the defaults for Executives who have performed ‘Satisfactory’ and above.

Figure 13.15   Setup the guideline matrix

The final compensation guideline will include guideline matrix as defined in Figure 13.15 and the proration rule defined in Figure 13.13.

Figure 13.16   Setup the guidelines for stock options

The compensation plan attributes will include the eligibility variant and guideline variant that have been defined specifically for the stock options plan.

Figure 13.17   Setup the compensation plan

The compensation plan payroll data is not applicable for LTI plans. This is due to the fact that the LTI plans are not monetary.

Figure 13.18   The payroll data doesn’t need to be added here

This leads us into the discussion about the additional configuration that LTI entails.

LTI Setup

LTI requires further configuration then the standard budgeting and compensation administration. LTI awards are in stocks but the end goal is that the employee can realize the gains in monetary terms. We will review the additional configuration needed for LTI as shown in Figure 13.19 below.

Figure 13.19   Settings for LTI plans

LTI Vesting

An LTI award can follow different vesting rules depending on a company’s practices and policies. Some companies might follow a 3 year vesting period. This means that an employee has to wait for 3 years before they can ‘sell’ their LTI grants and realize any profit thereof. Some companies might follow a 5 year vesting. Some companies might follow 3 years vesting for their salaried employees and a 5 year vesting for their executives. What a company decides will be based on their philosophy and belief in what will work for them to retain and motivate people to achieve more and in turn the company achieves more and hopefully the stock market sees the same and the stock prices raise and the employee’s can sell their grant for more profit!!!!

There are 2 vesting rules configured in the Figure 13.20 below.

Figure 13.20   Defining the vesting rules

The gradual vesting schedule is designed as shown in the Figure 13.21 below. It means that 20% of the grant will vest after 12 months. After 24 months, another 40% of the grant will vest and so on. The employee can ‘sell’/ ‘exercise’ these options anytime after they have vested..

Figure 13.21   Setting up the vesting schedule

There might be some restrictions on exercising the grants after they have vested. There might be different exercising windows for all the non-executive employee and executive (or insiders) employees. The non-executive employee can be setup to exercise their grants anytime but the executive employees can only exercise their grants during certain periods where they can be considered to have the same information as has been disclosed to the public. These can be a month after the annual results have been announced, or a month after each quarter results have been made public.

Figure 13.22   Defining the exercise window

Figure 13.23   Designing the exercise window

LTI plan configuration

The LTI plan attributes consist of 3 many options.

The first is a checkbox ‘At Ex’ that determines whether the exercise price is determined at the time of granting or exercising. If the check box is clicked then it’s determined at the time of exercising otherwise it needs to be updated on IT 0761 at the time of granting.

The second is a dropdown ‘Data Evaluation Mode’ for accounting interface. We will chose ‘No Data valuation’ for our stock options plan.

The exercise window (EW) is a dropdown of all the exercise windows that have been created. If we leave it blank, the employee can exercise their grants at any time. We could do a manual override for the executives on their infotype 761 and add an exercise window only for them.

Figure 13.24   LTI plan data attributes

We can update the LTI grant of an executive to have an exercise window as show below in Figure 13.25:

Figure 13.25   Overrides added to an executives infotype 0761

We will now setup the LTI plan time dependent attributes. The plan terms indicates the validity of the award. The stock options will be forfeited after 4 years if they are not exercised.

Figure 13.26   LTI Plan time dependent attributes

For a particular plan, the exercise price can be fixed for everyone. If the stock is trade above the exercise price, then the employee makes a profit on the difference. If it’s traded below the exercise, the employee will not exercise the stock option and will not make any profit.

Figure 13.27   LTI plan pricing information

When the exercising data is received back from the broker, the following wage types have been provided by ECM for payroll calculations.

Figure 13.28   LTI plan payroll data

Life events impact LTI awards. Some of the life event are listed in the Figure 13.29 below. These life events change the LTI grants in some form. If the employee terminates, most company forfeit the unexercised options. In case of retirement, the options can vest immediately.

Figure 13.29   LTI life events

For each life event, we can configure the system reaction. If the employee is terminated, all the remaining awards will be forfeited.

Figure 13.30   Employee termination impact on awards

13.5   Setup the Award

<<Executing stock options plan> >

We will first need to create the stock options plan. We would not really do it to the lowest level of the organization but restrict it to the top 3 levels. By restricting the budget to the top 3 levels doesn’t mean that the awards can’t be granted to people below that level. It only means that the budget numbers will be cumulated at level 3 for all the awards that happen under. We will add the budget amounts to each of the budget units.

Figure 13.31   Planned budget for stock options

Once the budget amount is finalized, we will release the budget and the status will change to ‘Released’.

Figure 13.32   Released budget for stock options

The manager follows similar path for selecting an employee. As you would notice in Figure 13.33, the stock options plan is now added to the annual review process along with merit and bonus plan. You would also notice that only the executives (Chief Operating Officer, VPs) are eligible and the status displays that it is a new record and not yet been created in the system. The statuses for rest of the employees are marked as ‘ineligible’. The effective date defaults based on the value from the compensation plan review item configuration.

Figure 13.33   Annual review with the stock options tab

Instead of scrolling up and down for eligible employees, we can turn on the filter by clicking ‘Filter On’ button and adding the status filter as ‘New’.

Figure 13.34   Filtering the eligible employees

When we apply the guidelines to the selected employees, the stock options are assigned to the employees. Based on the budget unit the employees are financed by, the budget numbers are impacted.

Figure 13.35   Applying guidelines for stock options plan

Since exceeding the budget is just a warning as configured for the compensation review item in Figure 13.6, we can go ahead the create the records. You would notice that there will be no record with ‘New’ status now and on removing the filter, you will see that all of them are now ‘in planning’. The corresponding records for infotype 0759 have been created for the employees

Figure 13.36   Stock options assigned to employees

Now we need to follow the approval process. All the approved records need to be activated by the compensation specialist. The infotype 0762 will be created with all the relevant information.

Figure 13.37   LTI grant for stock options

13.6   Integration with Brokers/ Banks

We need to setup the system to receive the information from the brokers in relation to the exercised options. If this is not possible, we will still have to maintain this information manually.

Figure 13.38   Create LTI Exercising

The brokers will also need the participant data as shown in Figure 13.39

Figure 13.39   Create LTI Participant Data

13.7   Summary

The chapter covered many aspects of LTI awards. It covered the compensation administration process and also the LTI specific portion of vesting, exercising, etc…

Chapter 12- Managing Year-Round Off-cycle Bonus

Employees are compensated year round over and above their normal remuneration as a token for their work, as a motivation, as a compliment for their achievement, etc…

12   Managing Year-Round Off-cycle Bonus

In this chapter, we will see how the ECM takes care of year round off-cycle bonus awards. We will follow a similar approach that we have taken in previous chapter to go through the process.

We will consider the generic off-cycle process for Recognition programs that most companies have. One has to do a cost-benefit analysis of managing this program using ECM. The cost of additional plans must be weighed in against the potential advantages of having a streamlined process of managing these programs.

<<Configuration setup for recognition rewards> > This should be as heading 2 and the rest under should become heading 3

12.1   Setup the budget

We will setup a separate budget for recognition reward. It will a monetary award.

Figure 12.1   Setup budget for recognition rewards

12.2   Setup the Compensation program

We will create a new compensation plan for recognition rewards that is of ‘Off-cycle bonus’ category. Also note that we will create a similar compensation plan for any other recognition award that we want to capture separately.

Figure 12.2   Setup compensation plan

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

Figure 12.3   Setup compensation review

We will create a compensation review item ‘Recognition rewards’ using the compensation plan ‘Recognition reward’ and the anytime compensation review ‘RERE’.

Figure 12.4   Setup recognition reward review item

The compensation review item attributes for Pay increase are defined in the screen Figure 12.5

Figure 12.5   Setup recognition reward review item in details

12.3   Setup the eligibility

Anyone in the US is eligible for recognition reward. In this case the macro eligibility is sufficient. That means that anyone with the compensation program record with compensation area 10 and first grouping of ALL and second grouping of ALL are all eligible. There is no need to define micro eligibility using eligibility rules.

12.4   Setup the guidelines

We don’t need any elaborate guidelines since the recognition reward is for $100. We don’t need to create any guideline matrix. We will enter default, minimum and maximum as $100. We will create similar guidelines for all the guideline groupings.

Figure 12.6   Setup compensation guidelines

12.5   Setup the award Off cycle Bonus (IT 267)

We will define the compensation plan attributes along with the guideline variant. The absence of eligibility variant will make the macro eligibility as the only eligibility criteria

Figure 12.7   Setup compensation plan

We will also setup the compensation plan payroll data with the off-cycle reason of ‘Special Payment’.

Figure 12.8   Setup compensation payroll data

It’s very important to include it in the compensation program as shown in Figure 12.9

Figure 12.9   Setup compensation program

<< Executing the recognition rewards> > this should become heading 2 and the rest of the heading 2 below should become heading 3.

Create the budget and setup the budget amounts

Figure 12.10   Setup budget amount

Assign the budget to the highest unit. If anyone is given recognition reward and who is under the Executive Board- USA hierarchy will reduce the budget even though the budget is assigned to the highest level.

Figure 12.11   Setup budget release

When you apply the guidelines, $100 will be awarded. For this particular plan, there are just too many columns and don’t really help. The user can easily reduce the number of columns by clicking on the ‘Personalize’ button and removing redundant columns.

Figure 12.12   Personalization options

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 12.13   Select the employee

The manager can apply the guidelines and award $100.

Figure 12.14   Grant the award

The award is reviewed and send for approval.

Figure 12.15   Submit the award

The initiator of the award and provide notes that helps the approver.

Figure 12.16   Add a note

Once the award has gone through the approval cycle and it’s in the approved state, the compensation specialist proceeds to execute the compensation process status change transaction. In this case it might also be done on a regular monthly basis. All the awards in the approved status will be changed to Active status.

Figure 12.17   Activate the award

The compensation process record IT 0759 is shown below Figure 12.18

Figure 12.18   Award in infotype 0759

On activation, the additional off-cycle payment infotype 0267 is created with the amount, effective date and reason for the payment.

Figure 12.19   Off-cycle infotype 0267

As awards are distributed, you can review the amount spent when you execute the transaction.

Figure 12.20   Check the budget

For the New Year, you can copy the existing budget and create a new budget. The new budget has all the features of the old budget including the budget amount.

Figure 12.21   Create a new budget structure for the next year

12.6   Summary

In this chapter, we have covered the creating of recognition rewards program. We have also created a budget for the new year based on the previous year’s budget. We have also created a fixed guideline for the budget that can’t be changed.

Chapter 11- Managing Year-Round Basic Pay Increase

There are changes to compensation an employee receives round the year. They should be managed 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 provide the framework of maintaining different components of an increase much more organized and rather than losing the individual line items of an increase.

11   Managing Year-Round Basic Pay 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 provide an opportunity for compensation specialist to become an integral 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 retain the existing staff and also 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 as to 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 provide 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. These 2 can now be captured in compensation and one time increase can be captured in IT 0008.

<< Configuration Setup for year around pay increase> > This should be the new heading 2 and the rest of the heading 2 below should become heading 3

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 that is required for budgeting. We will come back to more transaction budgeting requirement 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

The compensation review item attributes for Pay increase are defined in the screen Figure 11.6.

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 whereas 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

The guidelines can be setup for each of the compensation plans separately.

Figure 11.11   Setup guideline variant for pay increase

We already have the guideline groupings that have been 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

<< Executing the Year around pay increase> > this should become heading 2 and the rest of heading 2 below should become heading 3

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 the US’.

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 utilized 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 accordingly.

Figure 11.23   Pay increase

Once both the adjustments have been made, the award is reviewed. 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

When the program is run, the message in screen Figure 11.26 comes up with successful changes.

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 has been 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 requirement to update any other infotype, then it needs to be done in the activation routine using the BAdI HRECM00_ACTIVATIO.

11.7   Summary

Many of the practitioners of SAP HR are very aware and familiar with the limitation of 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. This kind of problems can be totally taken care of if we use the ECM approach. 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 review 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.