Five Tips for Effective Compensation Planning

Five Tips for Effective Compensation Planning

by Steve Bonadio

Compensation planning systems automate and manage the planning, modeling, budgeting, analysis and execution of enterprisewide compensation plans.

Here are five tips to help talent managers get the most out of their investments.

1. Simplify global compensation practices and processes.

Reducing the complexity of global compensation planning should be a top priority for all organizations. Any company that has managed dozens or more plans using spreadsheets or legacy systems can attest that the complexity is staggering. Modern compensation planning solutions reduce complexity and improve visibility by centralizing compensation data and facilitating some of the more arduous tasks, such as rollups, exception handling and approvals.

With a flexible compensation planning system, organizations can readily reduce the total number of plans they currently administer. Rather than administer 50 unique plans for a global workforce, does the system enable organizations to define a base number of plans (for example, one plan for each division or geography) and then easily define unique policies (business rules) and variables (payout components) for specific groups, business units or even individuals? By reducing the total number of plans and leveraging a compensation planning system that enables flexible definition and change of plan elements as well as eligibility, the amount of resources and time spent on compensation administration can be significantly reduced.

2. Gain fresh insight by improving decision support.

Without proper analytic and reporting tools, the ability for HR and business leaders to make good compensation decisions is severely limited. Therefore, modern compensation planning systems must provide numerous standard out-of-box reports, and the tools should provide the ability to easily create new reports, dashboards and metrics. Report navigation should be streamlined to promote ease of use by nontechnical users, and familiar tools such as Microsoft Excel should be available for ad hoc analysis to enable managers to create graphs, comparisons and pivot tables. Finally, detailed compensation statements should be easy to produce.

3. Link compensation to performance management and goals.

Best-in-class organizations focus on a performance-driven rewards system that compensates individual contributors directly proportionate to what they achieve and what they contribute to the bottom line. The challenge lies in effectively aligning employee goals with organizational objectives, automating performance management processes and linking them with complex compensation policies or time-based incentive plans at an enterprise level.

Merit-based pay programs - especially those that relate to executives - have received renewed interest lately due to emerging legislative and regulatory compliance pressures stemming from the global financial system crisis. Ideally, a single, centralized HR platform that natively connects all of the required components for pay for performance - compensation planning, incentive compensation and performance management and goals - is required because it facilitates cross-functional reporting and eliminates the technical challenge and cost of integrating and managing disparate systems.

4. Achieve global visibility while preserving local action.

Most multinational companies lack a global view of their compensation practices because their current systems are inadequate and data is siloed. Widespread use of spreadsheets, homegrown systems and legacy systems to manage compensation planning efforts prohibit achieving a truly global view. As a result, HR and business leaders alike tend to make decisions based on incomplete data - or worse, inaccurate data - thereby creating systematic risk. In the world of spreadsheet-based compensation planning, rollups, exceptions and reconciliations are manual, time-consuming and expensive processes.

The use of a central, global compensation planning system in lieu of disparate spreadsheets and systems is a viable path for companies seeking a global view of compensation, but the fact remains that different groups, divisions, regions and geographies may have unique localized requirements. Preserving local action is therefore contingent upon the flexibility of the compensation planning system to support unique workflows and compensation cycles by division or geography, while easily fitting into existing organizational hierarchies. Multi-currency support with automatic conversion is also essential for localized support.

5. Optimize the approvals process.

Once compensation plans have been configured for a workforce, the policies are applied to employees. Managers review proposed salary adjustments, compare them to standard guidelines or market salary survey data, adjust as necessary and approve the compensation plans for their direct reports. A manager's submitted recommendations are available for review by the next level in the organization's hierarchy, and higher levels of management can reject a plan, sending it back for additional changes. A compensation plan can be defined for individual or team approval, and the compensation system should automatically alert a manager that new compensation information is awaiting approval. After final approval, the updated salary records are pushed to payroll.

The process outlined above is relatively straightforward, but in reality can be quite involved for organizations with complex reporting structures and hierarchies. Ultimately, the compensation planning system should contain a model of the organization's existing hierarchy and be flexible enough to support complex organizational structures.

[About the Author: Steve Bonadio is a 15-year veteran of the enterprise software industry and currently serves as the vice president of product marketing for Softscape.]