The New Horizon for Online Compensation Planning Tools

By Francis Chan Director of Product Management, SuccessFactors March/April 2007 | Benefits & Compensation Solutions™ |

Just as it has over the past five years, technology, over the next five years, will give human resources professionals far greater power and ability to wield more influence over their organization's operations. From day-to-day functions like performance reviews, goal management and recruiting strategy, technological innovations are helping transform human resources from a sometimes burdensome afterthought into a valuable piece of a company's business plan.

Just as technology has changed the way HR people and management view their work force, it also is transforming the way they compensate their work force. 

After years of largely ignoring the massive benefits that can come from a concise, focused compensation system, companies finally are looking at compensation as a key business driver—and using technology to leverage it. Over the past few years, compensation tools—especially those used as part of a larger human capital management software suite—have become a more widely adopted way to cure the corporate aches and pains associated with pay planning. The future only holds wider adoption of these technologies, as more companies look for lean, agile compensation systems that tie into their larger human capital management plans-more specifically their performance management system by implementing a pay-for-performance compensation system

By linking performance management and compensation systems, a company can get a clear picture of its work force—who is employed, what workers want out of their jobs, who's contributing, who's not—then pay employees accordingly. In doing this, companies essentially take their payroll, which is often a company's largest and most complicated expenditure, and turn it into a motivation tool, built into the infrastructure and culture of a company. Likewise, linking pay to performance eliminates the need for managers to rely on intuition and memory to recall an employee's performance highlights, goals and targets. A cutting-edge compensation system automatically captures an employee's information so managers can make objective, fact-based decisions. 

Compensation information also can be used to examine other matrixes, such as how a company's employees are being paid compared to the larger market, if employees' goals are aligned with those of the company, and if workers are properly accredited or certified, among other factors. 

A compensation system that leverages technology to reward workers based on merit and allows employees to grow and advance based on their skills, aids in employee retention, and helps motivate underperforming workers is a key part of both a company's overall HR strategy and business plan and is a critical piece to a business' success. It's the best internal investment that a company can make.

What does It Look Like?

An effective compensation system should have three characteristics: It should be intuitive and informational for managers and employees in order to drive adoption; it needs to be powerful, yet simple enough to allow administrators to troubleshoot any problems; and it should be flexible to allow managers to change compensation processes as they evolve over time. 

Compensation tools must be intuitive and easy to use. Most companies start with homegrown Microsoft Excel tools and get off track trying to build more complex, multifunctional spreadsheets. A well-designed compensation system should focus users on making informed decisions by presenting key information in useful and actionable ways. Most compensation tools contain traditional information such as an employee's manager, current salary, bonus target, currency type, performance rating and other benchmark information. 

There are, however, other pieces of information that are just as, if not more, important to a manager's ability to make informed compensation decisions: targets and achievements of employee; business unit and corporate goals; competency ratings, which reflect how the goals were achieved; past compensation history such as promotions, merits increases, bonus awards, stock grants; risk of loss; membership in the high potential pool; and other succession planning information. The tool should be intelligent - able to balance presenting the most relevant data directly within the planning worksheet versus providing managers easy access to other relevant pieces of data. 

Management and analytics tools are also an important aspect of a compensation tool. Budget usage and adherence are critical components, but other analytical tools, such as reports that show distribution of budget, average merit increase or bonus percentage among different levels of performers, pay grades or locations, add significant value to managers during the compensation planning process. With a compensation system, the analytics tools that are normally handprepared by compensation administrators and used almost exclusively by senior management can be made easily available to line managers, allowing them to make better informed recommendations. 

While a compensation tool needs to be easy and intuitive for managers, it needs to be powerful, yet simple enough to be selfserviced by administrators to accommodate changes during a planning process. Compensation administrators commonly are tasked with updating employee information, such as incorrect base salary, job title and bonus target, during very tight compensation planning cycles. 

Employee eligibility for compensation programs and incorrect managing relationships also require administrative intervention to ensure managers are planning for the appropriate set of employees. With an Excel-based program, it is virtually impossible to track down the managers using appropriate spreadsheets in order to make changes during the process. With a compensation tool, administrators can make changes conveniently, with the added flexibility to update budgets and send out appropriate notifications, as well as make workflow changes. 

Finally, compensation tools need to be flexible and allow administrators to implement different compensation processes. Focal salary planning, variable pay planning that are driven by company and business unit goals, and long-term incentive planning are key components of a compensation management tool, which should allow the deployment of any combination of those components. The planners, workflow, schedule, budget and guidelines for different departments or divisions within an organization may be different. 

Similarly, business environments and compensation plan structures change over time, so a compensation tool should be flexible enough to accommodate different business groups, across different time periods. Compensation tools also should grow and evolve along with industry best practices in order to allow companies to implement and refine processes. 

The proper compensation software system of the future is actually here - the technology's wider adoption is the key to moving the industry forward. When tied into a larger performance management solution, these new tools provide a model for companies to transform their compensation system from what it often times is now, an expensive, hassle-ridden, error-prone process, into a template for other HR business functions - an easy, simple, costefficient function of a larger performance management system that encourages a culture of performance and accountability within a company.

Additional Information

Francis Chan is responsible for overseeing the product line development and strategy for SuccessFactors' performance management and compensation applications. SuccessFactors offers on-demand performance and talent management solutions.

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