Automating the Compensation Planning Process:
All companies, whether large or small, must engage in compensation planning. Compensation planning is the process of ensuring that managers allocate salary increases equitably across the organization while staying within budget guidelines. Usually, the company identifies set times during the year (called â€œfocal reviewsâ€) when all the firmâ€™s managers review employeesâ€™ performance, and match these with budgetary constraints and formulate pay raise recommendations for the coming year.
As employers like IBM have moved toward linking their compensation plans more closely with strategic consideration, the job of developing salary raise recommendations has become increasingly complex. Itâ€™s no longer just a case of the manager allocating raises across the board, or allocating raises based just on performance appraisals. Instead, (as at IBM) numerous issues including strategic concerns, geographic considerations, the effects of paying employees based on competencies rather than job duties, and the need to take into consideration a variety of elements including bonus payments and stock option grants make allocating equitable raises while staying within budget quite a challenge.
Making raise decisions has always been cumbersome, even when there were fewer complexities involved. In the 1980s and early 1990s, employers used spreadsheets to administer these compensation planning periods. The firmâ€™s HR department would create individual spreadsheets for each manager, and the manager would use these to record their salary increase recommendations for all their subordinates. HR and its compensation unit would then have to assemble the spreadsheets by unit, department, division, and finally companywide. This was obviously a very labor-intensive and costly process.
In the late 1990s, firms began moving toward mainframe or client-server-based applications for facilitating this compensation planning process. This usually required developing custom designed compensation planning software for each customer. It also tended to lack the flexibility most companies desired, for instance, to add new compensation components, such as when a company moves to competency-based pay.
Today, companies are moving toward intranet based compensation planning programs. Using an intranet-based compensation planning application has many advantages. It lets the company control and distribute its application centrally, so that it can quickly update its compensation programs, without having to modify the software on individual managersâ€™ computers. Automating the system can also produce huge cost savings for even medium-sized businesses. For example one company estimated that it cost them about $35 to complete a single manual compensation transaction such as combining the raise budgets for two departments, but about $16 if it automated this process. Using a centralized application saves money in other ways. For example, employers often assign pay raise budgets to all their managers, only to find that once the various department budgets all come together the accumulated excess raises amount to millions of dollars. This generally doesnâ€™t happen with an automated system.
In acquiring a system like this for a company there are several criteria to keep in mind. First, look for the most intuitive and easiest to use application. Second, make sure the application includes decision-support tools such as pop-up window with guidelines alerts, calculators, and additional supporting information to make it easy for managers to make intelligent compensation allocation decisions. Third, the application should be flexible, so that the employer can easily add different pay raise components like merit pay, yearly bonuses, and so on for various departments. Fourth, the application should be robust, in that it can easily handle all of the business rules and actual calculations that the system aims to support. Fifth, the compensation planning application has to be compatible with a variety of HRIS (such as payroll systems) so that the employer has no problem integrating systems from several vendors without costly code customization.