Lecture 40

COMPENSATITION MANAGEMENT

LESSON 40: PAY RESTRUCTURING IN MERGERS AND ACQUISITIONS Latest Trends in Compensation Management

Merger and acquisition check-list

Learning Objective

Executive Rewards

To know and understand the below mentioned points:

1. What is the composition of the executive remuneration package? Information on package structure and service contracts will be needed to assess: a. whether the gaps between practice in the two organizations is likely to prove problematic;

•

Mergers and Acquisitions Merger and acquisition check-list

•

Profit-sharing schemes

•

Communication strategy

•

Job Evaluations & Market Considerations

•

Reconciling market & job evaluations

•

Interaction Restructuring - a means of implementing strategic change aimed at improving performance by reducing the level of differentiation and integration and downsizing the number of employees to decrease operating costs.

Mergers and Acquisitions The implications of a merger or acquisition on pay and conditions of employment do not seem to be considered seriously enough in most most take-over battles. Executives and employees are too often pawns in a game of chess played by remote grandmasters. However, acquisitions or mergers do not always live up to expectations and one of the principal reasons for failure is the demotivation of managers and staff. This is inevitable if insufficient attention is paid to their needs and fears as well as any existing imbalances between the reward strategies and remuneration levels of the organizations set to merge. This issue has assumed increasing significance as globalization leads to mega-mergers between organizations starting from very different places in the reward philosophy spectrum. The degree to which staff are affected by a merger or acquisition does. of course, vary, At one extreme the holding company adopts a completely ‘hands-off approach, leaving the acquired company to run its own business, in its own way, and with its own terms and conditions of employment as long as it delivers the goods, At the other extreme, the acquisition is merged entirely into the parent company and all terms and conditions of employment are ‘harmonized’, The employees affected, however, might ha\’c different views about the extent to which the process is harmonious. Between these two extremes there is a measure of choice, In some cases it is only the pension scheme that is merged. In others, it is the pension scheme and all the other benefits that are harmonized, leaving separate pay structures. In making decisions about what should be done and how, the points on the following check-list should be considered jointly and in advance by the parties concerned.

11.622.1

b.

whether the values underpinning executive rewards are significantly different;

c.

what the priorities are for the executives involved.

Salary Structure 2. To what extent, if at all, should a common salary be introduced? To answer this question information will be needed, first, on the economics and strategy of each business unit to see how far they conform. Then, if the business case emerges, details will be needed on: a. existing salary structures; . b. organization structures, with salaries and grades for each job; c. the distribution of salaries within each grade; d. the method of job evaluation used; e. policies and procedures for grading or regarding jobs and for fixing salaries on appointment or promotion; f. any terms and conditions negotiated with trade unions or staff associations; g. the similarities and differences between the work carried out in each company and, therefore, the type of people employed. 3. What are the advantages and disadvantages of merging salary structures? The advantages seem obvious. A common basis is established throughout the group which facilitates movement and a consistent approach to salary administration. The disadvantage is the disturbance and potential cost of merging, bearing in mind the regarding and salary increases that might be necessary as well as the expense of job evaluation. Why go to all this trouble if the operations in the respective companies are dissimilar and they are located in entirely different parts of the country? It could even be damaging. 4. If salary structures have to be merged, how should this be done? The choice is between: a. a full job evaluation exercise involving rebenchmarking which may be disturbing, time consuming and expensive but may now have to be looked at in the light of recent equal values cases; or

© Copy Right: Rai University

249

COMPENSATITION MANAGEMENT

b. the arbitrary slotting of jobs into the new structure using existing job descriptions (if any):- This could result in gross inequities unless full job descriptions are available or there is already a good fit between the two salary structures; or c. a compromise between (a) and (b), slotting in jobs without a full evaluation if the fit is obvious, but evaluating doubtful or marginal cases. Note that if pay is negotiated with a trade union or staff association they would have to be involved and they will obviously fight against any detrimental changes. d. using this as an opportunity to adopt a new structure based on job family models/generics and broader pay bands. 5. When the merger takes place, should action be limited to the creation of a common grade structure, defining benefit levels but allowing different salary scales to reflect regional or separately negotiated variations in rates? It is possible to have common grade structures with different salary levels as long as the differences can be justified by reference to market rates. 6. What should be done about staff whose grade or salary range is changed as a result of merging pay structures? To regrade people and adjust their salaries to higher levels could be prohibitively expensive. To reduce salaries could be impossible, especially if there are trade unions in existence who carry any weight at all. It might then be necessary to ‘red circle’ staff affected by grade changes, that is, give them ‘personal to job holder’ gradings and salary brackets which they retain as long as they are in the same job. General salary reviews 7. Should general salary reviews be centralized and take place simultaneously in all locations? The answer is clearly yes if a common salary structure exists or pay is negotiated centrally. If structures or pay levels vary or if site negotiations continue, then it may be best to maintain local arrangements. Performance Management and Performance Related Pay 8. Should performance management processes and linked salary rev-i€1.o procedures be standardized? It is tempting to say that they should, in the interests of consistency and control and to facilitate career and salary planning for the new group as a whole. But there are strong arguments for maintaining the local scheme if it is operating effectively. Managers who are familiar with one system might resent change. They could be forced to accept: it but reluctant reviewers are bad at performance management, especially in a year of great uncertainty. Salary Administration Procedures 9. Should standardized procedures operate throughout the new group? A bureaucratic centralized approach is inevitable in some organizations, but if local arrangements work well, why change them for change’s sake? 250

Bonus- schemes 10. Should different arrangements for bonuses be allowed to continue? The answer to this question again depends on how close the links between establishments are. There is much to he said for retaining effective local bonus schemes which have an immediate link to performance as long as they do not conflict too much with group policies.

Profit-sharing Schemes 11. What should be done about profit sharing, assuming a scheme exists in one or other or both of the companies? Clearly, if there has been a complete take-over and the merged company loses its status as a separate profit center or can no longer issue shares under arrangements such as profit sharing share schemes, then the scheme in the company which has been taken over must be discontinued and employees moved into the take-over company’s scheme. if one exists. If there is no scheme in that company, consideration would have to be given to some form of compensation which could be as high as three times the average of the last three years’ payments. Pension Schemes 12. Should the employees of the acquired firm be transferred into the acquirer’s pension fund? This is quite common and, obviously, there is no problem for staff if benefits are better. However, the back-funding of previous pension arrangements in order to pay for improvements can be very expensive, and it may be necessary to maintain separate schemes. When the pension scheme in the acquiring company is inferior, it may be possible for members to choose under which scheme they will retire in the unlikely event that both schemes can continue. This could be divisive when staff in the take-over company see that employees in the taken-over company are better off than themselves. However, many employees may leave the takenover company before retirement and there will only be a handful of genuine anomalies reaching retiring age. The government regulations on personal pensions and the development of portable pensions would also have to be taken into account. Employees in the acquired firm should be told about their rights and given advice on what is best for them to do in their own-interests. Other Benefits 13. To what extent should employee benefits be harmonized, for example: a. company cars; b. free petrol for company cars; c. life insurance; d. sick pay; e. private medical insurance; f. mortgage subsidy; g. season ticket and other staff loans;

© Copy Right: Rai University

11.622.1

i.

leave entitlements;

j.

discount facilities?

The degree to which benefits should be harmonized is, like other areas of reward management. a policy question, the answer to which depends first on the philosophy of the controlling company (the extent to which it believes in centralization and absolute consistency in the treatment of employees) and second, on the circumstances in each company (the degree to which their operations and their geographical locations are linked or adjacent). Considerable variations in benefit between employees in different parts of a group are undesirable, especially if there is any interaction or interchange between establishments. But a brutal approach to harmonization which significantly reduces the total remuneration of the affected employees will damage morale - will the take over company wants its acquisition to be operated by de motivated people? Trade Unions or Staff-associations 14. If a trade union or staff association has negotiating rights. how should they be involved? It is desirable in these circumstances to enter into discussions as soon as possible. The two companies should already have considered the approach they want to adopt and this will provide a basis for consultation and, were negotiated terms and conditions are affected, negotiation.

Communication Strategy Apart from any discussions with bodies representing staff, it is essential to have a communication strategy which ensures that staff in both companies know what is going to happen and how it is going to affect them. This strategy must be prepared in advance and this implies that the questions in the check-list will have been considered before the merger is announced.

Restructuring Restructuring covers events as a result of which the terms, as agreed by the reference entity or governmental authority and the holders of the relevant obligation, governing the relevant obligation have become less favourable to the holders that they would otherwise have been. These events include a reduction in the principal amount or interest payable under the obligation, a postponement of payment, a change in ranking in priority of payment or any other composition of payment. A default threshold amount can be specified. This approach purports to adopt an objective approach by identifying specific events that are typical elements of a restructuring of indebtedness. As restructuring events could be those undertaken by a reference entity that would result in the credit quality being improved or remaining the same, the Credit Event under the 1999 Definitions is specified not to occur in circumstances where the relevant event does not result from a deterioration in the creditworthiness or financial condition of the reference entity.

11.622.1

The, implications of a merger or acquisition on pay and conditions of employment do not seem to be considered seriously enough in most take-over battles. Executives and employees are too often pawns in a game of chess played by remote grandmasters. However, acquisitions or mergers do not always live up to expectations and one of the principal reasons for failure is the demotivation of managers and staff. This is inevitable if insufficient attention is paid to their needs and fears as well as any existing imbalances between the reward strategies and remuneration levels of the organizations set to merge. This issue has assumed increasing significance as globalization leads to mega-mergers between organizations starting from very different places in the reward philosophy spectrum. The degree to which staff are affected by a merger or acquisition does, of course, vary. At one extreme the holding company adopts a completely ‘hands-off approach, leaving the acquired company to run its own business, in its own way, and with its own terms and conditions of employment, as long as it delivers the goods. At the other extreme, the acquisition is merged entirely into the parent company and all terms and conditions of employment are ‘harmonized’. The employees affected, however, might have different views about the extent to which the process is harmonious. Between these two extremes there is a measure of choice. In some cases it is only the pension scheme that is merged. In others, it is the pension scheme and all the other benefits that are harmonized, leaving separate pay structures. In making decisions about what should be done and how, the points on the following check-list should be considered jointly and in advance by the parties concerned.

Job Evaluations and Market Considerations You can arrive at appropriate wages for positions on your farm on the basis of two main management tools: 1. job evaluations (based on compensable factors such as education, skill, experience, and responsibility), and 2. the going rate (or market value) of a job. Illegal Pay Differences It is illegal to base pay differences on such protected personal characteristics as sex, race, color and marital status. The term “protected” is used because employees are safeguarded by law against discriminatory practices based on these personal characteristics. Federal law, established in the Equal Pay Act of 1963, explicitly requires men and women performing the same work to be paid the same—with four key exceptions: [when] payment is made pursuant to (i) a seniority system; (ii) a merit system; (iii) a system which measures earnings by quantity or quality of production; or (iv) a differential based on any other factor other than sex. Blatant cases of sex-based discrimination include instances where men and women hold the same jobs yet are paid differently with none of the defensible reasons applying. Somewhat veiled, but no less illegal, are cases where sex-

© Copy Right: Rai University

251

COMPENSATITION MANAGEMENT

h. lunch arrangements, including luncheon vouchers;

COMPENSATITION MANAGEMENT

segregated jobs are equal, except for their titles, and yet are paid differently.

Job Evaluation A farmer such as Cecilia who pays different rates for different jobs usually first classifies the jobs on her ranch. Through a job evaluation she rates the jobs on the farm according to their relative “importance.” Each job might be given its own rate, or jobs of comparable importance may be grouped or banded into a single wage classification, or pay grade. Job evaluations compare positions in an organization with respect to such factors as education, responsibility, experience and physical effort. Figure 7-2 shows a sample job evaluation. In it, for instance, much more value is given to responsibility and education than to physical requirements. The supervisor in this example would earn about twice what an equipment operator would. Figure 7-2

If education is used as a compensable factor, a bachelor’s degree might be worth 200 points, a junior college degree 150, a high school diploma 100, and an elementary diploma 50 points. Some of the jobs in the ranch might require a high school diploma, thus earning 100 points in this category, while others might have no education requirement (0 points allotted)— regardless of the educational qualifications of the person who may actually apply. Similar ratings of jobs would be made for responsibility and other factors worth compensating. You decide how much weight to allot various compensable factors and how to distribute points within each job. For the job evaluation to be useful, a detailed list of compensable factors needs to be articulated. (The job analysis created during the selection process can help.) You can test the job evaluation by comparing a few jobs you value differently. Does the tentative evaluation match your expectations? If not, are there any job factors missing or given too much or too little value? Workers may also participate in the process of evaluating jobs and can add valuable insight into the essential job attributes for various positions. Personnel involved in evaluating their own jobs, nevertheless, are likely to experience conflict of interest. Although supervisors will normally make more than those they supervise, this is not always the case. A very skillful welder or veterinarian will probably make more than her farm supervisor. Some workers harvesting at a piece rate often make more than the crew leaders supervising them. Supervisors may be offered additional pay during labor-intensive periods. Job evaluations, then, reflect the relative value or contribution of different jobs to an organization. Once a job evaluation has been completed, market comparisons for a few key jobs need to be used as anchors for market reality. In theory, other jobs in the job evaluation can be adjusted correspondingly.

Market Considerations In practice, results of job evaluations are often compromised or even overshadowed by market considerations. Labor market supply and demand forces are strong influences in the setting of wages. No matter what your job evaluation results may indicate, it is unlikely you will be able to pay wages drastically lower or higher than the going rate. Supply and demand factors often control wages. When there are many more pickers than available jobs, for instance, the going wage decreases. If few good livestock nutrition specialists are available for hire, they become more expensive in a free market. The market may also influence the migratory patterns of farm workers, for example, whether a worker stays in Mexico or travels to Texas, Florida or Oregon. Figure 7-2 uses education as a compensable factor. You may prefer to think in terms of what combination of experience and education would qualify a person for the job. This is an important step for determining the value of the position to be filled. However, when it comes time to hire someone, you may not care what combination of education or experience an applicant has as long as he can do the job.

252

Of course, the market is not totally free. Legal constraints affect wages (e.g., equal pay, minimum wage). Labor groups, in the form of unions, can combine forces to protect their earnings. They may prevent employers from taking advantage of a large supply of workers. At times wages are driven so high they disable corporations who cannot compete in a broader international market. Some professional groups can also impact the

© Copy Right: Rai University

11.622.1

products and HRMS. (Kellogg used Oracle products for financials and Cyborg Systems Inc. for HRMS.)

To establish external equity, employers need information about what other employers pay in the same labor market. While some employers are content to lean over the fence and simply ask their neighbors what they pay, others conduct systematic wage and salary surveys.

Kellogg’s compensation department wasn’t thrilled with the prospect of changing systems. It had been successfully managing salaries and bonuses using homegrown enterprise compensation management (ECM) software for two years. Its compensation planning system (CPS) achieved all its goalsautomating compensation planning in a decentralized, consistent procedure with a market-based approach with little burden on HR.

Wage surveys need to describe jobs accurately as positions may vary widely even for jobs with the same title. Surveys should seek information about benefits given employees (e.g., farm products, housing). Of course, there are other “intangible benefits such as stability, the prestige of the position or the institution [and] the possibility of professional development”. Surveys need to consider the number of workers per farm in a given classification. Wages on a farm employing many employees affect the going rate more than one with few. In some cases, farmers may compete for labor within a broader labor market. When compensating mechanics or welders, for instance, you may have to check what those in industry are paid. An important pay decision is whether one will pay the going market rate. Those who pay at or below the market may have difficulty attracting workers. Further, they may find themselves training people who leave for higher paid positions. Merely paying more than another farm enterprise, however, does not automatically result in higher performance and lower labor costs. Even when well paid, workers may not see the connection between wages and their performance. Farmers who pay too much may find it difficult to remain competitive. Furthermore, there are other factors valued by employees besides pay, such as working for an organization that values their ideas and allows them to grow on the job.

Reconciling Market and Job Evaluations In wage setting, it is usually more beneficial to reconcile market information and job evaluation results than to singly rely on either. Unique jobs are more appropriately priced on the basis of job evaluations. You may depend more heavily on the job market for common jobs. In most cases, farmers have freedom to satisfy both job evaluation and the market. Where the market pays a job substantially less than a job evaluation does, however, you can either pay the higher wage, reconsider job evaluation factors, or pay the reduced wage. The farmer has fewer viable options when the market would pay a higher wage than the job evaluation. Compensation Restructing –Acquisitions Concept – Case of Kellog Acquisits Keebler Co. The compensation department at Kellogg, the Battle Creek, Mich-based packaged food company, faced a tough challenge in 2001. That year, Kellogg acquired the Keebler Co. of Elmhurst, Ill., and with the acquisition came different technology and HR management systems (HRMS). Standardizing onto one became a priority for the company’s information technology (IT) department, which ultimately decided on the system Keebler used-from SAP AG of Walldorf, Germany, for financial

11.622.1

Since the CPS implementation in 1999, “we have tried to put more information in the hands of managers and empower them to make more of the compensation decisions,” says Miles Meyer, Kellogg’s vice president of global compensation. The compensation staff was happy with the CPS, so they resisted the change, Meyer recalls. “We had a lot of positive comments on its ease of use.” Managers liked it, too, although they were less attached. However, the IT staff pushed forward, informing the compensation department that it had one year to move off the CPS because IT would no longer support the system. Other departments also had to move off legacy systems and onto the SAP system. The compensation department could adopt either the SAP compensation features or a commercial product that had interfaces to SAP. SAP’s features didn’t come close to the CPS, says Meyer, so the compensation department decided to look elsewhere. Key to its decision would be a product that could achieve the same capabilities-or as close as possible-as the CPS with the ease of use managers and HR had grown accustomed to. Homegrown ECM Kellogg developed its CPS to support new compensation practices, according to Meyer and Catherine Hager, director of compensation. Hager was at Kellogg when this transition began, and Meyer, who reports to the executive vice president of HR, joined later that year. Before the CPS, the compensation department would send out spreadsheets with budgeted merit increases for each division. Three staffers in the compensation department would recommend a merit increase and a merit range for each of the nearly 3,000 salaried employees. In most cases, Hager says, managers accepted the recommended increase. The value of each job was based on a comparison to similar jobs at Kellogg. “As competition in the job market increased, that way of evaluating jobs and connecting to pay didn’t serve the business model very well,” says Meyer. Kellogg decided to move to market pricing of jobs. The company benchmarks each job relative to comparable jobs in the marketplace, and this data is a key factor in determining merit raises. Kellogg also decided to push decision-making to managers, who could better determine the right pay increases for their direct reports. But managers had little understanding of market pricing and little experience in making pay decisions. They needed training and tools. Before the compensation department undertook

© Copy Right: Rai University

253

COMPENSATITION MANAGEMENT

market. By limiting acceptance to universities, a limited supply of available professionals is set.

COMPENSATITION MANAGEMENT

training or development of tools, its staff interviewed managers and executives across the company to make sure that market pricing and involving managers would meet their needs. “We spent quite a bit of time making sure we had buy-in to move forward,” says Hager. Market pricing sounded good in theory, but it raised a mental hurdle for managers, she says. Before the inaugural use of the homegrown CPS in 1999, Kellogg gave all managers a day and a half of training, including a session to validate the market pricing of jobs within their departments. They later received a half-day of training on the CPS itself. The following year, everyone got another day of training on compensation practices and upgrades to the CPS. Managers also received about two hours of training before each compensation planning cycle; initial compensation training was included in a broader training program for new managers, Hager says. The second hurdle was to provide managers with the necessary tools. The compensation department, with help from an outside consultant, developed the CPS in Lotus Notes to help managers make decisions and to provide information on compensation planning and decision-making. Kellogg went merrily through three compensation-planning cycles with its CPS and had no intention of buying a commercial product, says Meyer.

The Decision Of course, those intentions had to change with the Keebler acquisition, forcing the compensation department to look into commercial products that were supported by SAP. Meyer knew of a compensation product called TotalComp by Kadiri Inc. of Burlingame, Calif., because the company had made a presentation to Kellogg a couple of years earlier. At that time, however, TotalComp did not have all the features that Kellogg’s CPS had, Meyer says. “We were very biased. We felt our CPS was the better system of the two,” he admits. With the one-year deadline looming, the company re-examined TotalComp in 2002 and found that the newer versions came closer to meeting Kellogg’s needs. “Kadiri offered about 70 percent of what [the] CPS had,” Meyer says, and his staff could customize it to provide features that Kadiri didn’t offer. TotalComp did offer a distinct advantage over the CPS: timely disparate impact analysis. With CPS, Kellogg executives had to wait until all annual merit increases were awarded before they could analyze companywide data to determine whether any minority groups-based on race, age, gender or job level-were treated unequally in performance ratings or merit raises. But TotalComp had the capability to perform disparate impact analysis before employees were informed of their performance ratings and merit increases, allowing for necessary adjustments. With those key features identified, Kellogg selected Kadiri in June 2002 with installation to be completed by Dec. 1. Programming began in August. The biggest challenge was to migrate the CPS features that were not offered by TotalComp. Fortunately, TotalComp had knowledge management technology that allowed the adopters to migrate information from the

254

CPS and to configure the new software to include some of the custom features that were developed for the CPS. “Kadiri didn’t have all the functionality of [the CPS], but we figured out how to do it with the knowledge manager,” says Lori Stafford, the project team leader. “We took three years of learning on our old system and loaded it [into TotalComp] in four months.” One example of a feature that was migrated from the old system to the new: a decision-making tool from the CPS that walks managers through the process of making a merit decision-what an employee is paid, the worker’s performance, market pricing, and how hard he or she would be to replace. “The tool sums up with a recommendation based on inputs from the manager,” Stafford says. Kellogg had four people, including Stafford, working nearly full time along with a project manager from Kadiri who could tap any resources needed from the vendor. Because Stafford had quite a bit of self-taught IT knowledge, Kellogg did not rely heavily on its IT staff for this implementation, says Meyer. When the project was done, the customized TotalComp software had 85 percent of the CPS functionality. No managers complained; TotalComp looked a bit different on screen, but basically it did everything the CPS had done. “We didn’t experience any disruptions with the transition, and we got a lot of compliments,” says Meyer.

The Process in Action After the merger, Kellogg workers totaled 25,000 worldwide, including 11,000 salaried employees. The company uses TotalComp to plan for merit increases, performance bonuses and stock options for 6,000 of the salaried workers. Kellogg does not expect to use TotalComp for the other 19,000 employees because they work on commission, are international workers or have their wages governed by union contracts. Starting on Dec. 1 each year, managers access TotalComp from the corporate intranet and input performance ratings for each employee. In mid-December, Kellogg closes the system to managers so employee relations and legal staff can run a disparate impact analysis. Each manager can do a disparate impact analysis of his own group after inputting performance rankings, so problems can be dealt with before the company analysis. In January, the compensation department uses the software to create a bottoms-up budget for merit increases and bonuses as well as to determine the dollar pool for each manager. Here’s a hypothetical example of the bottoms-up approach. If overall merit increases are budgeted at 4 percent, Aranked employees might be budgeted for an average increase of 5 percent, Bs at 4 percent and Cs at 3 percent. The manager’s total pool is based on those calculationsconducted by the software-but the manager can determine the actual amount that each direct report gets from the pool. With help from the software, including budget information feeds from the SAP system, the compensation department then figures the pools for merits, bonuses and stock options.

© Copy Right: Rai University

11.622.1

researcher at HR.com, a web-based HR consulting and research company in Aurora, Ontario, Canada. Technology lets compensation managers, HR professionals and CFOs comprehend the process, he says.

Managers complete their work by mid-February. The system is closed to managers again while a disparate impact analysis is performed on merit raises, bonuses and stock options. Adjustments are made with each manager as needed. Then the proposed compensation is reviewed to make sure it meets budget.

While compiling a buyer’s guide that includes ECM software, Weir encountered a company-using spreadsheets and e-mail for compensation planning-that routinely had a $ percent to 10 percent error rate, forcing the compensation department to act as fact checker. One year the errors were so numerous that the company ran millions of dollars over budget. Weir says. “They had to e-mail everyone that they were reducing pay after already issuing a few of the higher checks.” That company now uses software by Kadiri Inc. of Burlingame, Calif., he says.

Around the first of March, the system is opened to managers, who begin to give employees the news about their merit raises, bonuses and stock options for the year. The system can print a compensation report and stock option certificates for each individual. In December, Kellogg will begin its second compensation planning cycle on TotalComp-its fifth automated compensation planning cycle since installing its own CPS. Kellogg has dramatically reduced the total time it spends on this process even while involving managers more than ever, Hager says. Another dividend is that managers are more knowledgeable about pay factors, Meyer says. Kellogg budgeted the Kadiri project at $300,000 but spent $400,000, Meyer says. Just under half the total was for customization. Meyer has not calculated return on investment, but he states emphatically: “The direction we have gone is more supportive of our business model and the competitive environment we have to keep up with.”

An Article The ECM Experience Enterprise compensation management (ECM) software helps companies get the most out of their compensation dollars, which for many is their biggest budget item. Good compensation management helps single out the better workers and reward them accordingly. “Companies that practice good compensation hygiene will have better retention,” says Craig Symons, an analyst at Forrester Research Inc. of Cambridge, Mass. Most companies understand their markets and customers better than they understand their compensation practices, analysts contend. These practices tend to be inefficient and don’t always produce the biggest bang for the buck. “Compensation is an enormous [budget] line item, but we don’t have a good understanding of it,” says Jay Weir, a senior

11.622.1

ECM is different from incentive management software, which calculates and tracks sales commissions; such payments are highly specific to individual business unit goals. Rather, ECM covers payments such as merit increases, performance bonuses and stock options, which tend to be consistent across a company.

Other ECM software developers include Workscape Inc. of Framingham, Mass., and Advanced Information Management Inc. of Santa Barbara, Calif. All of them allow the adopter to integrate ECM software with the company’s HR management system (HRMS) and provide web access for managers. “Kadiri has a bit of an edge,” says Symons. “They’ve been at it longer and have a bit larger installed base. But all three are credible solutions.” Kadiri has 40 TotalComp customers, says Kevin Dobbs, Kadiri’s vice president of marketing, including Dow Jones, The Gap and Wells Fargo Bank. Motorola Inc. of Schaumburg, III., is its biggest client, with 13,000 managers planning compensation for 100,000 employees in 60 countries. ECM software starts at around $250,000, but the value can be significant, says Weir. Motorola didn’t calculate a financial return on investment (ROI) because the benefits were so obvious, says Craig Morgenroth, Motorola’s director of global reward programs and services. Companies have not widely adopted ECM. In the economic downturn, corporations have reduced overall information technology (IT) spending and have spent even less on HR information systems (HRIS), Symons says. However, analysts expect adoption to pick up, especially among companies with 1,000 or more employees. HRMS vendors, including SAP AG of Walldorf, Germany, and PeopleSoft Inc. of Pleasanton, Calif., include some compensation planning features, but they tend to lag those from ECM developers. “If you’re looking for 60 percent of the functionality at 20 percent of the price, then PeopleSoft has it,” and that may be enough for some users, says Weir. By Bill Roberts

© Copy Right: Rai University

255

COMPENSATITION MANAGEMENT

Starting Feb. 1, managers access the software again and decide what merit increases, bonuses and stock option grants to give to each employee. Pay decisions are based on three factors, which the software helps automate-performance rating, pay relative to the market pricing, and how difficult it would be to replace the worker. The manager’s boss also can access the same information, and workflow applications allow them to interact and deliberate. The work in progress from across the company can be rolled into a single report to be viewed by the CFO or the CEO while the work is under way.