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Chapter 6: e-Compensation—The Potential to Transform Practice?

Overview

James H. Dulebohn Janet H. Marler

In most U.S. organizations since the 1990s, the employment relationship has shifted from being lifelong with career management provided by the organization into being more short-term with employees having to manage their careers as they move between multiple organizations with flatter organizational structures. As a consequence, the role of compensation has become an important management tool for attracting, retaining, and motivating the talent needed to be competitive. In this chapter we discuss how e- compensation tools have the potential to transform the administration of existing compensation plans to better adapt to the dynamic demands of this evolving competitive landscape.

In the past, firms primarily hired employees at the lowest organizational levels, placed workers on career tracks, trained them for higher-level jobs, and promoted from within. The focus at that time for most jobs was on internal equity of compensation and less on external competitiveness. Today, however, organizations hire at all levels. Consequently, they must pay more attention to external market rates of compensation, thus increasing the demand for market salary data as well as tools to access, analyze, and communicate this data to hiring managers and to employees.

Through e-compensation tools organizations can adapt to shifting demands for information. e-Compensation tools enhance the practice of designing and administering compensation programs in a dynamic and competitive environment in three key ways. First, e-compensation tools can increase access to critical compensation information without the need for sophisticated or dedicated IT staffs and sophisticated technology infrastructures. They can simply access key information electronically on an as-needed basis. Second, e-compensation tools enable round-the-clock availability of meaningful compensation information to senior managers, HR managers, and employees. Third, e- compensation tools can streamline cumbersome bureaucratic tasks through the introduction of workflow functionality and real-time information processing.

Human Resource Information Systemsand e- Compensation

e-Compensation represents a web-enabled approach to an array of compensation tools that enable an organization to gather, store, manipulate, analyze, utilize, and distribute compensation data and information. The term e-compensation connotes web-

based software tools that enable managers to effectively design, administer, and communicate compensation programs. What distinguishes e-compensation from previous compensation software is that e-compensation is web-based, rather than client-server based or stand-alone PC-based. Using an Internet browser, the Internet and the World Wide Web, individuals access electronically distributed compensation software, databases, and analytic tools from anywhere—their office, their home, on vacation, on the other side of the globe.

Most HRIS systems provide data storage, transaction processing (that is, automated handling of data for HR functional activities), and management information system (MIS) functionality (that is, functionality to convert raw data from transaction processing systems into a meaningful form; an example would be reporting total compensation of each direct report to the manager). Systems that are web-enabled also allow related data entry and data processing to be performed remotely by managers and employees (for example, through self-service portals and workflow functionality), and other stakeholders through an Internet browser. For example, a manager can review a list of the proposed merit increases for his or her direct reports.

Many human resource information systems, however, do not yet provide integrated analytic features needed for compensation planning and decision support, such as the ability to also see related real-time competitive market salaries. Instead, the compensation functionality provided by most software focuses on database administration and record keeping related to compensation activities such as payroll, merit pay increases, and benefit enrollment. Migration and effective use of web-enabled integrated compensation design and analysis capabilities are still in their infancy. Many larger organizations have implemented sophisticated human resource information systems (HRIS) from enterprise resource programs (ERP) vendors such as PeopleSoft, SAP, Oracle, and Lawson, yet these ERP HRIS systems have yet to provide a full suite of integrated analytic features needed for compensation planning and decision support.

While large-system vendors such as PeopleSoft have been adding analytic tools and some compensation planning functionality to their HRIS system software, this is the exception rather than the rule. Therefore, e-compensation planning software programs are typically add-ons to a larger HRIS system or separate systems altogether. This is illustrated in Figure 6.1. The figure portrays the typical HRIS, which does not provide capabilities to perform compensation system design. HRIS systems generally provide administrative functionality at the transactional processing and management information system levels. It is through add-on software programs, or stand-alone programs, that HR specialists are able to perform higher-level functions such as designing compensation systems that represent more strategic activities. e-Compensation add- ons allow HR managers to focus on important strategic compensation issues.

Figure 6.1: Current e-Compensation Systems.

e-Compensation and Strategic Design

Whether computerized or manual, the process of designing, adjusting, and administering organizational compensation systems is based on procedures for establishing internal equity, external equity, and individual equity. Internal equity refers to establishing the relative worth of jobs inside the organization. External equity, or external competitiveness, involves determining an organization’s pay in relation to the external labor market. Individual equity involves recognizing and rewarding individuals for their contributions.

An organization’s compensation system consists of policies and practices that address how the organization establishes and maintains internal, external, and individual equity. This configuration of policies and practices is considered strategic if it supports achieving critical business goals, including how the cost of total compensation is controlled, managed, and communicated.

We review how e-compensation tools can reduce the challenges inherent in designing and implementing an effective compensation system. To do this, we organize our discussion around using e-compensation to better achieve internal equity, external equity, individual equity, and strategic administration. Within this framework, we highlight some of the available software that, as noted earlier, are typically stand-alone compensation systems or HRIS add-on programs. We also illustrate how e- compensation technology can: (1) facilitate access to sophisticated databases and decision-support tools; (2) enable round-the-clock availability of key compensation information; and (3) streamline processes. At the end of each section, we conclude with challenges that HR managers still need to address despite advances in technology.

Objective One: Internal Equity

Researchers have shown that employees’ perceptions of fairness affect their work- related attitudes, such as job satisfaction and organizational commitment, and their behaviors, such as turnover and productivity (see Dulebohn, 1997; Rynes & Gerhart, 2001). Consequently, an important consideration to organizations is that the pay differentials between jobs should accurately reflect differences between positions in terms of their requirements, responsibilities, and complexities. An organization’s pay structure should logically convey that jobs with greater requirements and responsibilities are paid more.

Organizations achieve internal equity through performing job analyses and job evaluations. Job analysis is a systematic process of collecting information about jobs: identifying and describing what knowledge, skills, abilities, and other characteristics are required to do a job. Drawing on the output of job analyses, job evaluation is a formal procedure for hierarchically ordering a set of jobs or positions with respect to their value or worth, usually for the purpose of setting pay rates. The outcome of job evaluation is a rating of a job’s worth (not rating the incumbent), and ultimately provides a rationale for paying jobs differently inside the organization.

While there are several job evaluation methods, the most widely used approach in larger companies is the point method. This approach evaluates jobs based on a set of compensable factors that represent what the organization wants to pay for. A compensable factor is an element of skill, ability, responsibility, or competency that can be described at various levels. For each compensable factor, a scale is devised representing increasing levels of worth. Each level is assigned a given number of points. The range of possible points is constant across all jobs. Each job is rated on each factor separately and is assigned point values. After rating all jobs, the end result is a job structure or hierarchy, which ranks all the organization’s jobs based on their total point values (that is, summation of point values received for each compensable factor level).

e-Compensation Tools for Establishing Internal Equity

The job evaluation process is associated with bureaucracy, hierarchy, and over- attention to internal structure to the detriment of flexibility and market competitiveness.

But while external competitiveness garners greater attention when labor markets are tight and competition for talent fierce, achieving internal equity can be critical to successfully managing mergers, acquisitions, and reorganizations. Keeping existing employees productive and maintaining morale is best achieved by managing internal equity and meshing disparate compensation systems in a systematic and equitable way. Consequently, despite declining popularity, job evaluation is essential to deriving and maintaining pay structures that promote fairness and reduce perceptions of inequity.

Thompson and Hull (2003), executives of Link HR Systems, believe that intranet/Internet-based technology will transform the job evaluation process and restore its earlier popularity. The range of products that use the Internet and web access to enhance either job analysis or job evaluation illustrate how e-compensation tools can transform designing and maintaining internal equity policies from a bureaucratic hassle to an effective automated competitive practice. The Internet and web access make best practices more accessible and available and can also streamline existing internal equity practices.

Increasing Accessibility

Internet technologies level the playing ground by making available expert information to a much broader audience. For example, HR managers can electronically access advanced job analysis techniques developed by well-regarded experts such as Personnel Systems and Technology Corporation’s (PSCT) web-based job analysis tools. Subscribers to PSCT do not need sophisticated hardware or to be HR specialists in job analysis or job evaluation (www.pstc.com). For example, subscribers can access PSCT’s flagship job analysis instrument, the Common Metric Questionnaire (CMQ), a web-based questionnaire designed and validated by I/O researchers to accurately describe both managerial and nonmanagerial occupations (www.cmqonline.com). PSCT also offers web hosting and reporting services to administer online tests and surveys, custom web-programming, and test design.

Knowledgepoint (Shair, 2001) (www.knowledgepoint.com), a subsidiary of CCH, offers another job analysis product accessed over the web. The advantage of Knowledgepoint is that it pro-_vides low-cost access to an extensive job description library, along with search capabilities. Knowledgepoint’s web-accessed software and database illustrate how e-compensation makes sophisticated ―knowledge management‖ databases available to even smaller companies, potentially reducing competitive advantages larger organizations have.

A caveat to these marketed online compensation tools, however, is that it is hard to determine the value of the information before you pay. For example, while William M. Mercer Inc.’s description of its eIPE job evaluation tool provides screen shots, descriptions, and demos to convey in more detail what you are purchasing in advance, it still costs money to acquire (www.imercer.com). Job evaluation tools and information are easily available on the web, but are not necessarily low cost.

Not all job evaluation tools on the web carry hefty price tags. With patient searching, if you have time, at the other end of the spectrum, organizations can find free web-based services such as HR-Guide’s job evaluation tool. This interactive web-based tool found at www.hr-software.net/cgi/JobEvaluation.cgi provides an online point-method job evaluation instrument. Using this tool, an HR specialist can specify the number and type of compensable factors; the number of levels within each factor; and the points associated with the factors. Completely free, customizable, and simple to use, this tool is a quintessential example of the value of sharing resources and knowledge on the web.

Increasing Availability of Job Analysis and Job Evaluation Tools

Web-based compensation software increases the accessibility of information, making it available 24/7 using corporate networks, servers, PCs, and handheld devices. Managers and employees have access to key information to make completing a job analysis or job evaluation project relatively easy. Furthermore, best practices in both these activities are built into the software. For example, JPS Management Consulting (www.jpsmanagement.com) provides web-enabled standardized questionnaires that collect information from a constituent manager or job incumbent. Because the system is web-enabled, HR specialists can electronically distribute them to target employees or managers via the corporate intranet. Intranet technology, therefore, enables the responsibility for job evaluation to be decentralized to the desktop of the hiring manager, if desired.

Streamlining the Process

With online JPS Management Consulting Questionnaires, once the manager completes the online survey, the data is automatically collected and summarized. A standardized job description is automatically generated, converted to job evaluation format, and given a job evaluation point score. Because production, distribution, collation, and analysis are all automated and electronically distributed, the HR specialist is freed from multiple time-consuming and transactional tasks to spend more time on careful design and on developing practices that leverage the job evaluation information.

Challenges to Achieving Web-Enabled Internal Equity

Web-enabled technologies can increase the amount of information available to decision makers and speed up the process of developing and distributing this information. There are several factors, however, that can hamper companies from fully realizing the potential of web-enabled internal equity tools. First, most of these tools are not generally integrated across software packages. While there are a growing number of software programs in the market that support the design and maintenance of internal equity policies and practices, relatively few are currently both integrated and web- enabled. A survey of compensation administration software conducted by Advanced Personnel Systems in 2003 reveals that, of the thirteen web-based products with software supporting internal equity practices, only three companies also integrated

external equity, individual equity, or administration practices (Advanced Personnel Systems, 2003).

InfoTech Works Inc. provides one of the few integrated web-based compensation software solutions that automates and integrates internal equity and external equity software applications and can be used stand-alone, over an intranet, or over the web on an outsourced basis. The job evaluation module automates any point-factor plan, including Hay or modified Hay point plans. Its job evaluation software comes bundled with market pricing modules, a salary range/bands module, and salary budgeting and records management modules. The job evaluation data are then used to create grades or bands and to interface with the other modules.

A second challenge facing organizations in implementing these e-compensation tools is that these tools are only as good as the data they access. This means there must be organizational commitment to gather, manage, and maintain accurate and relevant data. Organizations often assume IT tools will save money through reduced headcount, but many find that database software still requires employees’ time to collect and manage more data. Third, proper training is required to ensure user acceptance and competent use of the technology. Companies frequently skimp on this aspect of software implementation to their detriment. Fourth, some users find data entry tends to be slower and less flexible using web applications than client-server-based software, particularly with nonlinear processes (that is, moving around to various screens without losing data). Faster servers and networks, however, are alleviating this early criticism.

Finally, while web-based software tools increase access to and distribution of information, the quality and efficiency with which decisions are made still remain ultimately with the manager. Thus, web-based technology makes information accessible and available and can streamline the whole process, but it is still ultimately a tool to be used by, not to replace, a HR specialist.

Objective Two: External Equity

Organizations have to offer competitive rates of pay if they wish to attract and retain competent employees (Barber & Bretz, 2000). While job evaluation provides an acceptable approach for determining relative worth of jobs within an organization, the organization still has to ensure that the value they attach to the job is competitive outside, in the external labor market. External equity, or external competitiveness, refers to an organization’s pay in relation to the external labor market. Managing external equity is essential because employees also compare their pay to the pay for similar jobs in competitor organizations (Dulebohn, 2003). If an organization does not consider policies on external equity in its compensation designs, it stands to lose valuable employees and will fail to attract new ones.

Organizations establish external equity in compensation system design through conducting wage and salary surveys whereby data are gathered on the amount competitors are paying for key or benchmark jobs. Salary survey data provide organizations with a basis for evaluating their rates of pay as compared to their competitors. The process for conducting wage and salary surveys includes several steps. First, organizations determine on which benchmark or key jobs to gather wage or salary data. In practice, organizations do not gather market data on all jobs. Instead they gather survey data for a number of key jobs, which typically have the following characteristics: the jobs are defined quite precisely; the content of the jobs is relatively stable over time; and the jobs occur frequently in the organization and in competitive organizations that will be surveyed. The jobs chosen are representative of the range of jobs in the job hierarchy produced from the job evaluation.

In the second step, organizations determine which organizations to survey. The selection of survey companies depends on the product and labor markets in which the organization competes for talent. After relevant competitive organizations are chosen, the organization must verify that the job descriptions of the surveyed competitor organizations closely match the benchmark jobs the organization wishes to price. If necessary, the organization has to make adjustments to the collected wage data. For example, if an organization’s job does not include supervision of subordinates, but a comparison job does, this has to be factored into the wage analysis.

Finally, an organization must also consider the date at which the wage survey data were collected. If the data are old, it may need to be adjusted (that is, aged) using the CPI or a similar index to account for price changes in the external market. Once the data are carefully matched and adjusted, only then can compensation analysts use the wage survey data to compute central tendency statistics. These metrics are then used to determine how competitive a particular job within the organization is compared to its competitive counterparts.

e-Compensation Tools for Managing External Equity

Online salary survey data is what most people think about when the term e- compensation is used. Online surveys and salary survey websites give users, both employer and employee, electronic access to salary information formerly available only on paper-published survey statistics for benchmark jobs (Gherson & Jackson, 2001). Since their introduction a few years ago, web-enabled surveys have proliferated. Salary survey websites are easy to use, easy to access, and increasingly used by both companies and employees.

Increasing Accessibility of Competitive Information

In facilitating the collection and distribution of benchmark job survey information, the Internet has accelerated a shift from focusing on internal equity to a greater emphasis on achieving external competitiveness. The outsourcing of these activities is also common. Salary survey participation, job matching, managing of salary surveys, and job

pricing are some of the most frequently outsourced compensation practices (Brink & McDonnell, 2003).

With the increased accessibility and management of salary survey information, even smaller organizations with smaller HR staffs can develop relatively sophisticated external market analyses. Spreadsheets are available for download from the Internet that provide forms for consolidating multiple salary surveys along with automated features such as aging and weighting data. Compensation consulting firms that collect the salary survey information also make available downloadable spreadsheets that save hours in matching jobs, summarizing, and auditing data (Brink & McDonnell, 2003).

Increasing Availability of Salary Data

The salary survey data available over the Internet, while accessible 24/7, nevertheless does not represent real-time data. Much of the survey data published on the web represent the collation of job data that may be as much as two years old. Few consulting organizations have found it cost-effective or feasible to update their survey information more frequently than annually. Furthermore, few participating organizations have the manpower to support this effort. Thus, while the data are online, available, and accessible, they are not as yet real-time.

Streamlining the Process

Several specialized software vendors, such as Advanced Information Management Inc., HR Web Solutions International, and InfoTech Works Inc., and HR consulting companies, such as Mercer Human Resource Consulting LLP, Aon Consulting, and Watson Wyatt Worldwide, offer web-based systems that integrate external market and internal compensation data into a centralized database that also provides customized manager self-service access. These systems enhance the organization’s ability to manage their external competitiveness by providing decision makers with relevant market salary information to compare against internal total compensation. They also speed decision making with the automation of the review and approval process.

Managers can now access their direct reports’ salary history along with comparative market data derived from several salary surveys. Based on this information they can make salary increase and adjustment decisions that are within budget guidelines and are consistent with market competitiveness. Moreover, the process is further automated by workflow technology that electronically routes compensation decisions to senior managers and HR for approval. Interfaces with HRIS and payroll databases further automate the process. As a result, decision-making effectiveness, efficiency, and execution are enhanced.

Challenges to Achieving Web-Enabled External Equity

One of the challenges that compensation specialists face in having easy access and availability of market data is using it wisely. Easy web access to market information

does not eliminate the necessity to be careful consumers of information. Users must still evaluate the quality of the market data, and this includes considering the quality of survey data, the quality of the benchmark job matches, survey age, sample size, and relevant competitive market. Some of the newer websites capitalizing on increased interest in market salary data do not always provide sufficient information for consumers to fully evaluate the quality of the data.

Another challenge is to integrate market data into an existing HRIS system such that the HRIS database includes current relevant market information on well-matched benchmark jobs. The challenge is both technical and organizational. From a technical perspective, the challenge is to create data-integration interfaces, which transfer data across different database platforms without errors. Organizationally, the challenge is to maintain a consistent sample of benchmark jobs that are well matched to the salary survey jobs. Without careful management of the plethora of accessible market information, compensation managers run the risk of distributing poor-quality data that will only enhance the efficiency with which poor decisions are made. Thus while the Internet and web-based technologies increase accessibility, availability, and efficiency of information access, HR managers must still critically evaluate the quality of the data, manage its integration across information technology platforms, and ensure that the timeliness and integrity of data is maintained.

Objective Three: Individual Equity

Achieving individual equity means managing comparisons individuals make relative to others working the same job inside their organization or to themselves, based on their contributions to the job (their performance, seniority, responsibility, and so forth). The concept is based on Adams’s (1965) theory of inequity that focuses on the causes and effects of perceptions of wage inequity. Adams posits that individuals evaluate the fairness of their outcomes using an equity rule whereby they compare their own input- outcome ratios to a referent or comparable other, which is typically someone working a similar job in the organization. Individuals perceive equity or fairness when the ratio or balance of their outcomes to their inputs is equal in relation to the relative inputs and outputs of the referent other. In contrast, inequity exists when the ratios are perceived as unequal.

Adams asserts that perceptions of unequal ratios (resulting from either under- or overpayment) result in a state of inequity distress or psychological uneasiness that motivates individuals to engage in actions that will remove the dissonance and restore perceptions of equity. According to Adams (1965), ―The presence of inequity will motivate [the] person to achieve equity or to reduce inequity, and the strength of motivation to do so will vary directly with the magnitude of inequity experienced‖ (p. 283). Workers will attempt to achieve equity through actions such as altering inputs, altering outcomes, adjusting their evaluations of their inputs and outputs, by using psychological justifications, or by withdrawing from the organization (for example, by engaging in negative behavior). In contrast, perceptions of a balance between input and output ratios result in evaluations that an outcome distribution is equitable, and this evaluation

contributes to satisfaction and other positive individual and organizationally related attitudes and behaviors.

The terms ―internal‖ and ―external‖ in internal equity and external equity highlight the focus of comparison (in the former it is other jobs within the organization; in the latter it is the external labor market). The term ―individual equity‖ best reflects what Adam had in mind in his theory of inequity—individuals making comparisons of their pay in relation to others in the organization working similar jobs. In establishing individual equity, organizations must have mechanisms in their compensation systems that reward individuals for their performance and their contributions to the organization.

Structurally, wage grades and wage ranges allow organizations to pay individuals differently based on differing productivity, despite having similar jobs. A wage grade is a horizontal grouping of different jobs that are considered substantially equal for pay purposes. Successive wage grades represent increasing amounts of job evaluation points, based on compensable factors such as responsibility, skill, knowledge, ability, and so forth. The accepted practice in designing wage grades is to use equal wage grade point intervals. This is accomplished by dividing the total job evaluation point amount by the number of grades needed to reflect differences in point values for groups of jobs. For example, a ten-grade structure consisting of 1,000 total points would have 100 points for each grade width.

Grades enable the compensation designer to treat jobs of similar value identically in the wage determination process. Grades also enhance an organization’s ability to move people among jobs within a grade without changing in pay. Finally, grades enable an organization to recognize different individual performance in similar jobs.

The most widespread practice that U.S. organizations use to formally recognize individual differences in performance is merit pay programs. In practice, however, the determination and allocation of merit increases is a time-consuming and complex process. While pay grades provide some measure of structure and control in this process, it nevertheless is incumbent on the organization to keep them updated, equitable, and competitive. Merit increases must also be evaluated in terms of their effect on external competitiveness and internal equity.

There are two approaches to managing the merit pay programs. In a centralized approach, first, salary budgets are centrally determined based on factors such as average labor market rate increases, ability to pay, competitive market pressures, turnover, and cost of living. Once these factors are analyzed and an overall target salary increase is budgeted, the second step is to consider individual differences in productivity and merit. To capture this aspect but still maintain internally equitable pay structures, compensation managers develop merit increase grids as guidelines. In this system, centralized HR specialists rather than operational managers exercise greater control over salary increase decisions.

In a more decentralized approach, managers across the organization forecast the pay increases they expect to recommend in the coming year to retain their key employees and to remain competitive. These data are rolled up to form the organization’s salary budget. This bottom-up approach allocates more discretion and control to line managers. HR managers are simply responsible for rolling up the information and ensuring the data are accurate and the resulting budget produced in a timely fashion.

Both approaches are widespread, and commercial products facilitate either approach although compensation managers should determine which administrative approach is built into the product to ensure a better fit with their organization’s existing practices.

e-Compensation Tools for Achieving Individual Equity

Most large organizations rely on their HRIS to provide most of the information needed to administer pay increases based on individual merit. This includes accurate headcounts, current compensation levels, pay structure, pay history, pay survey information, and performance history. The challenge, however, lies in accessing data that is notoriously disparate, driven by multiple homegrown legacy systems, or spreadsheet processes and further complicated by multiple merger and acquisition activities. The result is often an environment in which organizations have islands of information that make the gathering and standardizing of compensation information extremely difficult (Weir, 2003). Most compensation administrators today are still conducting their salary or merit increase process using Excel spreadsheets and email, or by sending out the spreadsheets on paper. This process is time-consuming, prone to errors, and not very secure (www.aimworld.com/press_52902.html).

Streamlining the Process

Two firms, PeopleSoft and Kadiri, Inc., offer comprehensive web-enabled compensation planning software that coordinate and integrate information from internal pay structures and external market data to effectively and efficiently implement individual equity policies. PeopleSoft, an ERP software vendor, offers an HRIS module that is better leveraged in centralized structure. Kadiri, Inc., a specialized compensation software vendor, favors a more decentralized approach.

PeopleSoft Corporation is a comprehensive enterprise-wide resource planning software vendor known for its particularly strong Human Capital Management (HCM) module. As part of this HCM module, PeopleSoft includes a total compensation component that allows HR managers to budget and administer a compensation system that includes salary plans/grades/steps, multiple pay components such as base pay, spot awards, and geographic wage differentials, variable compensation plans such as stock options, and benefits. Their HCM module also interfaces directly with two self- service compensation modules, one for managers and one for employees.

The manager self-service module gives managers, upon proper authorization, access to their direct report employee records residing in the centralized PeopleSoft HRIS

database, which includes compensation history, current total compensation, and job history. Managers also may request salary changes for their employees that include not only salary increases but also bonus allocations or spot awards. These salary requests are then electronically routed through a workflow routine to a more senior manager for approval before the database is updated.

Kadiri, Inc., has a web-enabled add-on software product that facilitates the salary budgeting allocation and approval processes. By integrating several key web-enabled technologies: self-service, workflow, and knowledge management, Kadiri TotalComp allows compensation specialists to gather information from their HRIS, configure it, add additional information such as pay survey data, and develop various budget allocation scenarios before placing it in an accessible central data repository. Through a centralized data repository, managers can access the comprehensive information necessary to make efficient, effective salary allocation decisions. This includes salary budgets, allocation guidelines, and employee salary and performance metrics for base, variable, and equity compensation. Managers can use this information along with an integrated compensation HR metric modeling tool to evaluate various allocation configurations before making a final decision. Upon completion of this process, managers submit their allocations electronically to senior managers, who complete a review before it is routed back to compensation managers for final review and integration into the organization’s HRIS and financial plans.

Web-enabled compensation planning software can deliver significant savings through reduced decision-making time, more accurate data, and reduced errors. Using Kadiri to automate, streamline, and communicate compensation practices, one financial services company reduced their planning cycle from thirteen weeks to five weeks and reported over $10 million in cost savings from reduced hours spent by both line managers and compensation managers in the planning process (www.kadiri.com).

Objective Four: Strategic Administration

Compensation managers have to demonstrate how compensation decisions support achieving organization success. Administrative practices should ensure that policies on internal, external, and individual equity are properly operationalized in the day-to-day management of individual compensation and that this effective implementation supports overall business objectives. Effective compensation administration also ensures that total compensation costs are controlled and total compensation decisions are clearly communicated to employees. Both activities are critical to the success of any compensation design.

e-Compensation Tools forCompensation Administration

Planning and controlling compensation costs in a PeopleSoft system is more effective if there is a well-organized, defined, and centralized HR function. Control in a

PeopleSoft compensation administration package builds control mechanisms within the software, therefore leaving less managerial discretion. Thus PeopleSoft automates the salary change approval process but does not provide built-in knowledge management capability that would guide or empower managers to make their own compensation decisions. Instead the choices are built upfront into centralized and standardized software routines.

In contrast, Kadiri, Inc.’s flagship product, Kadiri TotalComp, combines the attributes of both centralized and decentralized managerial structures. Kadiri’s software enables centralized control over compensation design so that standardized compensation structures, guidelines, and pay allocations are consistent with overall business strategy and objectives. Decentralized decision making, however, is also facilitated with the distribution of a compensation knowledge management system. The knowledge management system reinforces company policy and objectives by providing managers with consistent, customized decision-making guidance.

In both approaches to compensation administration, HR managers have access to comprehensive compensation metrics that facilitate managing the organization’s cost of labor within a strategically designed competitive framework. In both examples, however, these tools do not replace the need for compensation specialists who can optimize the potential these tools offer.

The communication of compensation policies using e-compensation tools provides another excellent example of the importance of developing an effective sociotechnical interface.

Communicating Compensation Policies

A compensation plan, no matter how brilliantly designed, will not accomplish its objectives without a communications strategy that is just as brilliantly designed (Fitzgerald, 2000). Even with the most meticulously planned and managed compensation system, communication to employees can make the difference in how compensation decisions are received and how favorably employees respond. For example, Jones and Scarpello’s study of employees in a large county government found that perceptions about the fairness of the pay communication procedures contributed uniquely to the prediction of organizational commitment (Bergman & Scarpello, 2002).

There are four basic steps to designing a compensation communication plan. First, senior managers must set the objectives of the communication plan and the strategy for achieving these objectives. Second, HR specialists develop the content of the communication. Third, the content is distributed in a form and media that best achieves the communications objectives. Fourth, the effectiveness of the communication plan is evaluated.

Unfortunately, setting communication objectives is frequently ignored in a rush to get information out (Milkovich & Newman, 2002). However, it is important to have a clear

idea of what the communication is meant to achieve. Is it meant to communicate the value of the employment relationship and thereby increase employee commitment and reduce turnover? Or is it meant to communicate how an employee can earn greater compensation by pointing out the motivational aspects of the compensation system? Is it meant to direct attention to valued behaviors? Is it meant to establish expectations about the nature of the employment relationship? Defining specific objectives is important because, without them, no matter how fancy the web-based technology, objectives cannot be achieved that have not been articulated.

Once objectives are articulated, managers must define a communications strategy. Will using ESS capability be the most effective communication vehicle? Will the targeted audience have access, know-how, and confidence to find and use the information? For example, PeopleSoft’s HCM self-service module allows employees access to their personal compensation history through a feature that allows them to navigate via a web- based portal to their relevant data. Employees have viewing capability but cannot update or change the database. This may enhance communication or increase frustration if employees cannot find someone to answer questions.

Is it better to market an organization’s total rewards or is it more effective to simply provide them with all the details and facts, as is the case in PeopleSoft’s employee self- service module? A Towers Perrin study found that higher performing companies are more likely to share the details of their compensation programs such as salary ranges and grades with employees (Gherson & Jackson, 2001). Ultimately, compensation strategy and communication objectives should guide the electronic content and distribution practices.

e-Compensation Tools and Compensation Communications: Facilitating Strategic

Administration

Web-based technologies communicate total compensation and can provide depth, flexibility, and connectivity that make the technology highly valuable for employee and employer. Employees’ perceived value of the employment relationship is enhanced by the inclusion of a vast array of components; these range from base pay, stock options, paid time off, insurance, sabbaticals, and retirement plans to often-forgotten expenses such as seminars, conferences, training sessions, tuition reimbursement, car allowances, uniforms, and safety equipment. Presentation in the form of graphs and charts or illustrations can drive home the ―a-ha‖ factor. Thus, with carefully crafted content and targeted distribution, web-based communication software can facilitate the dissemination of critical information and manage how employees perceive the value of employment relationship employees. Moreover, this vast amount of information can be personalized to each employee. For example, Nerheim & North (2001)of Hewitt indicate that, whereas a standard benefits statement offers four to twelve pages of information, a web-based tool can easily provide three to five times the content at a click and can be accessed 24/7.

Electronic communication offers several crucial advantages relative to print. First, the rapid online turnaround time gets information to employees far sooner than print, minimizing outdated information. Second, a website can be refreshed multiple times annually, resulting in total compensation communications that is fresh and relevant year around. Third, online publication results in substantial savings on paper and publication costs. Finally, websites can provide links to sites where employees can take action to grow their base pay or ensure they have enough money for retirement.

The comprehensive nature of such a website doesn’t simply serve to convey data. It can help employees better understand the reciprocal nature of the employment relationship and how to maximize individual financial opportunities and also convey to employees the connection between personal behavior and business results.

Challenges to Web-Enabled Strategic Administration

Web-based technologies enhance and facilitate the compensation communication process but do not replace the need for well-designed content. While the steps involved in managing compensation communications have not changed, web-based technologies are changing the cost, quality, and speed with which these steps are executed. Best practice in total rewards today entails getting relevant information to employees, managers, senior management, and HR staff so they can make real-time informed decisions on a collaborative basis (Martin, 2001). As a result, more than ever before, an organization’s communication practices can have a profound effect on how employees respond to an organization’s compensation practices and whether the organization indeed gets what it pays for.

HR specialists still need to develop the content because they understand the key objectives and design features of the compensation system. As Michael Snipes of Allstate Insurance notes, ―You must connect the dots for employees as to how they play in the larger corporate picture. Employees must understand their role in earnings per share in order for them to understand the last piece in the puzzle—what’s in it for me and how can I benefit‖ (Berger, 2000, p. 23).

Conclusion

Compensation plays a critical role in organizations today. The decline in lifelong employment relationships and internal labor markets has increased the prominence of competitive compensation in attracting and motivating critical human capital. This necessitates a closer linkage with the external market and the tools to make rapid changes in compensation in order to remain competitive and attractive to current incumbents and prospective employees. e-Compensation tools provide HR managers with the ability to effectively adapt compensation systems to meet these challenges, to manage and maintain all aspects of equity in pay plan design, and to link compensation systems with the strategic management of the organization.

With increased ability to gather information electronically,e-compensation tools provide HR professionals greater access to knowledge management databases, best practices in internal and external and individual equity design, as well as to competitive information. Web-enabled tools also enhance HR professionals’ ability to distribute this key information and compensation metrics to employees and managers, thus making critical compensation information more available to support decision making. Finally, they increase HR professionals’ productivity through automating information access and distribution of transactional compensation administration responsibilities to line managers and employees.

As shown in Figure 6.1, web-enabled e-compensation systems also serve line managers, employees, and senior managers. Line managers benefit from e- compensation functionality by being able to access compensation information and analytic tools. These tools also provide them with the ability to access compensation data, compensation metrics such as average salary, market salary, and salary budgets, and to edit and update employees’ compensation information online. HRIS and e- compensation tools provide employees with the ability, through self-service modules, to access their compensation and benefits information. They also provide them with tools to assist them in understanding their compensation and benefit packages. Finally, upper managers benefit from e-HRIS ande-compensation tools in that these systems provide them with tools and relevant compensation metrics to evaluate and integrate compensation information into their strategic management.

e-Compensation software and systems (as portrayed in Figure 6.1) provide HR professionals with the ability to manage their compensation systems in order to meet the traditional compensation objectives of internal equity, external competitiveness, individual equity, and administration. Most web-enabled HRIS programs, on their own, however, do not currently provide sufficient compensation system design or strategic administration functionality. Instead, HR departments gain this crucial functionality through the use of web-enabled add-on software tools and stand-alone systems. As both hardware and software technologies advance, however, so will improvements in the technical integration of e-compensation add-on tools into HRIS systems themselves. It will be up to HR professionals to ensure that organizations adopt and integrate these capabilities organizationally to leverage their potential.

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