For Eng.Kelvin Only

Automation gives variable compensation a boost

Drew Robb . HRMagazine . Alexandria: Aug 2002 . Vol. 47, Iss. 8; pg. 72, 6 pgs

Enterprise incentive management's

timely feedback can help modify

employee performance.

Enterprise incentive management (EIM) technology, an emerging category of software and services for automating variable-pay processes, can be a powerful behavior modification tool as well as a means of furthering N's role as a critical business partner.

ElM analyzes, tracks and pays bonuses, commissions and other types of variable compensation. It collates data from various systems to provide management with a comprehensive picture of payout versus performance, and it does it more efficiently than unwieldy manual entry systems.

EIM's early roots began in sales compensation management, where it has long been harnessed to automate calculations, taking into account commissions, accelerators, quotas and special promotions. Such calculations can be cumbersome and can result in high spreadsheet error rates, once a sales force expands beyond a handful of individuals, or commission system variables multiply.

Trimble Navigation Ltd., a Sunnyvale, Calif., maker of global positioning systems, has discovered the need for EIM in complex recordkeeping and report generation. Trimble two years ago implemented an EIM system from Motiva of Pleasanton, Calif., for its sales force, replacing a system that lacked flexibility, could not handle special credit rules and did not provide formal reports, says financial analyst Nam Trinh. The new system calculates commissions for agents and wholesalers, and it creates commission reports, says Trinh. "At month end, the system e-mails clear, accurate performance reports to salespeople and managers."

While Trimble implemented an in-house EIM system, other companies prefer to outsource EIM functions. Instead of purchasing software, they make their compensation data available to an external EIM systems provider for processing and analysis.

For example, Rockwell Automation of Milwaukee added Synygy Inc. of Philadelphia to its team effort involving HR, finance and operations to create a new sales force.

"Synygy is implementing the program's variable compensation plan," explains Ralph Lalone, Rockwell Automation's HR manager. "Management benefits from across-the-- board detailed data on performance so it can provide direction, training and resources to foster organizational growth and development on a global basis."

Beyond Sales

Trimble and Rockwell have discovered EIM's usefulness in managing a sales force, but sales is not the only department that can benefit from EIM. More companies, in fact, are rewarding performance with variable compensation plans for executives, partners, customers, suppliers and staff in general.

"On the sales and partner selling side, EIM blends compensation plans, quotas, transaction and crediting schemes," says Joe Galvin, an analyst with Gartner Inc., a technology research and consulting company based in Stamford, Conn. "On the enterprise side, it analyzes, tracks, pays and brings together the various components of staff compensation. It derives data from a multitude of disparate systems and bundles it against an individual's record."

EIM automation makes it possible to rapidly generate and analyze compensation reports more efficiently than manually digging through numerous files to find and compile figures.

Kinko's Inc., headquartered in Dallas, is implementing EIM technology from Incentive Systems Inc., based in Bedford, Mass., to manage incentive plans in both sales and operations at three levels-store, district and market. Each Kinko's store employee participates in a bonus or variable pay plan; branch managers have a separate incentive system based on sales and profits. Some payments are issued monthly, others quarterly. The new system administers payments, tracks performance and analyzes payout vs. performance.

"Until now, such metrics and analysis have been cumbersome," reports Wesley Wada, vice president of compensation, benefits and HR management systems (HRMS) at Kinko's. "We had to go to multiple sources to collect information and pull it together."

Kinko's officials wanted an incentive management system that balances business process with enabling technologies. As well as motivating people, any automated compensation plan must align behavior with business objectives. EIM technology speeds up the process of analyzing employee performance and providing feedback. That can result in a more motivated workforce, which can boost business success.

"Research shows that timely performance feedback is astounding in its ability to modify behavior," says Thomas McCoy, managing member of T.J. McCoy & Associates LLC, a Kansas City, Mo.-based consulting firm, and author of Compensation and Motivation and Creating an Open-Book Organization. "It is equal to or more important than reward. Employees who don't know what is going on can't make a difference. A system that links timely performance feedback to variable reward based on performance is the foundation for meaningful work. It creates a culture of partnership that attracts and retains top employees who are business partners rather than hired hands."

At Rockwell Automation, for example, Lalone noticed greater job satisfaction among the sales force after the EIM implementation. "They responded positively to the breadth of information we provide on performance and compensation," he says.

Dallas-based 7-Eleven Inc. expects a double bonus-both workforce satisfaction and customer satisfaction-- from its implementation of EIM software from Callidus Software Inc. of San Jose, Calif. With the system, the convenience store chain can reward performance that provides customers with a positive shopping experience centered on five fundamentals: quality, value, fast and friendly service, cleanliness, and assortment.

"We reward managers based on financial performance and these fundamentals," says Terry Guth, director of organizational effectiveness at 7-Eleven. "If we had to do it by hand, it would be overwhelming."

Previously, 7-Eleven managed variable compensation with a spreadsheet, which couldn't handle complex data. Further, the chain lacked the ability to enter data for all 2,500 stores. As a result, the compensation system failed to extend to store level, let alone to the individual.

"The feedback on our incentive program has been very positive," says Guth. "We anticipate a beneficial impact on morale and retention."

Implementation Pitfalls

If EIM technology is to fulfill organizational expectations, however, integration with other systems, as well as compatibility with business processes, is critical. Any compensation system must be able to pull transactional data from enterprise resource planning or order management systems, salary-based bonus tallies from HR systems, and hierarchical information from a customer relationship management system.

Also, a requirement for successful implementation is a thorough understanding of organizational requirements, as well as a clearly defined compensation plan. Rockwell Automation, for instance, found that geographically separate business units and systems posed a challenge to EIM implementation. In addition to separate networks, each business unit had its own processes and compensation plans that were not compatible with the other units' procedures. So one system didn't fit all. To resolve these issues, the company had to define its organizational structure properly, streamline compensation plans and provide data in a format that could be processed across the organization.

Implementation of an EIM system can take three months to a year. "Time spent in up-front planning saves time and money during the implementation phase," Guth says.

Another important consideration is breadth of implementation. Rather than rolling out the entire enterprise at once, it might be wise to begin in sales, because that's where results will be immediately obvious, suggests Monica Barron, senior analyst with Boston-based AMR Research Inc.

A Winning Strategy

EIM can also boost HR's importance to top management. While CFOs have always been able to access company performance and financial data to assert the value of their initiatives, HR has often struggled to back up its claims of business impact due to a lack of comprehensive information. (See the article "Count on Business Value," page 64.)

"With EIM technology, HR executives can finally become equals among peers, provided they develop their analytical and business finance skills," says McCoy.

It may be some time, though, before that vision materializes. EIM application outside of sales is still low. But Galvin believes that incentive compensation management systems will soon be in much wider use. When the business climate turns around, organizations will invest in technology that solves specific business needs, has a reasonable deployment schedule and provides tangible return on investment, he says.

"EIM and incentive compensation management systems meet all three of those requirements," Galvin says. "Now is the time to prioritize where to invest and what to look for in terms of impact and value. EIM technology should be at the top of many lists."

[Sidebar]

Is an Internal System or

Outsourcing Best for You?

[Sidebar]

An essential step in planning the implementation of any enterprise incentive management (EIM) system is to decide whether to purchase an EIM suite and run it internally or outsource EIM functions to a competent third party. Deciding factors can include the size of the company, its functional requirements, company culture and preferences, the competence and workload of the information technology (IT) department, and economics.

For example, large companies with a substantial IT department may find it more cost effective ti implement their own system, while some smaller companies with limited IT resources may find outsourcing more economical. However, a small company for which IT is a core competence could develop an efficient internal system.

If you choose an internal EIM system, whether buying a larger enterprise suite that includes an incentive compensation module or an individual EIM application, you should insist in complete integration with related systems and demand a high degree of flexibility. Further, you must investigate the vendor's reliability and track record.

On the other hand, if outsourcing works better for your organization, be aware that you are shipping outside of the firewall some of your most sensitive compensation and transactional data. Appropriate security measures are

[Sidebar]

absolutely necessary, and they include a thorough review of potential outsourcing partners.

Those who lean toward outsourcing will have fewer internal demands. Further, vendors that host EIM applications often take a modular approach and can take on as little or as much work as the client desires, which of course, affects the price. "Outsourcing is not cheap, but removes the burden of having to maintain the systems expertise to alter compensation plans or do mid-year mid-- course corrections," says Joe Galvin, and anyalyst with Gartner Inc., a technology research and consulting company based in Stamford, Conn.

No matter which EIM route you take, you should perform a careful cost/benefit analysis before finalizing any decision. Costs for EIM tools, whether internal or outsourced, can vary widely.

[Author Affiliation]

Drew Robb is a California-based freelance writer who specializes in technology, engineering and business.