Compensation Technology:
Choose Your Performance Investments Wisely!
By David H. Johnston
President, Sales Resource Group
Compensation in most organizations is the largest and most complex expense item on the
corporate income statement. It would make sense then that senior management would invest
considerable resources, budget and deliberation on how this money is managed to achieve an
appropriate return-on-investment…….wrong. In particular, incentive compensation where
achievement and payout are supposed to be tied to measurable objectives is one of the most
poorly managed areas in the majority of companies. Organizations spend millions of dollars on
ERP technology to manage corporate financial and operational information, yet they continue to
use spreadsheets to manage their compensation programs. Using technology for the management
of these programs is not just about the collection and analysis of compensation data. Rather, it is
using technology as an enabling “tool” with which to:
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Improve performance management
Provide clear employee feedback
Create a focused, motivational environment
Develop increased competency and skill development
Enhance human resource management decision-making
In discussions with senior management teams regarding organizational performance
improvement, the same issue always crops up within their top three objectives. How do we
accurately measure and align compensation and rewards to the business goals and strategies?
Processing transactional data to determine incentive payouts is only one part of the technology
requirements puzzle. Technology solutions in this area needs to address the alignment and
linkage of several strategic elements, including plan design and target setting (both by position
and for each individual), plan management and tracking, communication, coaching and
mentoring and management reporting. Performing only the data processing and ignoring the
strategic elements, will result in limited performance enhancement and poor financial
management.
Why is it important for organizations to embrace compensation technology?
The Human Resources function has made considerable strides in recent years towards becoming
a strategic business partner to the rest of the organization. The need for this consultative resource
to attract and retain exceptional talent will only increase in the future with the scarcity of
qualified staff within our aging population. Effective compensation programs will be one
important component in the corporate value proposition to current and potential employees. A
competency gap, in most HR groups however, is the knowledge and use of technology to
manage compensation. Spreadsheets, the primary tool currently for managing compensation, are
the cheap and easy way to “get-the-job-done” without investing time or budget into a long-term
solution. Organizations would not take this cheap and easy way for other long-term capital
investments or for research and development, so why here? If people are really the important
factor in long-term organizational success, why not employ technologies to effectively manage
compensation?
A major difficulty in securing support within the organization to acquire compensation
technology is the perceived inability to quantify the return-on-investment. The arguments and
discussions always seem to default to subjective behavioural measures including efficiency (time
savings), motivation (willingness to perform) and focus (doing the “right” things). While it is
difficult to objectively measure and compute a value for these aspects of improved organization
performance through use of technology, consider the following:
1. 8 – 10% of total incentive payments are overpayments versus expected payouts
against targets (conservatively, multiply 8% times your total incentives paid out
last year).
2. Errors in compensation calculations and data input impact the organization to the
tune of 5% of total payroll (multiply 5% times your total payroll, including
executives).
3. Inability to accurately and consistently measure performance in incentive plans
reduces the effectiveness of the plan by from 10 – 25% (multiply the total
payments to recipients last year by conservatively 10%).
4. Insufficient communication and feedback to plan participants on performance
reduces the linkage to behaviour and achievement of business objectives and
thereby the effectiveness of the base salary and incentive program by up to 50%
(multiply the total payouts of your incentive plan by say 25%).
It is obvious when you assess the above factors that the multiple impacts of poor communication,
feedback, measurement errors and overpayments are indicative of why the current incentive
approach and management processes are not delivering the results, behaviour change and returnon-investment expected by senior management. Further, the “real” return-on-investment through
using compensation technology is not measured in years, but rather in months or less. This does
not even take into account the positive potential for better human resource management
decisions based upon superior, accurate and timely information.
What is compensation technology?
Compensation technology relates to applications that support the rewards, recognition and
performance aspects of human resource management. These are not H.R.I.S. applications
typically found in larger enterprise systems or developed for small to mid-sized companies to
house the “people data”. An example of a new compensation technology that addresses the
requirements of organizations in this area is PlanIt sales compensation from SRG Technologies.
Compensation technology applications are developed to:
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Support the design of better compensation structures and incentive plans that are
linked to the business goals and objectives of the organization. These plan designs
must add greater consistency to the treatment and performance expectations of
similar roles within the company. Even in organizations where there are multiple
divisions or business units, the consistency of approach is important to maintain
structures that are fair, manageable and defensible with a link to business
contribution.
Provide feedback to employees on their personal performance and development,
contribution to team and organization goals and the rewards that they have
earned. Many H.R.I.S. systems are “one-way” applications that service only the
needs of the organization, although more recently developed applications are
moving toward “self-service” capabilities. It is important in the compensation
technology applications that employees can access their own performance and
reward data. This is especially true for employees (e.g.: sales, service) that are
remote from the company offices and have limited access to corporate data.
Support the needs of managers at all levels to coach and mentor employees
regarding their performance relative to the expectations of the organization. The
difficulty with this aspect of management has always been ensuring a level
playing field with regards to expectations and consistency in evaluation.
Technology allows the organization to structure programs with common
performance measures as well as those specific to a particular role or division and
to track and report on performance delivery.
Allow analysis of performance and reward information so that management can
refine programs and respond to changes in strategy, structure or the market.
Review, continuous improvement and alignment or focus of plans on business
objectives are necessary in today’s fast paced environment. Manual or complex
administrative systems (e.g.: consolidation of spreadsheets) from a variety of
sources that need to be “cut and paste” to be formatted for decision-making, do
not work. They cannot respond to changes in the organization and unless all the
contributors are dedicated to adherence to process and format, after a while the
data is corrupted and the information that management is making decisions on is
suspect.
Many of these compensation technologies are just emerging on the market and the term
Enterprise Incentive Management (EIM) has been coined to differentiate them from more
traditional H.R.I.S. applications. The most urgent compensation technology needs have been
addressing the variety and number of incentive plans that reside in organizations. Many larger
complex organizations have sometimes hundreds of different incentive plans for a variety of
levels and roles within the entity. They also require greater management than the traditional base
pay systems in that they payout variable amounts, based upon variable performance and
sometimes on different schedules (e.g.: quarterly, monthly, semi-annual etc.).
There are critical business requirements that must be taken into account when looking at these
applications. In order to effectively support the organization compensation technologies must:
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Integrate with other corporate legacy systems to reduce repetitive manual entry
that leads to data errors and under/over payment.
Decrease the computation time required to determine payouts and increase the
accuracy of the calculations.
Reduce the consolidation requirements (e.g.: cut and paste spreadsheets) that is
necessary when data comes from a variety of sources or locations.
Provide easy, user friendly access to allow all participating employees to get the
information that is important for them on performance or payouts.
Supply the organization with a central source to communicate directly with all
employees about plans, performance and recognition.
Support the design and customization process for compensation plans to reduce
the time spent as well as make the approvals and assessment more open and
consistent.
Have the flexibility to make changes to plans designs, plan assignment and
organization structure as well as tracking and transaction accumulation (e.g.:
individual, team, business unit, industry vertical).
Ensure clarity of expectations and rewards for target levels of achievement.
The compensation technology applications are typically delivered either as server-based or SaaS
hosted applications. These differ as follows:
1. Server-based Applications: The Company purchases the application and it resides
on the hardware of the company inside of their systems environment. It is supported
by the technical staff of the company or on contract to outside service providers. The
software and all of the transactional information remains within the firewall of the
company.
2. SaaS Hosted Solutions: In this scenario, the company never really invests in the
software, but rather “rents” the application and the data and application itself resides
on the hardware and systems environment of the vendor. The SaaS provider supports
it and provides all upgrades as part of their service fees (typically paid monthly or
annually with a discount). The transactional information is typically exported in a
secure/encrypted file to the host where it resides in their database along with the
software.
Who needs this technology?
If organizations choose the right type of compensation technology application, it will be used by
everyone in the organization and if applied properly its value will be evident to personnel at all
levels. Conversely, the wrong application or the right application implemented incorrectly will
not get used and will diminish the organization’s credibility with its people and reduce
motivation. Investment in compensation technology should also have an impact on desired
behaviour and delivery of results. Executives today are frustrated because they struggle to get the
dedication and passion for execution that they are looking for and that they themselves feel.
While there are other cultural and generational issues that are parts of this performance and
execution equation, clarity and focus on expectations and deliverables is a major contributor to
the frustration. Compensation technology can be a serious contributor to setting and managing
toward clear, measurable and achievable business goals.
The investment required to configure and install a compensation application need not be
exorbitant, but will depend on the complexity of the plans and the degree of customization that
the organization wants in its program. The current mantra in compensation plan design is “keep
it simple”. Focus on those things that people can impact and limit it to no more than three
elements in order to create focus.
Compensation technology will provide “information” to management rather than “data”. Every
organization has a lot of “data” that gets generated regularly from systems, reports, meeting
notes and a host of other actions and interactions within the company. The problem is that this
“data” occurs in fragments and comes in different formats and with a variety of frequency that
makes it difficult to bring to bear on decisions that need to be made by management. When
properly packaged, data becomes “information” that can improve management’s ability to make
good business decisions.
Compensation technology will add exponential value in certain situations. Particular examples of
these are:
1. Multi-divisional organizations that are moving to a shared services model for HR
services. In these situations, HR Generalists provide direct support to the divisions
and specialists like those in compensation reside in the corporate office and provide
consultative support to all line groups. The shared services approach allows for
centralized design, communication and administration support but with the capability
to customize the program to meet the needs of the division.
2. Organizations with 20 – 50+ people on incentive and/or sales compensation plans.
Those with fewer than 20 people could only justify the investment if their
environment had a high volume of transactions or the nature of the selling or sales
channel was very complex to track and manage. Those with 50+ participants will
require some sort of compensation technology in the future, especially as sales
channels fragment and products proliferate.
3. Organizations that are distributed, where many people work remote from company
offices either out of their homes or in satellite branches with limited management
contact. The technology interface will become a critical communication spot for the
employee to learn about changes in compensation, their performance and the
performance of their direct reports for managers.
4. Organizations that are looking to improve communication with staff and to provide
coaching and mentoring support to their staff. In order to be an effective coach, the
manager needs easy access to up-to-date information to share and discuss with
employees.
Creating sustained competitive advantage in today’s hyperactive business environment is
difficult. It is not about product or process anymore, as these can be replicated quickly. High
performing organizations maintain their competitive position by superior execution. This
requires attracting and retaining people who can execute consistently at a high level. To keep
these people and to differentiate them from the average performer will necessitate a rewards
system that can measure accurately and consistently and can differentiate payouts based upon
performance. This will require compensation technology to enable managers to address
performance and payout effectively and with a minimum of technical/systems knowledge and
compensation expertise. This is a tall order for most organizations and presents a challenge that
must be addressed quickly. Acquisition of compensation technology should not be viewed as an
expense item, but rather as an investment in improving individual, team and organizational
performance. Choose your compensation technology investment wisely however, since it is a
very visible application, and it is likely that you will only get one opportunity to do it right.