Three Ways to Skinny-down Compensation Administration

OK, the cool compensation plan you built a few years ago is now a pain in the neck to administer.  Here’s how to challenge the status quo and improve your administration and plans.

It was never your intention to create a monster but you’ve now realized that what seemed like a good idea at the time is no longer that.  The landscape has changed, or your staff has been downsized, and your goofy administrative processes have taken on a life of their own.  So now the ratio of administrative effort to realized value is out of whack.  Whatever the reason, you can take some practical steps now to regain healthier, more effective compensation administration and organizational effectiveness.

To Centralize or De-Centralize?

It’s not going to be one or the other, as you know, but a starting point is to ask these questions to determine which way to go:

1. Centralize more.  Are you burdened by arduous roll-up processes?  When you’re completing the annual compensation planning focal review do you have to rely on an army of HR generalists to send in data to corporate before the overall planned spending is known?  Lifting up certain responsibilities to regional and corporate rather than local control can streamline your roll-up reporting. Of course, modern systems can get you out of the spreadsheet roll-up game, but beyond that, you can also lessen the burden by consolidating plans and budgets at higher levels of the organization.  It’s worth it to reduce the number of approval steps and hops where you can do that without sacrificing quality.  Better regional and corporate reporting and analysis can greatly help and corporate won’t have to wait on local folks to send data.
2. The flip side.  Decentralize.  You’re a single comp department in a diverse company and now that you’re growing you can’t do it all.  The fact is, you may not know the needs of your constituents as well as the folks out in the regions, so engage them not only for their hands-on assistance but for their ideas.  Letting go of certain tasks is possible if you train your extended team members to take on tasks with competence.  If you have put good effort into a plan design with guidelines, rules, and controls, then train and deputize others to assist you with the management of your planning and administration.  Today’s cloud-based systems give you visibility and oversight and can enable you to be less of a doer and more of a designer, manager, and advisor without the whole plan wobbling out of control.  Smart people work in the regions and local offices, too.

Frequency of Increase:  Daily, Weekly, Monthly, Quarterly, or Annually?

When can an employee receive an increase?  Are you just completing a pay cycle and the next one is starting?  If the nature of your business dictates a competitive practice to increase pay more than once yearly, you may not have the luxury to reduce the frequency of your pay cycles.  Still, it’s worth it to ask the question.  Market conditions change.  The population mix of your workforce can change.  The competitive landscape can change.  Maybe you don’t have to accommodate all those one-off increases.

Also, moving from anniversary reviews to focal reviews dramatically simplifies comp planning and budgeting.  How do you make the transition?  By implementing a comp planning system that easily handles proration, you can convert your anniversary review cycle to a focal review cycle and save the effort of processing increases at all times of the year.  With integrated performance review and comp planning systems, you give your managers the tools they need to deliver quality reviews and rewards on a focal date.  The cost and administrative savings are considerable.

Design Simpler and Better Incentives

If it takes a 45-minute presentation to explain how your incentive plan works, what does it take for an employee to actually understand and appreciate it?  What does it take to administer?  Here are some ways to standardize and simplify your plan design:

1. Define an algorithm to assign the employee’s target incentive percent.  For example, different targets can be driven by pay grade or job level.  No exceptions.
2. Simplify your calculations for eligible earnings and target amounts.  You’ll need to test for affordability, but why not use salary and target percent at the plan year-end rather than prorating through the year?  If you have a highly upwardly mobile workforce or if local legal requirements require that you prorate earnings through the year this won’t work.  But for relatively stable organizations, you may be able to save a significant amount of administrative overhead by making this design choice.
3. Limit corporate goals and standardize.  Limit individual incentivized goals.  You can still deliver an incentive plan that highly correlates achievements with rewards but by reducing the number of possible components you simplify the calculation.  The result is easier data management, easier explanation of your plan, and fewer rounding issues in the calculation.  All of which results in ease of administration and greater understanding and acceptance of the incentive award.

Wrestling with centralization versus de-centralization, changing planning and pay cycles, and designing simpler and better incentive plans (or merit plans, a topic for another day) all take time, effort and significant commitment.  If you can improve your plan administration by improving even one of these, you’ll begin to reduce unnecessary administrative burden and you will help your organization become more effective, nimble and fit.