COMPENSATITION MANAGEMENT
LESSON 40:
PAY RESTRUCTURING IN MERGERS AND ACQUISITIONS
Latest Trends in Compensation Management
Learning Objective
To know and understand the below mentioned points:
• 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.
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11.622.1
Merger and acquisition check-list
Executive Rewards
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;
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
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 b. the arbitrary slotting of jobs into the new structure using
COMPENSATITION MANAGEMENT
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 impos-
sible, 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?
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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 immedi-
ate 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 improve-
ments 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 taken-
over 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;
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h. lunch arrangements, including luncheon vouchers;
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 central-
ization 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 restruc-
turing 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 circum-
stances where the relevant event does not result from a
deterioration in the creditworthiness or financial condition of
the reference entity.
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11.622.1
The, implications of a merger or acquisition on pay and
COMPENSATITION MANAGEMENT
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-
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 segregated jobs are equal, except for their titles, and yet are paid
COMPENSATITION MANAGEMENT
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
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.
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252
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.
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 interna-
tional market. Some professional groups can also impact the
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market. By limiting acceptance to universities, a limited supply
of available professionals is set.
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.
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 employ-
ees 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
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11.622.1
products and HRMS. (Kellogg used Oracle products for
COMPENSATITION MANAGEMENT
financials and Cyborg Systems Inc. for HRMS.)
Kellogg’s compensation department wasn’t thrilled with the
prospect of changing systems. It had been successfully manag-
ing salaries and bonuses using homegrown enterprise
compensation management (ECM) software for two years. Its
compensation planning system (CPS) achieved all its goals-
automating compensation planning in a decentralized,
consistent procedure with a market-based approach with little
burden on HR.
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 compen-
sation 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 recom-
mend 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
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 training or development of tools, its staff interviewed manag-
COMPENSATITION MANAGEMENT
ers 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 commer-
cial 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 presenta-
tion 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. Pro-
gramming began in August. The biggest challenge was to
migrate the CPS features that were not offered by TotalComp.
Fortunately, TotalComp had knowledge management technol-
ogy that allowed the adopters to migrate information from the
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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 calculations-
conducted 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.
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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.
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.
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 compensa-
tion 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
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11.622.1
researcher at HR.com, a web-based HR consulting and research
COMPENSATITION MANAGEMENT
company in Aurora, Ontario, Canada. Technology lets compen-
sation managers, HR professionals and CFOs comprehend the
process, he says.
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.
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.
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 compensa-
tion 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 compensa-
tion planning features, but they tend to lag those from ECM
developers. “If you’re looking for 60 percent of the functional-
ity at 20 percent of the price, then PeopleSoft has it,” and that
may be enough for some users, says Weir.
By Bill Roberts
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