Variable Compensation Software: An Emerging Market

HR Magazine, May, 2001 by Linda Thornburg

Customization or configuration? It depends on your needs and your pocketbook.

Many organizations have extended variable-compensation or pay-for-performance programs to all levels of their workforce as a way to reward and retain employees. While many employers find that expanding pay-for-performance participation boosts morale and productivity, it also creates a problem: How do you administer these increasingly complex plans?

In the early days. of pay-for-performance, when only key executives and salespeople were eligible, firms created internal solutions to handle variable compensation administration. These usually took the form of spreadsheets created by internal compensation managers. With some organizations now having hundreds and even thousands of employees in variable-pay plans, this approach may no longer be practical.

Pay-for-performance programs are fluid, needing to accommodate the ever-evolving goals of management and the demands of a competitive marketplace. Internal compensation managers simply can't revise their home-grown packages fast enough to keep up with the changes. That's why many companies turn to outside vendors for relief.

But, before you can bring in outside help, you need a full understanding of your firm's pay-for-performance administration needs. "The first thing you have to figure out is what is to be measured," says Sid Simon, vice president of professional services at CyberBills, a San Jose, Calif.-based application service provider (ASP) specializing in billing administration. Simon is a member of the Advisory Board for the SHRM HR Technology X-Change, which is designed for HR professionals interested in the straregic use of technology in the management of HR. "Then you have to define the measurements, determine what the data are and then determine how the calculations are made."

The current market for compensation software can be divided into three broad categories, says Rick Olivieri of Olivieri & Associates in Concord, Calif. Olivieri is a consultant with 25 years of experience in the compensation field working for companies such as Adaptec, US Sprint, Bank of America, Sibson & Company and Ernst & Young.

"First, there are the backroom salary function applications that allow compensation professionals to manage and develop salary ranges, store job descriptions and plug in salary survey information," he says. "Many of the HR consulting companies specialize in developing custom systems for the compensation manager. Second, there are the stand-alone variable pay packages for sales, executive and deferred compensation. Finally, there are products that address the needs of line managers. These tools can handle salary and incentive and stock compensation based on internal guidelines and budgets."

A number of consultants offer highly customized software solutions to meet customers' individual needs. For example, Aon Consulting has many clients for which it has developed software that is specific to the pay-for-performance programs of the individual company. Along with this highly customized software, Aon recently has introduced Comp Modeler, a software package that integrates the data from several compensation surveys into a system used to market-price existing or newly created jobs. Some of Aon's clients have even used the system for line managers, who use the salary survey information to help them make decisions on awarding merit pay and other incentives such as stock options, so that their employees receive pay that is competitive with the market.

Configurable Solutions

Customized solutions, such as those offered by Aon, can be expensive. A growing number of software vendors now offer software that can be configured, rather than customized, to fit a company's individual situation. With configured software, the purchaser of the software selects from a number of predetermined options to achieve a good company fit.

Compensation software manufacturers are designing their products to handle variable-pay and complex compensation calculations. The major vendors of human resource information systems (HRIS) also are beginning this journey. However, they are in the very early stages and do not have some of the features offered by manufacturers of configured software yet, such as the ease of incorporating data from a number of different sources. Configured variable pay software, sometimes called enterprise incentive management software, can handle information from a number of sources. When companies need to calculate payments based on more than one or two data sources, it is often difficult for the internal HRIS or spreadsheets created by compensation managers to keep track of the data and make the calculations in time to deliver payroll.

Olivieri says that while variable compensation products are still in the embryonic stage, he expects to see significant improvements over he next few years. Compensation software is more difficult to create than other types of Programs because the finished product needs to be both precise enough to satisfy organizations' needs and flexible enough to accommodate the changing characteristics of each unique compensation program.