Pay for performance is a globally accepted method of motivating and retaining employees based on their performance in the organization. This method is generally used to recognize and reward employees based on the work they are doing and how well they are doing it, and as a way to create criteria on which the employees’ performance can be evaluated fairly and objectively.

The most important objectives (Figure 1) of this strategy are:

1. Increase the employees’ motivation toward their work
2. Increase the employees’ commitment to the organization
3. Align the employees’ performance with the company’s performance’
4. Distinguish employees’ performance equitably among employees based on their performance

Figure 1

Pay-for-performance concept and its advantages

You can use the pay-for-performance approach for rewarding employees in the following ways:

1. Merit increase
2. Performance bonus
3. Sales commissions
4. Employee stock option plans

Organizations today are keen on implementing this payment practice in their IT landscape. SAP ERP HCM Enterprise Compensation Management (ECM), in combination with SAP ERP HCM Performance Management (PM), offers comprehensive functionality to help organizations realize this pay-for-performance approach. I cover in detail the process of configuring this pay-for-performance approach in SAP HCM ECM.

Prerequisites to Enable the Pay-for-Performance Option

To enable the pay-for-performance functionality in your SAP ERP HCM system, you must first fulfill the following prerequisites:

1. Activate either switch HCM_ECM_CI_1, available as of enhancement package 4, or HCM_ECM_CI_2, available as of enhancement package 5, using transaction code SWF5. This is required for activating new functionalities related to SAP ECM.
2. Activate switch HCM_OSA_CI_1, available as of enhancement package 4, or switch HCM_OSA_CI_2, available as of enhancement package 5, using transaction code SWF5. This is required for activating new functionalities related to PM (flexible and predefined). In cases for which performance evaluations are done in core talent management, Core Talent Management switch HCM_TMC_CI_1 (enhancement package 4) should also be activated.
3. The Performance Evaluation Template should be ready to use, either in PM or Core Talent Management. You can also read performance evaluation ratings from infotype 0025.
4. Performance evaluations done for employees should be in completed or closed approved status.
5. Business packages for Manager Self Service 1.41 or 1.51 should be installed on the SAP NetWeaver Portal to be used with enhancement package 4 or 5, respectively.
6. The configuration to support a pay-for-performance strategy should be present within the SAP ECM system.

Implementing the Pay-for-Performance Option

Take the following actions to implement the pay-for-performance option of the SAP ERP HCM system.

Step 1. Configure the Performance Evaluation Template

The performance evaluation template should be configured and released in the SAP ERP PM module or Core Talent Management module. Use transaction code PHAP_CATALOG_PA or HRTMC_CONF_ASSESS to configure the appraisal templates in Performance Management or Core Talent Management module, respectively.

Figure 2

Appraisal form settings to integrate compensation management

Step 2.  Enable the Pay-for-Performance Configuration

Most of the configuration to enable pay for performance lies under the Guideline Node of SAP ECM in transaction code SPRO (Figure 3). More specifically, you need to create a matrix and apply it to its respective guidelines.

Figure 3

Configuration node to enable pay for performance option

Before going any further into the steps to take, Table 1 lists some important pay-for-performance terms and their definitions.

Table 1

Common pay-for-performance terms and their definitions

Define Methods for Matrix Dimensions

This activity needs to be performed when you are adding a new method that is not provided by the standard SAP system (Figure 4) — for example, a method to derive the employee sub-group for an employee. A method in SAP is identified with up to a four-digit alphanumeric key.

Figure 4

Standard implementations (methods) of BAdI HRECM00_MATRIX_SE

Define Matrix Dimensions

Add the matrix dimensions that are going to be used in the matrix you created previously. This activity needs to be performed because methods cannot be used directly in a matrix. A matrix can only be formed from a dimension. Each dimension has a method attached to it and is compensation-area specific.

Each dimension also has an attribute called method parameter. This is important as the value entered here helps the BAdI to calculate the correct value of the associated method. For example, the SAP standard management by objectives appraisal (MBOA) method (Figure 4) is used to calculate performance ratings for MBOAs. Correct identification of appraisal templates (object VA) and criteria groups (object VB) is required to read the performance ratings from appraisal forms of employees (Figure 5). Similarly, in the case of the SERV method (Figure 4) which is used to calculate the length of service of the employee, the correct identification of the calculation process is required to accurately calculate the length of service for the employee (Figure 6).

Figure 5

Example of the MBOA method to demonstrate method parameter

Figure 6

Example of method SERV to demonstrate method parameter

Define Matrix Dimension Segments

The next step is to add individual segments for each dimension. Segments are required to locate an employee on a particular dimension within a range (i.e., a minimum and maximum value). For example, if an employee’s rating is between 1 and 5, he or she falls in segment 1 (Poor). If the rating is between 6 and 10, he or she falls in segment 2 (Average), and so on (Figure 7).

Figure 7

Example segment values for a matrix dimension

Define Guideline Matrices

This step allows you to finally create a matrix with its associated dimensions (maximum of three) and matrix relevance indicators (Figure 8). These indicators guide the system to the default amount, in percentages or numbers (i.e., in the case of employee share purchase plans, salary increases, or bonus distribution), in the manager’s compensation planning sheet or infotype 0759. Matrixes created in this step are compensation-area specific and multiple matrixes can be created in a compensation area. Therefore, creating matrixes adds flexibility in forming different guidelines for different groupings of people.

Figure 8

Example of a matrix

Assign Matrix Values

In this step, you can assign values to different possible combinations of dimension segments with defined values (Figure 9). For example, if dimension 1 has four values, dimension 2 has three values, and dimension 3 has four values, this results in 48 combinations (4 x 3 x 4 = 48) for which values need to be defined. Values defined here appear as default guidelines on the manager’s planning sheet and infotype 0759. These are the current matrix values, which typically change annually. Therefore, this configuration should be revisited every year to accommodate any organizational changes.

Figure 9

Example of a matrix with a few values defined

Figure 10 shows an example of a three-dimensional matrix with two employees plotted on it. The final guidelines proposed for these employees (yellow and blue) are different because of their different performance ratings, length of service, or experience.

Figure 10

Example of a three-dimensional matrix and associated guidelines

Define Guidelines

This is the step in which you assign your newly created matrix to a group of people (guideline grouping) and to a compensation plan, such as salary increase or regular bonus (guideline variant).

Step 3. MSS Object and Data Provider (OADP) Configuration

OADP configuration involves adding appraisal-rating-related columns to the planning sheet and changing their names to more meaningful ones.

Table 2 lists the key terms of OADP in relation to the pay-for-performance approach, along with their definitions.

Table 2

Key OADP terms and their definitions

Change Column Names

To customize the column names, follow IMG Integration with Other mySAP.com Components > Business Packages/Functional Packages > Manager Self-Service (mySAP ERP) > Object and Data Provider > Data Provider > Define Columns. Standard SAP has two columns to show appraisal ratings on the planning sheet:

1. Column EC_APPRAISAL
2. Column EC_APP_TEXT

EC_APPRAISAL shows the ratings awarded to the employee in column FAPP of the employee’s appraisal document. This should be named with the heading Appraisal Rating (Figure 11).

EC_APP_TEXT shows the description of the rating awarded to the employee with a hyperlink to the employee’s appraisal document. This link to the appraisal document helps managers plan the employee’s compensation, taking into account crucial inputs from the employee’s performance record. The descriptions can be stored against each rating defined for a scale in table T77SP, and are required by the system to show the appraisal document link on the compensation planning sheet. To make it clear what this is, the header should be named Appraisal Document (Figure 11).

Figure 11

Column names have been changed

Adjust Column Groups

To make adjustments to the column group, follow IMG menu path Integration with Other mySAP.com Components > Business Packages/Functional Packages > Manager Self-Service (mySAP ERP) > Object and Data Provider > Data Provider > Define Column Groups > Create or Change Assignment of Column to Column Group. Then add columns EC_APPRAISAL and EC_APP_TEXT to column group ECM_PLAN_SAL (Figure 12). Column group ECM_PLAN_SAL is used to display employee information on the compensation planning sheet in MSS.

Figure 12

Adding new columns in column grouping ECM_PLAN_SAL

After adjusting the column groups, you are able to see the pay-for-performance criteria that you have selected applied to your employees using SAP ERP ECM (Figure 13).

Figure 13

Example screenshot of MSS showing new columns added

Prashant Rastogi

Prashant Rastogi works at Accenture as an SAP HCM associate manager. He has been working in SAP ERP HCM for the past seven years in various assignments. Prashant has experience in implementing ESS, MSS, SAP ECM, Performance Management, Succession Planning, Talent Management, OM, PA, and Nakisa. Prashant has an MBA (HR) along with a master’s in law and labor welfare. He is also an engineer in IT.

You may contact the author at prashant.rastogi@accenture.com.

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