Over the past decade, the traditional “entitlement” approach of increasing all employee salaries by a percentage on an annual or otherwise regular basis has been replaced. Compensation plans have evolved instead to a “total rewards” concept, in which all practices and programs are designed to recognize and reward employees for their participation in and contributions to achieving business goals.

One of the most common comments I hear from SAP customers is that they want to determine if compensation awards are being given to the appropriate people and, once given out, whether they have a positive impact on continuing employee improvement and commitment. The Compensation Administration (CA) application in R/3, which is designed to link employee performance with company goals, helps answer those questions. It is a subcomponent of the Compensation Management application. (See Figure 1.)

Figure 1

Overview of key functions of the Compensation Management application

Figure 1 represents the various functions contained in Compensation Management: administration functions, budgeting functions (including Personnel Cost Planning), job pricing, and reporting.

The administration functions allow customers to perform compensation reviews, including fixed pay, variable pay, and long-term incentives (LTIs). You can apply eligibility rules and guidelines based on different criteria, such as performance ratings.

Using budgeting functions, you can create and maintain monetary and non-monetary budgets for compensation reviews and LTI granting. Job pricing functions allow you to export employee salary data for participation in salary surveys. You can also import salary survey data and create market composite results. You can compare internal and external pay and adjust company pay structures as required.

Reporting allows you to create total compensation statements for employees, as well as to inquire about significant employee compensation data.

In a series of articles, I’m going to give you an overview of CA as well as tips on preparing to implement it. My focus is on Release 4.6C and Enterprise Core 4.7 HCM extension 1.10. (See, “How to Prepare for a Compensation Administration Implementation in R/3.”)

I’ll use the example of a management incentive plan (MIP), which in this case is an annual bonus payment for employees in certain management jobs. The award amount is based on the manager’s overall appraisal rating and the percentage of target billing goals met by the manager’s organizational unit. This example requires a custom PD infotype that can hold compensation bonus information at the job level, and target and actual billing amounts at the organizational unit level.

In this article, I’m going to explain how to budget for a compensation/award plan. In subsequent articles, I’ll write about how to design a compensation/ award plan and describe how managers administer it.

Award Categories

Each company compensation or reward plan generally falls into one of these three categories:

• Salary increases (merit increases, promotion pay increases)
• Bonus payments (one-time or regular bonus payments, profit sharing)
• Stock awards (or other performance unit awards)

In CA, a budget may combine allocated values for several adjustment types or a single adjustment type. Alternately, creating a budget in SAP may not be a requirement for some types of rewards — for example, a profit sharing plan that a company pays out annually, based on a percentage of overall profit. This type of reward has no preexisting attributes from which to manage a budget, and the amount paid out is not controlled through a preset budget. The company might choose to create a planning or budget scenario showing the financial impact of a projected profit sharing payout, but not to assign specific budgeted amounts as limits.

The CA application can automatically generate a budget structure for any type of reward or pay adjustment that requires a budget. A budget structure is linked to an organizational structure and allows a manager to distribute rewards while tracking the available and spent amounts for his or her organizational unit. Budget structures linked to the organizational structure can be populated with monetary amounts by three methods:

• Manually, usually by a centralized compensation expert, based on calculations or values from company modeling results.
• Automatically, using an SAP-provided Business Add-In. Many SAP customers use this method and populate a budget for organizational units using the sum of a percentage of the salaries of employees belonging to each organizational unit.
• Automatically, from a cost simulation scenario created using SAP Personnel Cost Planning.

The first two options are available in Release 4.6C. All three are available in Enterprise Core 4.7 HCM extension 1.10.

For my MIP example, a budget is required, and the target goal for each manager is dependent on the job title and salary grade of the manager. The maximum target amount for the MIP bonus is a percentage of the manager’s base salary, which is stored in a custom PD infotype on the job object.

To configure the budget requirements, define the budget types in table view V_T7PM3_B (Figure 2).

You then define valid budgeting periods in table view V_T7PM9_B (Figure 3).

You now can create a budget structure in R/3 and populate it with amounts. The structure is automatically generated based on the existing organizational structure. To create the budget structure, execute transaction HRCMP0011 (Figure 4).

Select the Budget type and Budget period from the configured options and assign a short and long name to the budget structure. Click on the create icon.

Enter the root organizational unit (Figure 5) from which you want the budget structure to be generated. All other required information on this screen is defaulted. Select the generate icon.

Figure 6 shows the budget structure that was generated automatically based on a copy of the organizational structure for the organizational unit (10000003) specified in the selection screen.

Figure 2

Define budget types

Figure 3

Define budgeting periods

Figure 4

Create the budget structure

Figure 5

Enter the root organizational unit

Figure 6

Budget structure based on a copy of the specified organizational structure

Next, user exit HCMP0001 creates a program to populate the budget structure with amounts, using the following steps:

Step 1. Identify all occupied positions that have a job relationship to the appropriate jobs that are eligible for the MIP bonus (i.e., manager, senior manager, regional manager).

Step 2. Find the annual salary amount of the person holding the position.

Step 3. Find the target percent of each eligible manager, which is stored on the custom job infotype.

Step 4. Multiply the annual salary of the employee by the target percent on the custom job infotype to obtain the budgeted amount for the MIP bonus for that employee.

Step 5. Add the amount for each employee into the budget unit related to the organizational unit for the position.

When user exit PCMP0001 is activated, you can populate the budget via menu path Edit>Budget Value>Import Budget from the main Change Budget Structure screen. The system performs the logic written in user exit PCMP0001 and populates the budget amounts into the appropriate budget units. (See Figure 7.)

This calculation budgets the maximum allowed amount for the MIP bonus. Once the budget is verified as correct and is ready to use, a status check can be performed at any level of budget unit to verify that the selected budget unit and each of its subordinate budget units are consistent — that is, that the sum of the distributed amounts in the subordinate budget units is not greater than the amount of the selected higher-level budget.

To check the budget distribution, place the cursor on the budget unit for which you want to verify all subordinate units. In the example shown in Figure 8, the entire budget structure is to be verified, so the highest-level budget unit (Administration) is selected.

The menu path Budget Structure> Check is then executed. If the budget amounts are consistent, the system displays the message, No errors (selected budget and all subordinate budgets are consistent), at the bottom of the screen. (See Figure 9.)

If the budget selected does not contain adequate funds to cover all subordinate budgets, the message, Error found (inconsistent budgets exist), appears at the bottom of the screen, and the system displays an error log with the detail information on the budget unit and its deficit. (See Figure 10.)

When the budget unit amounts are adjusted and validated through another check, the budget can be released. The system does not allow an inconsistent budget to be released. To release the budget so that the amounts are available for distribution in a compensation adjustment or award, follow the menu path Budget Structure>Set Status>Released.

The system displays an information screen when the budget is released, verifying that the budget is consistent and that the budget cannot be edited after it is released. (See Figure 11.)

To release the budget for distribution with a compensation plan, select the Yes option.

Figure 7

Budget amounts populated into units

Figure 8

Selected budget unit for check

Figure 9

Budget check message for consistent budget

Figure 10

Error log for inconsistent budget amounts

Figure 11

Release budget verification message