The Complete Guide to Merit Pay Systems
By providing incentives and rewarding performance, Merit Compensation initiatives can drive desired behavior and help companies achieve their strategic objectives.
Merit Compensation takes a number of forms, including:
- Employee performance plans for salary, promotions and/or bonuses
- Team performance bonuses to reward the accomplishment of project goals
- Executive bonus structures to ensure accountability for organizational goals
Tailor Merit Compensation Initiatives to Specific Groups
Stakeholders Through the Entire Organization
A company’s Merit Compensation process affects the entire organization. Whether it’s developing the plan, setting the objectives, implementing the reward structure, managing the employees and teams, or, allocating the actual awards, every part of an organization is involved in the merit compensation process.
Understanding how each department is impacted can help to ensure that merit pay systems are optimized to meet the needs of the full organization.
Human Resources (HR): Strategic HR departments create compensation programs that reinforce a pay-for-performance strategy that drives all levels in the organization.
Finance: Finance departments track financial payout metrics such as revenue, margin and profitability, accrue the expected pay-for-performance payout, track the actual cost of compensation, as well as conducting financial analysis and forecasting future revenues.
Management: C-suite executives and management teams establish the desired behaviors by setting company strategy, identifying market and product priorities, then reviewing the plan’s outcomes.
All Business Units: Employees in all business units – including C-suite executives setting strategy, managers leading teams and front-line employees executing the plans – are participants in merit compensation plans.
Effective Communication – An Essential Part of Managing Merit Compensation
To fulfill its purpose, Merit Pay Systems rely on effective communication.
Merit Compensation only works if all participants understand and buy into the plan. They must understand the plan’s structure, rules and parameters, and have ample knowledge to successfully achieve the performance levels necessary to reach the incentive rewards.
To keep the process working effectively, companies must clearly communicate the fundamentals of:
- Company strategy and objectives
- Individual or team goals
- Reward Structure
- Methods of calculation
- Potential payouts
- Timelines of the merit compensation plan
Automated Workflow and Enhanced Communication
Incentive Compensation Management (ICM) technology provides automated workflow that facilitates improved communications between stakeholders. Specifically, an automated process provides an integrated internal workflow between HR, Finance, Executives and Management, and the various Business Units.
For example, an automated process facilitates communications benefits such as:
- Worksheet approvals, adjustments, comments and overrides
- Alert configuration
- Automated bonus suggestions, ranges and budget allocation
- Monitoring the status of approvals and budgets
- The ability to manage “Batches” of worksheets
An automated workflow also facilitates other aspects of financial management and strategic planning.
Greater Forecasting and What-If Analysis
Better Reporting and Forecasting: Leveraging ICM, the strategic planning and goal-setting process is data driven.
Improved Analytics: ICM enables effective reporting, analytics that will facilitate monitoring performance and evaluating the effectiveness of merit compensation.
Reliable Audit Trails: With an automated workflow, organizations can rely on the ICM system for producing accurate, reliable audit records.
Best Practices on Effective Communication and Merit Compensation
Effective communication will improve the flow of information between participants and help employees internalize the merit compensation plan. As the Merit Compensation plans are rolled out, companies must practice effective communication to share information about the plan’s rules and parameters.
As a best practice, Merit Compensation should be a regular part of organizational communications, including:
- Manager-employee meetings and/or performance reviews
- Company Intranet
- New Staff Orientation
- As an agenda item at staff meetings or all-hands events
All plans should have a starting date and ending date. Otherwise participants will come to expect it as part of their ongoing compensation structure.
Communicating the merit compensation plans benefit from the appointment of a senior-level champion who openly touts the initiative. By seeing a senior person adopt the plan, employees are more likely to accept it. Employee buy-in also increases if well respected, non-management members help communicate the plan to their peers.
Evaluation is also critical. To determine if a plan was successful in meeting its objectives, it must be reviewed. Review the outcomes, compare against historical baselines and start-of-period numbers, and then compare with expected attainment. An automated system makes this process much more accessible.
Merit Compensation only works when everyone understands and internalizes the plan.
How do you keep everyone informed and everyone pointed in the right direction?
You communicate effectively, ensure everyone has access to the Merit Compensation process, and leverage the automated workflow to keep people informed, engaged and focused on the company’s overall goals.
Iconixx Merit and Salary Management Solution
Manage your salary and merit compensation plans with enhanced transparency and ease-of use.
Management, Human Resources, Operations and Finance professionals too often struggle with multiple, complicated processes for managing salary payouts, making it easy to design, create and manage custom compensation plans that fit your business needs.
Salary Worksheet and Management Approvals
Iconixx Merit gives you the ability to view and approve large hierarchies of salary and payout information. “Worksheet” functionality, allowing users to quickly view, edit, update, change, and approve their bonus plans through:
- Worksheet approvals, adjustments, comments, and overrides
- Worksheet linked with alert configuration
- Automated bonus suggestions, ranges and budget allocations
- Setup and manage “batches” of worksheets
- Monitoring the status of approvals and budgets
- Setup budgets using forecasting and “What-If” Analysis
Integrate Internal Workflow
Salary and compensation processes extend beyond one department. Managing workflow between field representatives, HR, Management, Operations, and Executives is crucial. lconixx Merit seamlessly coordinates the input of all users with customization, security and ease-of-use. The integrated workflow allows for:
- Maintenance: Users can easily setup and maintain custom approval hierarchies, groups, email notifications, status, escalation, file attachments, and other custom functions
- Subject Types: Users can apply stock features “out-of-the-box” or create custom features for managing worksheets, document approvals, and HR actions
- Security: Integrates processes with overall auditing and reporting, so Sarbanes-Oxley compliance can be easily managed
Reporting and Analytics
Iconixx Merit allows you to create the right reports at the right time, with three options for reporting:
- Generate automatically scheduled reports: Reporting interface includes standard templates for pay statements, total compensation budget allocation, pool distribution, etc.
- Create Ad-Hoc Reports: Ad-Hoc interface allows the user to create criteria and filters, organize columns and save custom reports
- Data Analysis: Has “drill-in” ability to examine the data in many ways, then export the data to XLS, XML, CSV or PDF
Iconixx Merit features a simple, configurable, security-based dashboards with all the information in one place:
- Reports: Managers easily view reports (pay statements, bonus allocations, budgets, etc.) for all employees and teams
- Real-Time Data: Managers and their personnel have immediate access to their year-to-date salary, quotas and transactions
- Workflow Inbox: Access to a role-based “Inbox” with related workflow items; including worksheets, adjustments, and customized elements
Forecasting and “What-If” Budgeting
Iconixx Merit allows you to forecast the impact of compensation plans before activation, through two views:
- View total potential payouts: View side-by-side comparisons of incentives by individual, plan or team factors
- Budgets: Estimate payout amounts wile estimating scenarios for accruals and finance
Application Security and Roles
Your complex organization requires controlled and role-specific security. The entire Iconixx suite empowers administrators to create security roles and groups to refine the user’s ability to view, edit, update, and print data. The solution uses a simple set of interfaces to grant or revoke access to dashboards, workflow processes and compensation plan administration.
Iconixx Merit™ makes it easy for any business to design and manage merit and salary plans with flexibility, transparency, and accessibility. If your organization needs the capacity to view and approve hierarchies of subordinate-based pay information, the powerful, easy-to-use functionality of Iconixx Merit™ will eliminate errors and reduce planning time.