| EIM Information
State of EIM
EIM plans are complex
in nature and require sophisticated systems
to faithfully provide the results of these
plans. Automating EIM business processes
is a challenging issue for most companies.
Robust, flexible, easy-to-use software has
been a long time coming to this field. The
difficulty in this business area and the
lack of mature software is due to many reasons.
Uniqueness
of Companies
EIM Compensation plans
tend to be unique by industry. The Banking
Industry's compensations plans are based
on business features such as Financial Accounts,
Deposits and Loans, whereas the Retail Industry
plans are based on Stores and Product Sales.
Every industry tends to have its own set
of requirements for this business process.
But there are no rules or regulations governing
how these plans should work even within
an industry. This results in each company
literally creating their own compensation
plan that in many cases are very dissimilar
to other companies in their industry. This
requires a very broad based system to cover
all the different kinds of compensation
plans that may be built.
Complexity
In addition to the variation
between different companies, there maybe
a lot of variation within a company as well.
EIM covers a lot of different compensation
plans, typically segregated into Sales Compensation,
Variable Pay Plans, Executive Compensation,
Channel Incentive Compensation, etc. These
types of compensation affects different
participants, pays for different kinds of
performance, using different methods of
payments. Even within a particular area
such as Sales, compensation plans maybe
very different from employee to employee,
incenting for different performances in
many different ways. There are also different
sub processes within the administration
process of EIM plans, such as Territory
management, Goal Setting, Allocation and
crediting, Calculation and Payout determination.
Given all these varying needs the product
to solve them will necessarily need to be
very complex.
Change
Most EIM plans are designed
to address only a single fiscal year. Almost
every year, there is an initiative to readdress
the EIM plans for the next fiscal year.
This makes for a lot of change in the business
process and in the systems every year. In
addition, due to business conditions the
business may revise various aspects of the
EIM plans such as Quotas, Incentives, etc;
the organization itself maybe realigned
and affect the incentive plans. This area
typically has more than the usual impact
of change every year.
Integration
EIM software may calculate
payouts based on many different kinds of
performance such as Revenue, Gross Profit,
Contracts signing, Project Mile Stones,
Customer Satisfaction, Invoicing, Bill Payments,
etc. The data for this performance may come
from many different systems from Supply
Chain, Order Management, AR, AP, etc. Participants
may come from HR systems, CRM systems or
from external firms, as in the case for
channel salespeople. The output of the compensation
data may be updated to Payroll, GL, Accounts
Payable, etc. Data may need to be converted
and evaluated for processing on a daily
basis and may need to be retained for a
number of years. The process of moving data
in and out EIM system and the setup and
testing required to verify the quality,
could be a significant undertaking.
Volume
Some EIM plans can be
paying incentives by individual order lines,
because of product-based commissions. Larger
firms can have hundreds of thousands of
order lines per day. These individual order
lines may affect the payout of many participants.
By the time all the credits for these order
lines are provided and the compensation
has been calculated, the volume of transactions
handled by the system could have exploded
to millions of transactions. Global firms
may need to be able to process their plans
separately by global regions. Software needs
to be very robust to be able to handle these
volumes in a reasonable time period.
State
of Software
To address all the issues
listed above requires a very robust, flexible
and stable software system. The system has
to be a rule-based system, such that any
customer requirement can be easily be setup
in the system without having to reengineer
it. Most software is still not at a level
where they fully meet these needs.
CellarStone is very aware
of the kind of problems the typical company
will face as they try to automate this business
area. CellarStone is also familiar with
the capabilities of various vendors in this
area and can help you navigate through the
implementation of the products.
EIM
Implementation Issues
Implementing an EIM solution
is a complex task for most organizations
and there are many pitfalls to watch out
for. Under the State of EIM we discussed
many of the characteristics of the EIM business
which contributes to many of these issues.
We discuss some of those issues here.
Plan
Documentation
The entire logic of compensation
processing is typically captured in the
2 to 5 document that is the compensation
plan. These documents are constructed for
participant readability and do no adequately
capture all the special conditions required
to properly pay Incentives. The actual requirements
of an EIM system are typically buried in
the brains of the compensation administrators
and the code of the existing system itself.
It will take some effort to appropriately
analyze all three sources to create the
functional requirements necessary for any
new system.
Exception
Processing
Given the nature of the
plans and the difficulty of modifying existing
systems, a tremendous off-system processing
happens in this business area. Actions such
as late orders, order adjustments, new hire
and terminations, territory realignments
trigger manual changes in everything from
Quotas, commissions, credits, bonuses, etc.
It would be important to interview the business
partners in detail about all of these exceptions
and construct appropriate requirements so
that these actions can be automated.
Adjustments
Adjustments can be processed
in the system directly from source data
(order adjustments) or can be effected within
the EIM system (credit given to the wrong
participant). Adjustments may be used to
affect credits, rollup credits, split credits,
quota attainment, commissions, bonuses,
prior period payments, draws and many components
of the EIM system. Adjustments may need
to understand and affect multiple transactions
within the system (recredit all lines for
an invoice) or all transactions for a participant.
Adjustments are an important and complex
area of an EIM system and it would be important
to document these requirements clearly and
check that vendor systems support those
requirements.
Effective
Dating
Processes within the EIM
system is strongly driven by the date in
which data occurs. For example, the start
date of an employee can drive the transactions
for which the employee is eligible for.
Another example would be the specific date
of a transaction credit: this could determine
the commission rate the employee received
for the transaction based on when it occurred
during a plan year. Plans can change during
the year and they old and new plan may need
to be maintained in the system for recalculation
purposes. Territories maybe reorganized
and the old and new organizations may need
to be maintained as well. The underlying
architecture necessary to support all of
these changes is called "effective dating".
Additional system logic will be required
to take advantage of effective dating for
proper calculations but the underlying effective
date structure would be a key requirement.
Vendor systems should be carefully reviewed
for these requirements.
Territory
Management
Some variations of EIM
such as Sales Commissions and Channel compensation
may require territory management functionality.
The ability to add, move, consolidate, various
territories would be a necessary functionality
in that case. Territories are grouped to
create organizational structures and undergo
occasional reorganizations. Territory historical
information will be necessary to process
commission properly. In some compensation
plans territories direct allocation of transactions
to associated participants and the territories
may need to contain built-in logic to properly
direct the transactions. Sometimes territories
may be ill-defined and not automatable (everything
north of Hwy 92), but rules can be based
on area codes, zip codes, products, types
of customers, etc. If necessary for your
compensation process this should be considered
a significant portion of the functionality
you are looking for from the vendor.
Goal
Setting
Quota and Goal setting
are key parts of certain EIM business processes.
The facility to set goals, change them during
the plan period, prorate goals as necessary
are key features. Ability to set goals and
push them down the organization or to rollup
bottom-level goals will be required for
the more sizable organizations. More difficult
are requirements to have goal setting drive
a workflow process. When goals are changed
during the year, there needs to be a process
of approvals for the associated managers
and the participants prior to activating
the goals. Some vendors currently do not
offer a full-fledged goal management module
as part of their product offerings.
Allocation
and Crediting
The determination of which
transactions belong to which territories/participants
is an important part of the compensation
process. In some situations (e.g. 3rd party
sales), this may not be automatable. Issues
such as quality of data (customer name spelled
correctly) become important factors in this
process. The ability to flexibly set up
allocation rules for transactions are a
critical requirement for EIM systems. Rules
to determine if other participants split
the credits or how he credit is to be rolled
up to higher levels of organizations are
also required in the system. For organizations
with large transaction volumes, with order
level allocation and crediting requirements,
getting this portion of the business process
automated could be the lion's share of the
work involved.
Participant
Changes
When a participant is
hired, terminated, changes jobs or any other
change in the relationship with the company,
the EIM system needs to keep track of these
changes to properly attribute transactions,
calculate payments and determine actual
payouts. Based on the change, different
plans may need to automatically be assigned
to the participant. There may be special
kinds of changes such as "Leave of Absence"
that may require specialized processing.
EIM systems need to have the ability to
flexibly specify processes based on these
changes.
Retroactive
Changes
Most companies process
Incentives on a fiscal period basis which
is typically monthly within a plan duration
of a year. Some compensation is based on
attainment performance against goals and
rises as attainment increases. Typically
by the end of the year, the compensation
rate is much higher than in the beginning
of the year. If there was a reason to adjust
the transactions from the earlier part of
the year (large deal got canceled or there
was understatement of a transaction's sales),
then all the subsequent transactions may
need to recalculate the compensation rates
to be completely accurate. But periods have
been processed and closed and compensation
checks have been cut, so complete restatement
will cause issues. Many companies ignore
this and handle any such past changes by
means of exception processing and manual
adjustments. But for the companies where
proper recalculation and payments are critical
, the EIM system needs to provide a robust
and complex Retro change processing functionality.
A controlled scenario demo should demonstrate
this functionality from vendors.
Multiple
year processing
For some companies to
set calendars that cross multiple years
and have transactions affect payments in
multiple years, maybe important requirements.
Data needs to be retained necessarily for
such calculations. Such multi-year processing
should be configurable for the individual
customers' needs.
Global
Processing
For global firms, multiple
currency processing is a significant need.
The logic used in handling currency processing
needs to be matched against the customer's
requirements. Ability to calculate payments
for a transaction in one currency but make
payouts in the participant's currency needs
to be available. In addition, given the
typical volumes and time zone changes, the
system should allow processing of calculations
by parts of the company organization.
Maintainability
Given the complex nature
of the application, it is very common for
applications to build in all the necessary
logic into the application. But all of the
logic in the application should be configurable
in essence, since no plans seem to be alike.
A solid rule-based architecture allows a
tremendous amount of flexibility to the
application. Almost no change to the system
should require coding changes to the base
system.
Ease
of Use
When asking for flexibility
and maintainability the cost paid is one
of ease of use. As challenging as having
high flexibility and high ease of use, together
is, it is still important to look for ease
of use since the business expects to go
through constant change. Even if a rule-based
system is used, a good front-end that hides
the complexity will be necessary.
Volume
and Processing
Larger companies may process
millions of transactions through their EIM
system. These transactions need to be allocated,
credited, split, rolled up and paid out
against. The number of additional records
could explode from a base set of transactions.
Additionally processing may need to happen
every day and in some cases, reprocessing
of prior periods may be necessary. Ability
to handle large volumes in a reasonable
period of time with a reasonable hardware
configuration would be important. Customers
need to draw out their expectations in this
area and verify vendor supplied benchmarks
to make sure the processing will fit their
needs.
EIM
Benefits
Most EIM systems within
organizations are either unwieldy excel
based structures or legacy applications
that are rigid and brittle and require a
lot of upkeep. Upgrading to a robust, flexible
enterprise class application automatically
provides many benefits. A well crafted application
implemented with clear analysis and understanding
of the business's needs will provide many
benefits. The EIM systems can provide measurable
return on investment.
In a survey by Synygy,
Inc. respondents indicated the following
estimated benefits if they could improve
management of their plans-
- 3.5% increase
in company revenues
- 2.7% improvement
in margins
- 6.0% reduction
in employee turnover
- 5.9% reduction
in administrative and IT costs
- 6.2% reduction
in over payments
Source: Synygy
1999 Compensation Conference Survey Results
Gartner estimated the
hard ROI on improvement of payment accuracy
through the reduction or elimination of
overpayments to be -
Hard Dollar ROI Calculation
Example: Improved Payment Accuracy
| |
|
| Revenue
year/salesperson |
$2
million |
| No. of
sales people |
750 |
| System
costs for 750 payees (example) |
|
| License |
450 |
| Implementation/training
|
675 |
| First
maintenance @ 18% |
81 |
| Total
system cost |
$1,206 |
| |
|
| Average
target income |
120 |
| Salary/incentive
- 50/50 |
|
| Salary |
60 |
| Incentive |
60 |
| Performance
= 110% |
|
| Accelerators
at 10% |
20 |
| Total
incentive comp |
80 |
| Current
overpayment error rate 3% |
2.4 |
| Reduced
to 1% |
0.8 |
| Net improvement
per salesperson |
1.6 |
| Net
improvement for sales org. |
$1,200 |
| |
|
| ROI
= 12 Months |
|
Source: Gartner
Research Note 8 November 2001
In addition there are
many other benefits expected from a good
EIM system implementation:
Alignment
Incentive plan is more
directly linked to the way executives and
employees manage the business. It properly
and accurately reflects product groupings,
customer segmentation, sales channels, geographic
regions, organization structure and reporting
relationships. The business logic for calculating
compensation plans is accurately and legible
modeled in the system.
Trust
Due to transparent and
clear communication of the data and the
calculations used, more trust is engendered
in the system by the payees. This allows
freeing up of key resources to focus on
business objectives.
Change
and Maintenance
Constant change such as
payee change, reorganizations, product line
change, competitive change, etc can be more
easily reflected in the system and allow
the organization to respond quicker. The
necessary change in compensation plans at
the end of the year as well as the large
changes such as mergers and acquisitions
can be done with less effort and much faster.
Communication
Clear and more frequent
communication of plan calculations and results
allows the building of trust and elimination
of 'shadow accounting'. More frequent communication
allows payee to respond to market conditions
and their own performance much faster. Troubleshooting
of incentive calculation is quicker and
simpler.
Productivity
Due to transparent, immediate
communication and ability to easily identify
and resolve compensation problems, payees
are spared from spending a significant time
in administrative activities such as reconciling
or 'shadow accounting'. This allows the
payees to spend more of their time on achieving
their and the corporation's objectives.
Comp administrators and IT end up spending
a tremendously less amount of time in maintaining
the software, data, adjustments and reconciliation
of issues.
Turnover
A good clear compensation
administration should reduce payee turnover
and consequently reduce hiring costs.
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