February/March 2009 On HR/ECM

Should We Implement SAP® ECM? Concepts to Consider

By Satish Badgi, SAP HR Consultant

Editor's Note: While this economy may be a “buyers” market for employers, it’s much
easier to retain your current talent—especially those in whom you’ve already invested
time in training, and who know their jobs and perform them well. Therefore, it goes
without saying that adding a solid talent management piece to your SAP system would be
worthwhile, in order to monitor compensation in regards to areas such as employee
performance, budget, and market trends. In this article, Satish Badgi discusses the key
concepts of the SAP Enterprise Compensation Management (ECM) module, comparing it
to legacy solutions, and provides some considerations you can take to the discussion
table when deciding whether this module would be a good fit for your organization.

Introduction
The SAP Enterprise Compensation Management (ECM) module is generating interest
amongst many organizations and users. Many organizations have already implemented
SAP’s Personnel Administration (PA), Organization Management (OM), Payroll (PY)
modules, and are now ready for the Talent Management-oriented modules of SAP. The
ECM module forms a key piece of talent management Performance management, with
succession planning and overall skills management being the other areas of the talent
management space. Compensation is an important piece in the hiring and retaining of
your best talent in the organization.

The Compensation Management (PA-CM) module is available in the SAP enterprise core
functionality, while the Enterprise Compensation Management (PA-EC) module is
available in Extension Sets 2.0. The newer module has a lot more functionality and
integration, as compared to the older module. You can request a detailed comparison of
the two modules from SAP. The new module also has generated more interest among the
user community. This article will help you to decide if you should include ECM in your
new year’s HRIT strategy. For those of you who already have some kind of
Compensation Planning and/or Compensation Administration systems in place alongside
your SAP HCM application, the discussion will still be useful in reviewing your choices.

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 Should We Implement SAP® ECM? Concepts to
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We will cover topics such as concepts, identifying need, and making the business case.
We will also check the impact of payroll, portal, and other peripheral framework
considerations for ECM. In addition, we will present a discussion of SAP ECM
functionality, both in the Compensation Planning and Compensation Administration
areas. This discussion will help you with an overview of SAP ECM functionality. The
discussion in this article is applicable toSAP version ECC6; the screens are pulled from
ECC6 version.

Figure 1 shows SAP menu path to the ECM module under the Compensation
Management area.

Figure 1: ECM Menu Path

Compensation Flow
Compensation processes have their own importance in Talent Management and Retention
areas. Figure 2 presents a simple picture that shows the process stages and functionality
in the compensation management area (we will use the term Compensation Management
to combine Compensation Planning and Administration

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terms).

Job Evaluations Creating Release and

Job Pricing Packages Update payroll
Budgeting Eligibility
Designing Plans Criteria and
Guidelines

Strategy-------------Planning------------Administration-----------Execution

Figure 2: Compensation Management Process

As shown in Figure 2, the compensation management process starts with strategy (on the
left side) and completes when payroll is updated with the compensation data. You may
have heard the two separate terms in compensation world – planning and administration.
In Figure 2, Compensation Planning resides on the left side while the Compensation
Administration is towards the right of the picture. We will start the discussion with
strategy and planning topics, then move on to administration and execution related topics.

Compensation Strategy
Whether you have ERP systems or compensation-related IT applications, you will need
to start the compensation planning exercise with some pre-work. Considering that ECM
has many moving parts, let’s list some of the broad sub-topics in this area:

Budgeting Procedures and Rolling up of Compensation Budgets: You’ll first

want to discuss the budgeting process with the finance and HR departments. Most
of the time, organizations use many spreadsheets for this activity. If you are in a
multi-country global environment, you will need to hold similar discussions with
your regions to understand how the budgets are rolled up (bottom up), as well as
released (top down), from corporate to regions.
Organization Structures: If you are already using SAP Organization
Management (OM), you will need to understand the structures and strategy
followed in the original implementation. You will need to understand the
budgeting hierarchies and compare those with your OM structures.
Plans Matrix: Very similar to Benefits Administration (in the U.S.), you will
need to establish a matrix of compensation plans and related eligibility criteria.

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This will give you a fair idea of data requirements for deciding compensation
eligibility.
Performance Review Cycles and Calendars: Since compensation processes are
closely linked with performance review processes, you will need to understand
and align the performance review processes and calendars with the compensation
planning processes. We will keep the scope discussion for performance outside
this article for now. Every organization has calendars around performance, review
discussions, and budgeting, as well as compensation administration and release
processes.
IT Strategy: Compensation processes normally work with different IT
applications. For example: SAP HR, a home grown performance management
application, ESS and MSS front ends, workflow applications. Globally,
organizations may also have different applications in different countries.
Therefore, IT will need to discuss the management of the inventory of all such
applications and possibly decide on the retirement of some of the applications
(due to proposed SAP ECM implementation).
Requirements: Similar to any other SAP HR module, you will need a
requirements traceability of some sort, i.e. capturing the requirements of your
compensation users in a document and mapping SAP functionality to the
requirements.

A compensation strategy revolves around:

1. Money: Budgets, costs planning, and related processes

2. Performance: Employee’s performance, inputs to the review process, objective
settings, and related processes
3. Market Data: Comparing jobs to similar jobs in the market and to industry
standards
4. Compensation Plans: Designing the plans and eligibility rules

Compensation Planning
Compensation planning will largely be composed of planning the compensation policies,
creating budgets, and managing job pricing. In addition, collecting data and carrying out
cost planning are included in the compensation planning area. Let’s discuss each in more
detail:

Job Pricing: The jobs in your organization (within your OM structures) need to
be compared with the survey data from the "outside world". Third-party service
providers furnish market data that can help you compare the salary data to the
jobs within your organization. In SAP, you follow only a few steps:
o Getting data from providers
o Loading/ importing data
o Matching the jobs from your organization with those from survey data

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Market data analysis and internal analysis help organizations compare job roles and
ensure that their compensation is in alignment with the industry and market.

Budgeting: You will need to create and monitor budgets related to compensation.
Every organization has specific amounts budgeted towards salary, raises, and
bonuses. The budgets are typically assigned by organization units / business units;
therefore, they need to be aligned with OM structures (similar to job discussion
above). Budgeting processes typically have approvals built in at various steps.
Do we need SAP PCP?: Users always have asked whether they need SAP’s
Personnel Cost Planning (PCP) module. This module can be used to generate
budget values. The PCP module can use the payroll data and create cost planning
scenarios at an organization unit level.
Pay Grade Structures: If you have an existing SAP implementation, check the
pay grades and pay scale structures. These could be at job levels, or in some
cases, may just be set up with info type 0008, at an employee level. Note: These
structures will play a key role in job surveys and compensation planning.

Figure 3 presents a recap of the compensation planning processes.

Processes by HR / Finance Departments

Run PCP Create cost Explore Obtain

using payroll planning Budgeting Budget
data scenarios scenarios Approvals

Processes by Line Managers

Performance Annual Approvals

rating processes

Figure 3: Compensation Planning Processes

Compensation Administration
Along with the planning and budgeting exercises, the design of compensation packages
(as well as the management of the compensation packages as per types of employees) is
part of the administration process. Fixed, as well as variable compensation, needs to be
balanced. If you have worked with SAP’s Benefits module, you'll find the compensation
administration is very similar in concept. If you have worked with benefits areas, benefit

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 Should We Implement SAP® ECM? Concepts to
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program groupings, eligibility rules, or benefit plans, the compensation concepts are
exactly parallel. They are: compensation areas, compensation programs, plans, and
eligibility rules. Guidelines are another new concept in the Compensation module. A
Guideline is a suggested default value; e.g., default amount, or default % increase.

Updates to Payroll
At the end of the Compensation Management process, the employee data needs to be
updated with released compensation plans; for example, changes to basic pay, or release
of bonus and incentive amounts. If you are using SAP Payroll or planning to implement
SAP Payroll, the integration is delivered with the package and is straightforward. It will
update the required info types and ensure that payroll then processes the data. However,
if your payroll is outside SAP, or in an outsourced environment, you will need to plan for
an interface.

Comparing with Legacy Compensation Systems

Sometimes the greatest challenge could be your own legacy compensation management
system itself. You will need to compare SAP ECM with your legacy compensation
system. The typical comparison parameters are:
Performance and Compensation Integration: Many legacy systems could have
a customized performance and compensation functionality that is well integrated.
You will need to compare the SAP performance and compensation functionality
with your customized legacy system.
User Interface: In some cases, customized portals and web-based interfaces
could convert better than a standard, delivered portal in SAP.
Unique Rules for Some of the Plans: Some of the compensation plans could
have complex rules that may be customized in the legacy system and difficult to
configure in the SAP environment.
Existing Interface with Payroll System: You will probably need to replace the
existing interface between the compensation and payroll system.
Compensation Planning Models: These carry out the “what if” analysis using
the payroll and performance data.
Individual Country-based Planning and Administration: In a multi-country
environment, each country’s compensation rules and regulations are impacted by
local regulations. SAP functionality and a global implementation may give you
better choices compared to that of your legacy system.

Figure 4 summarizes these parameters in four main aspects – User Interface,

Requirements, Functionality, and Integration with other applications.

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User Requirements Functionality Integration

Interface with other
Applications

Figure 4: Four Main Aspects Used in Comparing the Legacy Compensation

Application

IT Framework: Portal, BI, Workflow, Process, and Forms

While you are drafting the strategy for compensation management, it is worthwhile to
visit your IT framework in SAP. A good implementation of ECM will require prudent
use of peripheral SAP tools, and the framework such as portals, workflow, processes and
forms. SAP used to have a traditional Compensation Management module; you can
leverage the strengths of the new ECM module by using these tools. A representative list
of these strength areas is as follows:

SAP has delivered many BADI’s (Business Add-ins) to customize ECM module
Improved MSS functionality for approvals
Organization structure-based budgeting
Help for administering the Long Term Incentive (LTI) process that many
organizations need
Standard XML interfaces (visit www.hr-xml.org for more information)
Delivers BI content for reporting

Portal: Both performance management and compensation management processes need

employee as well as manager data entry / display. The portal plays an important role in
user interface with the performance and compensation management applications. Legacy
systems sometimes have a customized, web-based interface. Especially in de-centralized
operations, portals provide a means to establish common standards and processes.

Business Intelligence (BI): You may look at an option to analyze historical

compensation / payroll data, or carry out trend analysis using BI info providers. The use
of BI is not mandatory if you are considering ECM implementation. However, it is worth
noting that BI reporting was not available in the SAP traditional PA-CM (Compensation
Management) module, while it is available in PA-EC (Enterprise Compensation

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Management) module. I also recommend that you study the budgeting reporting and
budgeting functionality available in BI.

Workflow: Along with portal, the workflow and triggering of e-mail / task items is
almost essential for implementation of an automated compensation management system.
Depending upon the approval structures in your organization, as well as other business
rules, you may need custom workflows in your ECM implementation. You will also need
to verify whether your existing SAP implementation already has a bridge with your e-
mail system for sending the e-mails triggered from SAP workflow / events.

Process and Forms: The shared service center model is very common among
organizations. The SAP HR Administrative services (PA-AS) module, with associated
forms and processes, will be useful in some scenarios for maintaining data. Similar to BI,
the use of forms is not mandatory, but it may be worth looking at this functionality to
establish smooth processes.

Compensation Administration

After stepping through the budgeting and planning scenarios for compensation, the
administration process starts with the managers. Managers normally have the control for
review followed by activation of the new compensation plans using MSS. This will create
compensation process records in employee data; i.e. Info type 0759 will get updated. In
the next section, we will discuss the applicable infotypes for the ECM module. When the
Manager approves and creates the process record, applicable payroll infotypes (0008,
0015, 0267) also get updated with new $ changes. Those changes then are processed in
the next applicable payroll for the employee. Figure 5 recaps these broad
steps.

Compensation Creating Updates to Run payroll

review compensation employee
activation process records payroll related
infotypes

Figure 5: Compensation Administration Process

Before we conclude the article, let’s look at the relevant compensation infotypes that are
applicable to the process.

Infotypes Related to Compensation

We will discuss the infotypes applicable to compensation administration process. There
are three infotypes that you need to be familiar with:

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Infotype 0758- Compensation Programs: If you are familiar with SAP’s benefits
module and the associated infotype 0171, the compensation infotype is very similar to
that. This too governs the eligibility for compensation plans and has program groupings.
Therefore, the HR structures play a key role in eligibility determination of compensation
plans. Figure 6 shows the screen for this infotype.

Figure 6: Infotype 0758- Compensation Programs

Infotype 0759: Figure 6 shows the screen for this infotypes. We had discussed in an
earlier section how this infotype gets updated when Manager reviews and completes the
approval. The available options for the field “status of process” are shown in Figure 7.
The Manager needs to set this to “approved” for a related compensation plan.

Figure 7: Compensation Process

Infotype 0760: You can use this infotype to override the eligibility of the employee as
determined based on the configuration as well as groupings from infotype 0758. Figure 8
shows the infotype view. The radio button for employee eligibility can override the
compensation plan eligibility for the employee.

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 Should We Implement SAP® ECM? Concepts to
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Figure 8: Eligibility Override

If you have previously worked with SAP’s benefits module, you can draw a parallel in
many concepts that ECM module follows, including Eligibility groupings, Plans,
Dependence on HR structures, integration with payroll, etc. These infotypes are updated
through the process that we described earlier and are accessible in SAP menus (or
through MSS) as shown in Figure 9.

Figure 9: SAP Menu for Compensation Administration

Conclusion
Compensation management is a key piece of the talent management discussion. I am
hopeful that this article has provided you with an overview in both the compensation
planning and administration areas of SAP. There are many projects which tend to defer
the compensation implementation process due to decisions surrounding the use of ECM
module along side SAP’s ESS and MSS capabilities. This article should provide you with
tips that will be helpful deciding to use and taking steps to implement ECM. We briefly
discussed the aspects related to ESS/MSS as well as usage of BI for ECM. As we
discussed in this article, it is always helpful to divide and conquer the compensation
topics in manageable pieces such as job pricing, budgeting, IT strategy and
administration.

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About the Author:

Satish Badgi, SAP HR Expert. Satish is a senior consultant with specialization in SAP
HR and Payroll. He has over twelve years of experience implementing and supporting
SAP systems across multiple countries in a variety of industries. In his recent
engagements, Satish has been involved with implementing SAP HR, Payroll and Benefits
systems in complex environments and integrating them with Finance, Costing, and Funds
Management. You may contact the author at [email protected]. Be sure to
mention the author’s name and/or the article title.

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