Performance Pay

Incentive management software can help companies retain employees by making sure they're rewarded for meeting their goals.

How do you increase your odds of retaining employees if you're in an industry plagued by revolving-door turnover? Convenience store giant 7-Eleven Inc.'s strategy is to use technology to reward performance through incentive pay in its nearly 3,000 stores throughout the U.S.

Prior to deploying an employee incentive management (EIM) system from San Jose-based Callidus Software Inc., 7-Eleven mostly used spreadsheets for compensation management. But the system had so many limitations that it was impossible to offer incentives to many employees.

"We primarily gathered data and loaded it into Excel spreadsheets, but invariably there was a manual process in which an analyst had to take compensation data and merge it with other data to make our incentive systems work," says Terry Guth, director of organization effectiveness at the Dallas-based company. "We just couldn't handle paying incentives to large groups of employees with a manual system."

With the Callidus EIM system, 7-Eleven can provide incentive pay to its 28,000 store managers and hourly employees based not only on a store's financial performance, but also on operational factors such as store cleanliness, quality customer service and product assortment.

"We've seen improvement in execution in stores because of increased attention and because we can pay incentives based on that execution," says Guth. "It's had a positive impact on morale, and our turnover has been down this year."

Numerous organizations are in the same situation. They need to offer variable pay based on individual or corporate performance, but they find it difficult to do because they have to deal with large numbers of employees, huge product portfolios and complex compensation plans with many variables. These challenges are generating increased interest in EIM and other compensation management systems.

Automating incentive management doesn't just enable businesses to pay workers more accurately. It also makes companies more accountable, provides them better modeling and reporting so they can react to changing dynamics and helps them improve relationships with their employees. EIM is becoming a key component in larger compensation management initiatives, which in turn play instrumental roles in burgeoning corporate performance and human capital management strategies.

"The focus for EIM is customer-facing roles that may have an impact on revenues," says Monica Barron, an analyst at Boston-based AMR Research Inc. Though initially used for sales force compensation, Barron says, EIM is also finding traction in call centers, in financial institutions for bank tellers involved in cross-selling and upselling, and in retail situations where employee compensation is tied to store productivity and profitability.

"If I work for Pratt & Whitney and sell one jet engine per year, it's not going to be tough to figure out a commission. But if I work in insurance or retail or consumer goods, where I'm selling hundreds of items in a week with different types of incentive plans, it's very difficult to calculate quickly enough to get payments out on time," Barron says.

It was compensation-plan complexity that drove Amersham Biosciences Corp. to abandon its spreadsheet-based system to outsource EIM to Conshohocken, Pa.-based Synygy Inc.

"For 200 sales reps [for North America], we have more than 20 sales incentive compensation plans," says Dan Eldridge, manager of business operations at Piscataway, N.J.-based Amersham. With more than 6,000 products in the biotech equipment supplier's portfolio, "clearly we don't incentivize at the product level, but with numerous compensation plans, often involving multiple credits, the process of accurately compensating is very complex," he says.

Beyond the difficulties generated by the plans themselves, Amersham had problems with sales report accuracy and timeliness of incentive payments, says Eldridge. "It was such a manual process: for every plan participant, we had to basically create an Excel workbook. It would take us six to eight weeks to calculate the quarterly incentives, and once we paid the incentives, we would spend another two to four weeks dealing with corrections. So during a good quarter, we would spend 10 weeks doing incentives and two weeks doing value-added work."

This intensive effort limited Amersham to updating sales reps with progress reports on incentive goals only once per quarter. With Synygy handling EIM, Amersham can quickly calculate variable pay, and reps can readily check reports via the Web-based Synygy Viewer. Eldridge has been able to eliminate one compensation analyst position, but more importantly, he says, "we've been able to distribute individual responsibilities so that my department has become a value-added resource for the entire company."

Suite Deployment

Though EIM offerings are attractive to companies struggling with variable pay plans, the number of employers deploying them is still relatively small. According to AMR, revenues for the EIM segment were $112 million in 2002 and are expected to reach $235 million by 2007. Homegrown systems still remain the most stalwart competition to commercial EIM offerings. However, many companies may eventually find the homegrown tools to be too inflexible, and vendors are making strategic moves to be there when they do.

In addition to best-of-breed vendors such as Callidus, Incentive Systems Inc. and Synygy, ERP/CRM vendors are adding EIM capabilities through innovation or acquisition. For example, Siebel Systems Inc. just bought Motiva, and Oracle Corp., SAP AG and PeopleSoft Inc. have added compensation capabilities to attract customers that want to leverage integration with larger suite deployments.

One such company is Minneapolis-based Select Comfort Corp., a specialty bed and accessories manufacturer and retailer, which opted to leverage its suite of Oracle financial, manufacturing and human resource applications when it went looking for an EIM application.

"We basically had an archaic employee-compensation plan: It took a number of days to calculate compensation, and it was done all manually on a homegrown Access application. With nearly 350 stores, we outgrew it," says Tom Wysocki, director of strategic systems migration at Select Comfort.

"Our compensation plans are pretty complex because our sales reps can switch stores on a daily basis, and we have different bonus plans for managers, district managers and regional managers," says Jason Otten, a software developer at Select Comfort. "Under the old system, it would take a person three weeks to do comps, then they'd take a week off and start all over again. With Oracle's OIC [Oracle Incentive Compensation], it probably takes three days, and with the new version of OIC [11.5.8] and our better implementation of it, it will take a matter of hours."

Select Comfort will continue to face challenges, as will any company reconciling EIM with legacy data stores and compensation complexities. "There will always be some issues from the IT perspective," says Wysocki. "We still face challenges with recalculations for warranties and returns—how do we manipulate all that? Our feeling is, if [a system] services 80% to 85% of requirements, grab hold because you can customize the rest."

"Our biggest problem is when we break our own rules because each of those requires manual adjustments," adds Otten. "We do about 60,000 transactions per month, and they're 99% correct, but you can't have rules for every situation."

7-Eleven, too, faces data integration challenges. To feed the Callidus system, the retailer has to pull in multiple line items, like store-level, subgroup-level and market-level data, as well as performance data.

"With thousands of data points, there's a certain amount of error that's going to be a part of that data. But when you're dealing with someone's compensation, it has to be perfect, and the world of IT often does not operate perfectly," says Guth. "There's a challenge for HR on understanding the limitations of integrating large databases and for IT on recognizing the standard they had established—one-tenth of a percent error rate—isn't OK anymore."

An EIM deployment can be a good time for executives to examine whether these plans are necessary, Barron says.

Moreover, EIM systems can deliver tangible and intangible returns on investment by reducing overpayments, ensuring that payments are made on time and improving employee relations, says Jim Holincheck, an analyst at Gartner Inc. "You might not reduce head count much, but it's worthwhile to get better accuracy, happier employees and better alignment with corporate strategies. There's some cost savings, but justification comes more from the flexibility to adjust plans, reduce errors and increase employee productivity," he says.


Major EIM Players

NOTE: Numbers don't add up to 100% due to rounding.

Source: Aberdeen Group

Gilhooly is a freelance writer in Falmouth, Maine. You can reach her at

Copyright © 2003 IDG Communications, Inc.

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