Crunching the Numbers

By Oct 1, 2003
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HR Magazine, October 2003Kellogg adopts compensation management software to streamline processes.

The compensation department at Kellogg, the Battle Creek, Mich.-based packaged food company, faced a tough challenge in 2001.

That year, Kellogg acquired the Keebler Co. of Elmhurst, Ill., and with the acquisition came different technology and HR management systems (HRMS). Standardizing onto one became a priority for the company’s information technology (IT) department, which ultimately decided on the system Keebler used—from SAP AG of Walldorf, Germany, for financial products and HRMS. (Kellogg used Oracle products for financials and Cyborg Systems Inc. for HRMS.)

Kellogg’s compensation department wasn’t thrilled with the prospect of changing systems. It had been successfully managing salaries and bonuses using homegrown enterprise compensation management (ECM) software for two years. Its compensation planning system (CPS) achieved all its goals—automating compensation planning in a decentralized, consistent procedure with a market-based approach with little burden on HR.

Since the CPS implementation in 1999, “we have tried to put more information in the hands of managers and empower them to make more of the compensation decisions,” says Miles Meyer, Kellogg’s vice president of global compensation.

The compensation staff was happy with the CPS, so they resisted the change, Meyer recalls. “We had a lot of positive comments on its ease of use.” Managers liked it, too, although they were less attached.

However, the IT staff pushed forward, informing the compensation department that it had one year to move off the CPS because IT would no longer support the system. Other departments also had to move off legacy systems and onto the SAP system. The compensation department could adopt either the SAP compensation features or a commercial product that had interfaces to SAP.

SAP’s features didn’t come close to the CPS, says Meyer, so the compensation department decided to look elsewhere. Key to its decision would be a product that could achieve the same capabilities—or as close as possible—as the CPS with the ease of use managers and HR had grown accustomed to.

Homegrown ECM

Kellogg developed its CPS to support new compensation practices, according to Meyer and Catherine Hager, director of compensation. Hager was at Kellogg when this transition began, and Meyer, who reports to the executive vice president of HR, joined later that year.

Before the CPS, the compensation department would send out spreadsheets with budgeted merit increases for each division. Three staffers in the compensation department would recommend a merit increase and a merit range for each of the nearly 3,000 salaried employees. In most cases, Hager says, managers accepted the recommended increase. The value of each job was based on a comparison to similar jobs at Kellogg.

“As competition in the job market increased, that way of evaluating jobs and connecting to pay didn’t serve the business model very well,” says Meyer.

Kellogg decided to move to market pricing of jobs. The company benchmarks each job relative to comparable jobs in the marketplace, and this data is a key factor in determining merit raises. Kellogg also decided to push decision-making to managers, who could better determine the right pay increases for their direct reports.

But managers had little understanding of market pricing and little experience in making pay decisions. They needed training and tools. Before the compensation department undertook training or development of tools, its staff interviewed managers and executives across the company to make sure that market pricing and involving managers would meet their needs. “We spent quite a bit of time making sure we had buy-in to move forward,” says Hager.

Market pricing sounded good in theory, but it raised a mental hurdle for managers, she says. Before the inaugural use of the homegrown CPS in 1999, Kellogg gave all managers a day and a half of training, including a session to validate the market pricing of jobs within their departments. They later received a half-day of training on the CPS itself. The following year, everyone got another day of training on compensation practices and upgrades to the CPS. Managers also received about two hours of training before each compensation planning cycle; initial compensation training was included in a broader training program for new managers, Hager says.

The second hurdle was to provide managers with the necessary tools. The compensation department, with help from an outside consultant, developed the CPS in Lotus Notes to help managers make decisions and to provide information on compensation planning and decision-making.

Kellogg went merrily through three compensation-planning cycles with its CPS and had no intention of buying a commercial product, says Meyer.

The Decision

Of course, those intentions had to change with the Keebler acquisition, forcing the compensation department to look into commercial products that were supported by SAP. Meyer knew of a compensation product called TotalComp by Kadiri Inc. of Burlingame, Calif., because the company had made a presentation to Kellogg a couple of years earlier. At that time, however, TotalComp did not have all the features that Kellogg’s CPS had, Meyer says. “We were very biased. We felt our CPS was the better system of the two,” he admits.

With the one-year deadline looming, the company re-examined TotalComp in 2002 and found that the newer versions came closer to meeting Kellogg’s needs. “Kadiri offered about 70 percent of what [the] CPS had,” Meyer says, and his staff could customize it to provide features that Kadiri didn’t offer.

TotalComp did offer a distinct advantage over the CPS: timely disparate impact analysis. With CPS, Kellogg executives had to wait until all annual merit increases were awarded before they could analyze companywide data to determine whether any minority groups—based on race, age, gender or job level—were treated unequally in performance ratings or merit raises.

But TotalComp had the capability to perform disparate impact analysis before employees were informed of their performance ratings and merit increases, allowing for necessary adjustments.

With those key features identified, Kellogg selected Kadiri in June 2002 with installation to be completed by Dec. 1. Programming began in August. The biggest challenge was to migrate the CPS features that were not offered by TotalComp.

Fortunately, TotalComp had knowledge management technology that allowed the adopters to migrate information from the CPS and to configure the new software to include some of the custom features that were developed for the CPS.

“Kadiri didn’t have all the functionality of [the CPS], but we figured out how to do it with the knowledge manager,” says Lori Stafford, the project team leader. “We took three years of learning on our old system and loaded it [into TotalComp] in four months.”

One example of a feature that was migrated from the old system to the new: a decision-making tool from the CPS that walks managers through the process of making a merit decision—what an employee is paid, the worker’s performance, market pricing, and how hard he or she would be to replace. “The tool sums up with a recommendation based on inputs from the manager,” Stafford says.

Kellogg had four people, including Stafford, working nearly full time along with a project manager from Kadiri who could tap any resources needed from the vendor. Because Stafford had quite a bit of self-taught IT knowledge, Kellogg did not rely heavily on its IT staff for this implementation, says Meyer.

When the project was done, the customized TotalComp software had 85 percent of the CPS functionality. No managers complained; TotalComp looked a bit different on screen, but basically it did everything the CPS had done. “We didn’t experience any disruptions with the transition, and we got a lot of compliments,” says Meyer.

The Process in Action

After the merger, Kellogg workers totaled 25,000 worldwide, including 11,000 salaried employees. The company uses TotalComp to plan for merit increases, performance bonuses and stock options for 6,000 of the salaried workers. Kellogg does not expect to use TotalComp for the other 19,000 employees because they work on commission, are international workers or have their wages governed by union contracts.

Starting on Dec. 1 each year, managers access TotalComp from the corporate intranet and input performance ratings for each employee. In mid-December, Kellogg closes the system to managers so employee relations and legal staff can run a disparate impact analysis. Each manager can do a disparate impact analysis of his own group after inputting performance rankings, so problems can be dealt with before the company analysis.

In January, the compensation department uses the software to create a bottoms-up budget for merit increases and bonuses as well as to determine the dollar pool for each manager.

Here’s a hypothetical example of the bottoms-up approach: If overall merit increases are budgeted at 4 percent, A-ranked employees might be budgeted for an average increase of 5 percent, Bs at 4 percent and Cs at 3 percent. The manager’s total pool is based on those calculations—conducted by the software—but the manager can determine the actual amount that each direct report gets from the pool. With help from the software, including budget information feeds from the SAP system, the compensation department then figures the pools for merits, bonuses and stock options.

Starting Feb. 1, managers access the software again and decide what merit increases, bonuses and stock option grants to give to each employee. Pay decisions are based on three factors, which the software helps automate—performance rating, pay relative to the market pricing, and how difficult it would be to replace the worker. The manager’s boss also can access the same information, and workflow applications allow them to interact and deliberate. The work in progress from across the company can be rolled into a single report to be viewed by the CFO or the CEO while the work is under way.

Managers complete their work by mid-February. The system is closed to managers again while a disparate impact analysis is performed on merit raises, bonuses and stock options. Adjustments are made with each manager as needed. Then the proposed compensation is reviewed to make sure it meets budget.

Around the first of March, the system is opened to managers, who begin to give employees the news about their merit raises, bonuses and stock options for the year. The system can print a compensation report and stock option certificates for each individual.

In December, Kellogg will begin its second compensation planning cycle on TotalComp—its fifth automated compensation planning cycle since installing its own CPS. Kellogg has dramatically reduced the total time it spends on this process even while involving managers more than ever, Hager says.

Another dividend is that managers are more knowledgeable about pay factors, Meyer says.

Kellogg budgeted the Kadiri project at $300,000 but spent $400,000, Meyer says. Just under half the total was for customization.

Meyer has not calculated return on investment, but he states emphatically: “The direction we have gone is more supportive of our business model and the competitive environment we have to keep up with.”

Bill Roberts, technology contributing editor for HR Magazine, is a freelance writer based in Los Altos, Calif., who covers business, technology and management issues.

Web Extras

HR Magazine: Automation Gives Variable Compensation a Boost (August 2002)
HR Magazine: The ECM Experience

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