Flexibility and Customization: A New Paradigm for Global Compensation Systems

By Thomas Shelton Apr 2, 2008

A recent Mercer Global Business Challenges Survey cited globalization of operations as a key business priority, along with continuously improving processes, controlling costs and managing risk. But while global companies may share some common ground, no two have identical needs when it comes to global compensation administration and management. From formatting compensation templates to generating management reports, HR must be able to extract data in a format that will provide critical business intelligence.

Customizable, web-based software solutions for managing global compensation are not new to the market. However, HR is often under the misconception that customizing applications, especially in the area of compensation, benefits and payroll, is costly. Bad experiences with overly complex installations -- i.e., large-scale enterprise resource planning (ERP) implementations that can drag on for months -- coupled with the high costs associated with add-on services (for everything from customized business rules to customized reports), has left many HR professionals reluctant, even averse, to the idea of tailored software or hosted applications.

The truth is that many modifications can be made cost-effectively during the implementation process and throughout the client/vendor relationship. HR should elevate its knowledge of applications in general, and of its needs in particular, to work more effectively with a technology partner to discuss and request modifications up front.

A New Paradigm: Flexible, Customized Solutions

According to AMR Research, HR software is the fastest-growing area of business software. The market for human capital management applications (including compensation and benefits) is projected to expand 11 percent annually between 2006 and 2011, to $10.6 billion.

As spending increases, so should HR’s expectations of the applications and the solutions provider with which it partners. A best-of-breed global compensation solution should provide HR with:

The flexibility to designate how each compensation element should be paid. For example, a percentage of each pay element can be inputto designate the value to be paid to the employee in host currency.
Next, amounts to be paid in both home and host currencies are calculated based on that percentage.
Finally, this data is transmitted directly to the employer’s payroll system.

Confronting 'Split-Pay' Challenges

Embeddedwithin the solution are functions to ensure that complex compensation rules and guidelines and other formulas are accurately applied and calculated for each employee’s “split-pay” structure.

According to ORC Worldwide’s recent Survey of International Assignment Policies and Practices, 48 percent of companies split expatriate remuneration between home and host-country currencies. When determining split-pay, 38 percent base it on the expatriate’s wishes, followed by 29 percent who use company policy.

The result is that companies often need to construct a variety of compensation and benefits packages that not only reflect the specific choices of each expat, but also are subject to change as circumstances and exchange rates fluctuate.

Split-pay is commonly provided in home and host currency. But increasingly, expats have begun to request that their payroll and compensation be provided in a third currency because conditions in the host and home countries are not secure. Such a change requires customization of the host application as well as coordination with the payroll provider to enact the new option. The new option is then integrated into the application and offered to all clients.

While a technology partner can offer and fulfill requests for customization proactively, internal IT plays a critical role in related functions -- such as exchanging data and interfacing the compensation solution with other platforms, systems and solutions.

Customizable Reports

Web-based solutions can also provide HR with a means to create management reports that provide critical business intelligence that is used to direct organizational objectives. In addition, different management teams within an organization are likely to request a custom report, perhaps even using the same data presented in a different format.

While the basic solution is the same, the process becomes more detailed so that HR can pull and correlate data to generate specific reports. For example, data on employee demographics, payroll and compensation costs, relocation expenses, and employee benefits impact the overall bottom line and are vital in calculating human capital return on investment.

Real-Time Changes at Textron

A case in point: Founded in 1923, Textron is an $11 billion global multi-industry company with market-leading brands and businesses serving the general aviation, aerospace and defense, industrial and commercial finance markets. The company, headquartered in Providence, R.I., has a workforce of 40,000 in 32 countries.

Limited resources and time-consuming legacy processes led Textron to look for a web-based solution that would administer HR and related functions more efficiently for its international assignees. It was important that web-based access not require the system to be tied directly to Textron's local IT network -- a need based on having HR administrators who often worked remotely and, as a result, needed quick and convenient access.

Another determining factor was the ability to have custom updates made by request rather than waiting for scheduled product upgrades or new version releases. A web-based program would allow Textron to request changes directly from the vendor and have them implemented in real time.

Textron’s demographic, accounting, tax equalization and compensation information had been housed in separate databases. Having all these elements in one database has provided HR with an efficient means to produce more accurate reports for management. And having a web-based program provided Textron with the ability to affect changes in real time -- a key to keeping pace, indeed staying ahead, of the fast-changing nature of the global compensation landscape.

Thomas Shelton is the founder and president of HRToolbox, based in Atlanta, a provider of web-based solutions for managing payroll, benefits and compensation for a global workforce.


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