Compensation practices are starting to go through a major transformation. To survive major shifts in pay philosophy and practice, companies must be proactive in preparing for them. This may require significant adjustments in how companies plan for, monitor, and communicate compensation decisions in general. Here is a peek into four lessons learned so far.

1. SAP White Paper
Compensation
Managing the Next Generation of Compensation
Strategies
Four Lessons Learned from Resesarch
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Table of Contents
Lauren Pytel, M.A.
Research Scientist, Human Capital Management Research, SAP SuccessFactors
4 A Look Inside the Compensation Revolution
5 Lesson 1: Decision-makers Need Appropriate
Support and Training
6 Lesson 2: Good Compensation Conversations
Don’t Just Happen
7 Lesson 3: Going “Ratingless” Changes Some
Things but Shouldn’t Change Everything
8 Lesson 4: If employees can’t get pay information
from you, they’ll find it somewhere else
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3. Managing the Next Generation of Compensation Strategies
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Compensation practices are starting to
go through a major transformation. This
transformation is driven by the need to
more effectively engage employees. It is
enabled by flexible cloud technology
solutions that allow companies to rethink
traditional compensation approaches.
And it is tempered by increasing
demands for equitable compensation
across employees.
© 2018 SAP SE or an SAP affiliate company. All rights reserved.

4. Managing the Next Generation of Compensation Strategies
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Recent transformations in compensation practices,
processes and philosophies are increasing the
demand on compensation professionals to man-
age three challenges:
1. Maximizing the value of novel compensation
methods that leverage things like spot bonuses
and nonmonetary rewards
2. Giving managers greater autonomy to make
compensation decisions while still ensuring
these decisions are appropriately made
3. Ensuring employees perceive compensation
practices as fair and motivating
To understand how organizations are navigating
these changes, the human capital management
research team for SAP® SuccessFactors® solu-
tions at SAP is conducting extensive interviews
with compensation professionals, managers, and
frontline employees. The results of our research
suggest that to survive major shifts in pay philos-
ophy and practice, companies must be proactive
in preparing for them. This may require signifi-
cant adjustments in how companies plan for,
monitor, and communicate compensation deci-
sions in general. Here is a peek into four lessons
learned so far.
A Look Inside the Compensation Revolution
The results of our research suggest that to
survive major shifts in pay philosophy and
practice, companies must be proactive in
preparing for them.
© 2018 SAP SE or an SAP affiliate company. All rights reserved.

5. Managing the Next Generation of Compensation Strategies
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Managers are being given increasing levels of au-
tonomy around compensation decisions. This is
in part due to organizations’increasing use of com-
pensation methods that are heavily manager driv-
en, such as“on the spot”awards. It is also related to
some companies moving away from clearly defined
methods for assessing employee performance con-
tributions.We often heard that so long as managers
stayed within a given budget, they were permitted
to distribute awards however they saw fit.This was
particularly true for spot awards where oversight of
manager decisions tended to be reserved for large
monetary amounts.When asked how, given such
limited oversight, companies ensured awards were
being equitably distributed, it was not uncommon
to hear that doing so had been deemed unneces-
sary.The reasons companies reported for not con-
ducting systematic reviews of spot awards included
the following:“because the amounts [associated
with spot awards] are relatively small,”“because
ongoing recognition programs are not widely used
in our organization,”“because we’ve never had a
complaint about distribution inequities,”and“be-
cause we trust our managers to do the right thing.”
The apparent lack of concern shown by some
companies toward how managers make pay deci-
sions could create problems over the long term.
Decision-making research suggests that even
well-meaning managers can make biased deci-
sions and even “small” awards can negatively im-
pact employees’ motivation and perceptions of
fairness when distributed inequitably.
A lack of explicit complaints about inequitable
decision-making should also not be taken as evi-
dence that decisions are equitable. According to
a survey from the Institute of Women’s Policy Re-
search, 51% of women reported that the discus-
sion of wage and salary information in their work-
place is either discouraged or prohibited. As
Maya Raghu, director of workplace equality and
senior counsel at the National Women’s Law Cen-
ter described in an interview with CNNMoney,
“Pay secrecy is one of the things that contributes
to pay discrimination and the wage gap. This is
when you’re in a job and your employer is saying,
‘You can’t ask about wages, you can’t disclose
them to each other and if you do you will be pe-
nalized,’ – and many times the penalties include
being fired.”
It is advisable that companies conduct regular re-
views of spot awards and bonuses for potential
demographic issues, just as they would review
base salary and other components of the com-
pensation package.
Companies can further mitigate the likelihood of
potential issues by providing managers with
training and resources to help them make effec-
tive decisions. Some examples include educating
managers on the compensation processes and
philosophies used across the entire organization,
providing guidelines for defining award-worthy
behaviors, and training managers to recognize bi-
ases and to keep their decision-making consis-
tent and equitable.
Lesson 1: Decision-makers Need Appropriate
Support and Training
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6. Managing the Next Generation of Compensation Strategies
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Companies work hard to ensure that compensa-
tion decisions are fair. Perceptions of fairness
positively affect employees’ performance, satis-
faction, and motivation. Research has also shown
that employees’ concerns about how their sala-
ries were determined accounted for more vari-
ance in job satisfaction rates than did the level of
those salaries. But it is unlikely that employees
will view decisions affecting their pay as fair if
they do not understand how these decisions are
made, who is responsible for the decisions, or
what they can do to influence decision outcomes
in the future.
Every compensation professional we spoke with
said that managers in their organization are ex-
pected to communicate compensation decisions
to employees. In other words, it was expected
that managers “don’t just put it on their desk and
walk away.” Many also described providing guid-
ance to managers on how to effectively commu-
nicate pay decisions as part of their manager
training. This included guidelines on things to ex-
plicitly reference during the conversation, things
to avoid saying, and guidance as to when the con-
versation should occur.
But it is also important that companies have
some method of monitoring or ensuring that
these conversations take place. As one employee
described,“We’re [employees] blind in terms of
compensation decisions. When it comes to bo-
nuses or raises, the supervisors and managers in
my organization are the ones responsible for
communicating that. They don’t do it well – it’s
very vague. For example, I found out the day they
were handing out the check,‘Hey, here’s a
bonus.’”
Talking to employees about pay decisions can be
awkward for managers if decision outcomes are
negative (such as a decrease in pay, absence of
bonus, and others), and may be particularly chal-
lenging if the decision was made by someone
other than the manager. Managers may find it
tempting in these situations to avoid having con-
versations altogether. But avoidance will only
lead to more frustration, suspicion, and demoti-
vation for employees.
Managers are much more likely to have critical
conversations related to pay decisions if they are
trained on how to do so. This includes making
sure managers can effectively explain how com-
pensation decisions are made to employees, re-
gardless of their role in the decision process.
Managers should also be given guidance on how
to handle difficult compensation conversations,
ideally including role-playing exercises to ensure
they can deal with what could become very diffi-
cult conversations.
Lesson 2: Good Compensation Conversations
Don’t Just Happen
Managers are much more likely to have critical
conversations related to pay decisions if they
are trained on how to do so.
© 2018 SAP SE or an SAP affiliate company. All rights reserved.

7. Managing the Next Generation of Compensation Strategies
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capabilities to inform decision making. As anoth-
er compensation professional described,“We
don’t have performance ratings. We just translate
that information and how we perceive the value
of employees to help make decisions regarding
pay.” Some best practices suggested by compa-
nies that eliminated end-of-year manager ratings
include:
•• Providing managers with guidelines based on
certain conditions (for example, is the employ-
ee above market? Below market? A significant
contributor?)
•• Using calibration talent reviews to categorize
employees based on their relative contributions
•• Using nine-box grids focused on performance
and potential
•• Providing ongoing feedback and communica-
tion with employees throughout the year to
avoid surprises
Numerous compensation professionals we inter-
viewed (40%) were from organizations that had
recently moved away from annual performance
ratings. While this shift is not surprising, what is
surprising is how many companies seem to elimi-
nate ratings without thinking about how they will
ensure effective compensation decisions are be-
ing made without ratings to which they can tie
these decisions. As one compensation profes-
sional said,“We don’t believe anybody needs
ranking or rating to know who their highest per-
formers are. But the risk [of no ratings] is how
you know you are creating equity across the
company.”
Just because a company stops using perfor-
mance ratings does not mean managers should
stop engaging in meaningful conversations about
employee contributions, accomplishments, and
Lesson 3: Going “Ratingless” Changes Some
Things but Shouldn’t Change Everything
40%
of compensation professionals we
interviewed were from organizations
that had recently moved away from
annual performance ratings
© 2018 SAP SE or an SAP affiliate company. All rights reserved.

8. Managing the Next Generation of Compensation Strategies
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Employees now have more means of accessing
pay information than ever before. Many employ-
ees we spoke with reported frequently using sites
like Glassdoor and Indeed to compare their sala-
ry with others in their own organization as well as
across other companies. As one employee said,
“Absolutely I seek compensation information
elsewhere – mostly Glassdoor and similar sites.
There’s a lot to be said for knowing your compen-
sation and how it compares [with others].”A con-
cern for organizations associated with employees
seeking information from these sites is that the
information may be inaccurate and cause unwar-
ranted alarm. As one compensation professional
described,“I do get quite a few e-mails about
things people saw on Glassdoor. Glassdoor is an
incomplete measure. But it’s all about how you
respond.”
Employees we spoke with who felt there was a
high level of transparency in their organization
surrounding compensation were much less likely
to report seeking out pay information from exter-
nal sites. Although increasing transparency on a
topic that has been kept deliberately private for
so long is a major challenge for many organiza-
tions, failing to make appropriate adjustments in
transparency philosophy and practice will do
more harm than anything else. As one compen-
sation professional explained,“With a black veil
over the compensation process, problems and
suspicion will always exist. We haven’t had the
proper philosophical debate about how transpar-
ent we want to be on pay. It’s a difficult question.
But it feels like you have to go through the pain
of being transparent to come out in a stronger,
better place.”
Employees who felt more satisfied with the level
of transparency in their organization described
things including:
•• Pay scales that are accessible to all employees
•• Pay tiers based on rankings that are published
•• Clear bonus metrics for reference
•• Comfort addressing questions and concerns
related to pay decision with managers
Compensation has changed and continues to
change in major ways. With this evolution comes
the need for companies to ensure they are plan-
ning for, communicating, and monitoring compen-
sation decisions effectively – something that is
often easier said than done. In a world of increas-
ing transparency, organizations must be prepared
to defend their pay philosophies and practices. To
do this requires having effective processes, deci-
sion making, communication, and reviews in
place. When it comes to compensation, it is not a
question of if neglecting these components will
frustrate and demotivate employees, but when.
Lesson 4: If employees can’t get pay information
from you, they’ll find it somewhere else
vQ218 © 2018 SAP SE or an SAP affiliate company. All rights reserved.

9. © 2018 SAP SE or an SAP affiliate company. All rights reserved.
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