How Many Comp Plans Does an Organization Need?
Does your organization have too many compensation plans? Or not enough?
Many are quick to assume that the fewer compensation plans an organization has, the better. An organization can quickly become bogged down with too many plans, which creates additional complexity and requires additional administration efforts. In general, it is easier to manage 50 plans than it is to manage 250 plans. However, it is not uncommon to see an organization that has too few plans. When an organization has too few plans, it can actually increase the overall complexity and administrative burden.
Compensation plans serve one main purpose; to identify which incentive logic is applicable to which employees. Incentive logic is then used to motivate employees, reward performance, attract and retain talent, and align employee goals with organizational objectives. Incentive logic may be unique to one plan, or shared across many plans.
Organizations with too many plans
One sign that a large organization may have too many plans is when the vast majority of plans are assigned to only a few people each. Plans are intended to group and pay similar employees together. A corporation with 1000 employees seldom needs 250 plans. Another indicator that plan counts are too high is when there are duplicate or redundant plans. If there are multiple plans that consist of the same components, the exact same configuration data, and there is no expectation that the handling will diverge in the future, the plans can often be combined into one. Lastly, if an organization spends far too much time and effort to administer its plans, it can be a sign that there are too many plans.
The consequences of having too many plans:
- More plan documents to manage
- More time spent managing plans
- Duplicate configuration data
- Easier to overlook errors on plan documents
- Admins may have trouble remembering how each plan works
- More complex and more expensive reporting
- More challenging to aggregate results for leadership
- Increased learning curve for new admins
Organizations with too few plans
When an organization has too few compensation plans, factors other than the plan are used to determine the applicable incentive logic. For example, say there is a bank that uses a single plan for Tellers, Senior Tellers, and Teller managers. If each role has a unique payout rate, you cannot rely solely on the plan to determine someone’s rate. Your rate table would need to factor in both the plan and job title. This alone is not a problem. But suppose that quotas are set using employee and region. And payout caps are set using plan, branch type, and tenure. When more and more factors are used to drive incentive logic, the complexity starts to increase exponentially, and an administrator can find themselves maintaining dozens of configuration tables. Compare that to an organization that uses plan, and only plan, to determine rates, quotas, and caps.
When each piece of configuration data is assigned using different factors, unnecessary complexity is introduced. This requires additional documentation to ensure details are not forgotten. The learning curve for new administrators becomes much higher, as they must memorize which granularity is used for different pieces of configuration data. Implementation costs increase as there are more configuration tables and more complex crediting rules. Defects are easier to overlook and require more time to investigate. Reporting is more challenging and restricted, as you must combine data points with different levels of granularity.
The consequences of having too few plans:
- Plans contain a large number of exceptions
- Increased learning curve for administrators
- Employees may not understand complex plans or which logic applies to their own role
- Increased inquiries due to lack of understanding
- Employees on the same plan are paid in vastly different ways or amounts
- Increased legal exposure as a result of unequal pay
- Increased implementation and maintenance costs
Finding the right balance:
Organizations must find a balance between the number of compensation plans they have and the variety of incentive logic they have. If ease of administration is a long term goal, the incentive logic variety should decrease along with the plan counts. For example, instead of reducing 100 plans with 400 components down to 50 plans with 400 components, the ideal future state would be 50 plans with 200 components. If you simply reduce plan counts without changing the incentive logic, there is a risk that plans become overly complex and the resources needed to administer the plans inadvertently increases.
One effective way to combine similar, but not identical, plans is the use of addendums. In the Teller example, if there is an annual bonus that is applicable to Teller Managers but not the other roles, that component could be placed in addendum to the original plan document. Shared logic would be found in the main plan document, and role-specific logic would be found in the addendums. Alternatively, some organizations opt to create entirely separate plan documents for each addendum.
Article written by: Mike Dumas