The Future of HRIS:
Technology is evolving all the time and will certainly impact Human Resource Information
Systems.
In this discussion
•
•
•
•
Identify and discuss some of your concerns about managing information security and
privacy in the future.
Analyze and discuss two of the following concepts: Bring your own device, Cloud
Computing, Social Networking, Enterprise Portals, and Open-Source Software.
Discuss their potential benefits and drawbacks to the future of managing information
security.
Your response should be at least 250 words in length.
Support your claims with examples from required material and properly cite any references.
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HRIS Effectiveness Measures and HRM
Advice for HRIS Implementation
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Human Resource Information Systems
Applications
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Performance Management
(http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo183) ,
Compensation, Bene its, Payroll, and the Human
Resource Information System
Charles H. Fay and Renato E. Nardoni
EDITORS’ NOTE
This chapter is the fourth one involving an organization’s talent management program and its
utilization as aided by an HRIS. This chapter completes our look at the cycle of activities involved in
talent management—planning and forecasting the need for talent (Chapter 11 (ch0011.xlink.html) ),
recruitment and selection of talent (Chapter 12 (ch0012.xlink.html) ), and training for talent
management (Chapter 13 (ch0013.xlink.html) ). The purpose of talent management is to achieve the
organization’s strategic goal of remaining competitive in its market. This chapter describes the HR
programs used in talent management and performance management, and how in concert they
maintain market competiveness for the organization. The focus of this chapter is on management of
employee performance in a systematic manner. This performance management system involves
evaluation of both individual job performance and the reward system of the organization that supports
the evaluation. The reward system of the organization involves the design, decision making, and
administration of both compensation and bene its practices. To understand why this performance
management system works we will cover the meaning of work and how it affects the motivation of
employees. The uniqueness of this chapter is its description of the design and operation of typical HRIS
applications in the performance management, compensation, and bene its programs.
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CHAPTER Objectives
After completing this chapter, you should be able to
• Understand the performance management (PM) cycle and the role of the HRIS in PM design,
decision making, and administration
• Understand typical compensation practices and the role of the HRIS in compensation design,
decision making, and administration
• Understand typical bene its practices and the role of the HRIS in bene its design, decision
making, and administration
• Understand payroll systems and the role of the HRIS in payroll administration
• Be able to discuss the meaning of work to employees in terms of their identities and self-esteem
• Discuss a motivation theory that helps to understand why work is so important to employees
and how the HR programs in talent and performance management affect employee motivation.
HRIS IN ACTION
As Mark walked into his work area, he was fuming. “Those idiots in HR and payroll are really the
gang that couldn’t shoot straight,” he announced to everyone in the vicinity. “What did they do
now?” asked Marsha. “Don’t tell me they got it wrong again!”
“They sure did,” said Mark. “After I complained last month you’d think they would at least check
to make sure they corrected their mistake. If I treated a customer this way I’d get ired!”
Mark’s paycheck is wrong once again, and the story is a complicated one. It started with the
performance review Mark had received from his boss the previous month. The review was good,
and Mark had earned an “Exceeds standards” summary rating. Somehow, when an HR data-entry
clerk entered the approved rating into the system an error was made, and “Does not meet
standards” went into the compensation review system. The error snowballed, and Mark received
no merit increase or bonus for the year. In fact, because of increased deductions for health
coverage, his check was actually smaller than the one he had received two weeks earlier. Apart
from the inancial costs, Mark was psychologically shattered because his boss had discussed in
their performance review meeting how good his performance was.
After his boss intervened, HR and payroll corrected the error and noted that Mark would
receive the expected increase and a one-time adjustment for back pay. On the strength of that,
Mark made additional inancial commitments. When the latest check was direct deposited into
Mark’s bank account, the mistake had not been corrected, and a check Mark had written was
returned for insuf icient funds. Payroll’s excuse? HR had not received the approved changes at least
one week prior to check issuance—payroll’s deadline for changes.
How can errors like this be avoided? They are not uncommon. A large state university in the
Northeast makes salary adjustments to faculty who receive performance increases in two stages:
The adjustment becomes part of the biweekly paycheck in late spring, and the adjustment for
January 1 through late spring is paid out as a lump sum in summer. Last summer, the back-pay
adjustment was considerably higher than it should have been because of a data-entry error in the
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adjustment formula. No one caught the error until this year, when the university had to notify all
faculty members that the back-pay adjustment for this year would be reduced by the excess
adjustment received the previous year.
PM, compensation, bene its, and payroll are sensitive areas for most employees. The typical
employee tends to “keep score” on his or her relationship with an employer through these systems.
It is critical that information technology (IT) systems in these areas be lawlessly executed from the
employee’s perspective because getting the wrong (or no) paycheck sends a very bad message to
the employee. Given the amounts of money involved, it is critical that IT systems in these areas be
lawlessly executed from the employer’s perspective as well.
In this chapter, we will provide an overview of PM, compensation, bene its, and payroll, so that
you have an idea of the complexity that must be captured if the HRIS is to work well.
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Introduction
Performance, rewards, and payroll systems focus on the basic exchange of inputs and outcomes
between employees and employers. Employees provide performance, and, in exchange, employers
provide rewards, which are distributed via payroll systems. These systems also serve as good examples
of several IT issues in human resources management (HRM). Performance management (PM)
systems are usually entirely internal to the organization, but data must be linked to several other
systems, including rewards, staf ing, training and development, and career development. PM systems
are used as working tools by managers to motivate employees to perform well in their jobs and must,
therefore, be inherently self-explanatory. Often, data are speci ic to the individual, although various
summary measures must be comparable across subsets of employees or all employees. Since job
performance is a function of individuals’ knowledge, skills, and abilities (KSAs) and their motivation to
work, a good starting point to understand how a PM program works is to examine the meaning of work.
The Meaning of Work
For most of us, work takes up a large part of our time and effort and is our major source of income. It
shapes our identity, is critically important in how we perceive ourselves, and affects our self-esteem
and self-worth. Each is an important part of the meaning of work, and strongly affects our motivation to
work and perform effectively. The employee-employer exchange is the basis of a work motivation
theory called Equity Theory (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections
/nav_140#glo83) (Adams, 1963, 1965). Basing our discussion of PM in motivation theory is necessary
since the primary purpose of a PM program is to both help align employee performance with
organizational outcomes and to motivate employees to perform well. Due to the importance of effective
employee performance, we will cover the major tenets of equity theory.
How does the theory apply to work and management? All employees seek a fair balance between what
they put into their jobs and what they get out of it. But how do we decide what is a fair balance? The
answer lies in Equity Theory. Importantly, we arrive at our measure of fairness, or equity, by comparing
our balance of effort and reward, that is, the ratio of input and output, with the balance enjoyed by
other employees whom we deem to be relevant reference points. None of us like to feel that we are
placing more effort into our work and receiving fewer rewards (e.g., salary, bonuses, bene its, etc.) than
those around us. Equity Theory can therefore help explain why people can be happy and motivated by
their situation one day, and yet with no change to their terms and working conditions can be made very
unhappy and demotivated, if they learn for example, that a colleague (or worse an entire group) is
enjoying a better reward-to-effort ratio. Use of this theory can help us understand why people select
one job over another, or seek a raise because one’s coworker has gotten a raise. Thus, the effectiveness
of the PM system in motivating employees’ performance has its basis in Equity Theory.
In contrast to performance management systems, which are entirely internal to an organization,
reward systems have both internal and external ties to multiple other information systems. Both pay
and bene its must be linked (or linkable) to external survey data, legal requirement data, and internal
systems such as budgeting and planning systems. Usage of parts of reward systems must be restricted
to HR professionals, while other parts must be widely available to employees for self-queries. Most
organizations consider rewards data to be highly con idential, so system security is critical. Reward
systems data focus on the individual, small-group, unit, and organization levels for different purposes,
and the same variable (e.g., value of a speci ic bene it, seniority, option value) may have to be de ined,
calculated, stored, and reported in multiple ways depending on the need.
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In the case of payroll systems, lawless data integrity and even more lawless execution are critical.
Anyone who has ever received an inaccurate paycheck will understand the frustration and anger that
occur; a payroll system that is not lawless is an administrator’s nightmare. Payroll systems must be
linked to external data (e.g., federal and state requirements for minimum wage) and internal data (e.g.,
general ledger, bene it choices) and must be capable of incorporating constant change. The payroll
system is generally used only by payroll specialists, but every employee “audits” his or her own results.
One inal aspect of payroll is that some summaries of payroll data are not likely to match summaries of
the same variables used in compensation or other HR systems. Even in a question as seemingly simple
as number of employees, there will be discrepancies in these data summaries. For example, the
compensation system is likely to contain only currently active employees; bene its might also include
employees on leave, retired employees, and those former employees who have elected continuation of
bene its under the Consolidated Omnibus Budget Reduction Act (COBRA) of 1986; and payroll iles
will contain everyone for whom a check is cut.
Although the interrelationships between performance management, rewards, bene its, and payroll are
clear, and it is obvious that the HRIS applications for these four functions need to interface seamlessly,
it would be a mistake to assume that these four functions can be considered independently of other HR
applications or, indeed, of any of the information systems operated by the organization. The HRIS must
allow for all aspects of the employment relationship (including relationships with prospective and past
employees that affect equity perceptions) to be considered, analyzed, and acted on. Neither managers
nor employees see the relationship between the organization and the employee through a single lens.
In turbulent times, it is dif icult to predict how information may need to be used. The potential must be
there for any data sets currently collected by the organization to be retrieved and analyzed based on
the requirements of the problems faced, not on the bin in which the data currently reside.
This chapter focuses on the data inputs, the typical reports that are generated, data out lows to other
systems, and the ways that the IT system can provide decision support to organizations and managers
in the areas of PM, rewards, and payroll. Before that discussion can be meaningful, however, a brief
overview of each of the areas is necessary.
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14.1 Performance Management
(http://content.thuzelearning.com/books/Kavanagh.5623.17.1
/sections/nav_140#glo183)
Overview
Until recently, most discussion in organizations focused on the performance appraisal process. The
emphasis was on getting the “best” appraisal format and training managers to “rate” employees using
the format. Most research, whether by scholars or professionals, was on rating formats, rater error, and
the training of raters. The assumption was that, if the correct format could be developed and managers
were trained to use it, the resulting ratings would be accurate.
During the 1980s, professionals and some scholars became interested in a different goal: improving
performance (Banks & May, 1999; Bernardin, Hagan, Kane, & Villanova, 1998). This interest led to a
reconsideration of the whole performance process, and attention shifted to PM. The PM process
consists of three parts: performance planning, performance observation, and providing positive
feedback (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_140#glo189) and/or
corrective feedback (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections
/nav_140#glo44) . In support of this process, periodic performance summaries are developed to serve as
a basis for performance planning for the next period while providing data for a variety of HR decisions,
including rewards, staf ing, training, and other decisions affecting the employee’s relationship with the
organization. This description of the process of performance management is based on the motivational
theory of goal setting (Locke & Latham, 1984, 1990a, 1990b).
The fundamental tenet of Goal-Setting Theory (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo102) is that goals and intentions are responsible for human
behavior. After years of research on this theory, the evidence for this tenant was strong (Locke, Shaw,
Saari, & Latham, 1981). On the basis of this extensive research, several other tenants of the theory were
veri ied. First, it was found that if goals determine human behavior, higher or more dif icult goals result
in higher levels of performance than those resulting from easy goals. Second, it was found that speci ic
goals (such as reducing employee absences by 25%) result in higher levels of effort than vague goals
such as “Why don’t we reduce absenteeism by 15%. Third, it was found that incentives such as money,
feedback, and competition will have no effect on behavior unless they lead to the setting and
acceptance of speci ic, hard goals. It is clear that the whole performance process described above was
based in some part on this theory since the theory and PM work.
PM is now considered within the framework of “talent management,” which encompasses all areas of
HR that have to do with onboarding, developing, evaluating, and managing the workforce through all
the normal cycles (see Chapter 11 (ch0011.xlink.html) for more complete coverage of talent
management and HRIS). PM is just one of the areas connected to others such as
• recruiting (external),
• staf ing (internal),
• career management,
• 360° assessment,
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• development management/training,
• retention management, and
• workforce planning.
The model of contemporary talent management is shown in Figure 14.1
(http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_114# ig14.1) .
Note that many organizations today, although having installed expensive and expansive enterprise
resource planning (ERP) systems, which were supposed to provide a single platform for all these
integrated applications, found that it was necessary to add specialized talent management solutions
from third-party vendors to achieve the necessary functionality.
Figure 14.1 Model of Contemporary Talent Management
The link from the resulting performance and compensation processes to the core payroll systems,
however, still remains as an integral link between the ERP systems and the specialized talent
management solutions. This link would also be consistent with the indings from goal-setting theory. In
the example given in the opening vignette, if there were an integrated talent management system
linking the performance module and compensation, there would be no need for anyone to enter the
performance rating into the compensation system since the performance rating would have already
been there as a result of the approved employee review.
Performance Planning
Performance planning, like most management processes, must be constructed in such a way that any
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manager can do it, regardless of management style or skills. Better managers involve the employee
collaboratively in all phases of the PM process, but the system is designed so that even directive
managers can follow the process. This discussion assumes that the manager is more directive than
collaborative.
The manager must irst de ine what performance means in the case of a speci ic direct report
(http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_140#glo68) (i.e., the employee
whose job performance is being evaluated). At the broadest level, this de inition of performance would
encompass any employee who ills the job position. Remember that the job position is described in
terms of duties and tasks outlined in the job description. Another way to conceive the de inition of
performance is that it is the performance expected of a new employee in the position if the direct
report were terminated. Ideally, this de inition is developed by a cascade of goals, itting the research
indings on goal-setting theory, beginning with the organizational strategy and operating plan, with the
immediate source being what the manager is expected to accomplish during the period and ending
with the direct report’s expected part of that accomplishment (Evans, 2001). The manager must then
move from the general to the speci ic, usually expressed in terms of desired outcomes. This constitutes
the performance dimensions for the direct report and is consistent with the indings from goal-setting
theory.
When outcomes are dif icult to observe or measure, behaviors that are expected to lead to desired
outcomes are added. For each performance dimension, the manager must develop speci ic outcomes
and behaviors that will be used to measure the direct report’s performance. For a performance
dimension of budget management, an outcome might be “Stays close to budget for each budget
category.” A behavior on the same dimension might be “Checks expenditures against budget.” After the
measures are determined, the manager must set appropriate standards for each measure. The standard
for “Checks expenditures against budget” might be “Checks expenditures against budget weekly.” After
de ining standard performance, “Exceeds standards” and “Fails to meet standards” would be de ined.
The “Exceeds standards” level for “Checks expenditures against budget” might be “Checks expenditures
against budget weekly; where discrepancies exceed 2%, checks those categories daily until
discrepancies disappear.” The “Fails to meet standards” level might be “Misses weekly check of
expenditures against budget; allows discrepancies to continue without any follow-up.” It should be
noted that performance dimensions, measures, and standards are unique to each position, although
attempts should be made to develop common standards for employees with identical job titles.
When performance dimensions, measures, and standards have been developed, the manager must
communicate them to the direct report. The manager must make certain that the direct report
understands measures and standards. The manager then gets the direct report to set goals for
performance for the coming year. Note that goals and standards are not the same thing. The standard is
what is expected of a fully job-knowledgeable employee who exerts normal effort. One purpose of PM is
to get employees to set stretch goals, to be better than the standard. At the end of the goal-setting
discussion, the direct report has agreed on some performance level as a goal. The set of performance
measures, with standards and goals, becomes the performance contract for a de ined performance
period, typically a year.
Formats
Most organizations de ine the performance instrument differently depending on the type or level of the
employee. For example, a nonmanagement or clerical position may have a relatively standard set of
criteria that requires little or no change year after year. On the other hand, management employees
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tend to use a format that combines both goals and objectives together with a competency evaluation. A
well-designed performance application can automatically map the correct “format” based on the
employee who has logged into the performance website.
For the management “format,” the performance evaluation can re lect a weighting of a goal portion and
the competency portion (e.g., 60% of the overall rating will be based on the goals results, while 40%
will re lect the competency ratings). Also, within each of these sections, a speci ic performance level for
each goal or competency might be rated. Therefore, the overall result could re lect a weighted
calculation of each goal, competency, and section. Web-based performance systems can easily perform
these calculations for the user. Even if the organization prefers that the employee and/or the manager
actually determine the overall rating, the system can provide “advice” as to the reasonableness of the
entered rating versus the underlying ratings.
Performance Period
During the performance period, the manager uses the performance contract as a benchmark for
observing the direct report. When performance above standard is observed, the standard becomes the
basis of positive feedback. When performance is below standard or below the goal set by the direct
report, corrective feedback is used, again relying on the standard and on the goal set as the benchmarks
for the performance observed. When discussion about performance is couched in terms of known
measures, standards, and performance goals, feedback can be much more objective, and it is less likely
to be seen as criticism of character. The direct report is not bad per se, but is simply not performing at
the agreed-on level on one or more measures.
Periodic Performance Summary
At some point, a summary of performance during the period is provided to the direct report. In most
organizations, this is an annual event, but some organizations have quarterly or semiannual
performance summaries. At this point, the manager provides a summary of how the direct report has
done on each performance measure and whether standards and goals have been met. In performance
systems that offer both the employee and the manager Web-based input capabilities, periodic review of
the employee’s progress toward achieving goals is much easier. Once the employee self-assesses her or
his own performance, the manager can also review each goal while viewing the employee’s comments
(see Figure 14.2 (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_114# ig14.2)
for an example).
Figure 14.2 Performance Planning and Rating Module Screen
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Consequences of achieving various performance levels are communicated, and planning for the next
period’s performance begins. If PM has been done correctly, the summary appraisal should have no
surprises for the direct report. As shown in Figure 14.1 (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_114# ig14.1) , development is a critical component. One of the more
important outputs of the performance process is an individual development plan (IDP) that is used
to document any steps necessary to improve employee performance. Each employee should have an
IDP.
The process described above applies to PM at the individual level. Yet most employees today work as an
integrated part of one or more teams. The PM process does not change signi icantly for a team. It is
usually easier to get outcome performance measures for a team than for an individual, and it is more
dif icult to get individual performance measures for a team member (Bing, 2004). Some organizations
have elected to use team output as the primary outcome measure of performance for all team members
and then develop a “team citizenship measure” for each team member.
Typical Data Inputs
Data inputs for PM systems include organizational-, job-, and individual-level data. Organizational-level
data consist of links to organizational and unit goals and strategies and business plans. Performance
plans should be able to tie back to unit and organizational plans; ideally, it should be possible to
consolidate individual performance plans to the unit level and consolidate unit plans to the
organizational level.
Job-level data is a signi icant part of the PM system. Key tasks, responsibilities, and outcomes should
low from job data sets to individual performance plans. Performance exists only within the context of
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the job.
Because performance begins at the individual level, most of the data in the PM system are individuallevel data. Data include all the performance criteria developed by the manager for the individual, the
particular measures that will be used to rate the individual’s performance on each criterion, and the
performance standards for each measure. If rating information is to be provided by more than the
manager, the names of other raters and the criteria for which they will provide rating information need
to be in the system as well. Usually, the entire performance contract will be a part of the system. Most
systems will include space for the supervisor (and other raters) to enter observed performance and
performance incidents. Contemporary systems allow both employees and managers to enter comments
and observations at any time during the review period and provide the option of having all those
comments swept into the inal review, presenting them in a concatenated area for editing by users.
There should also be space for documentation of positive and corrective feedback. While creating an
IDP, many systems can recommend and provide a library of development activities that can be used to
correct speci ic problems.
Performance management systems must interface with staf ing and training applications. As an
example, if certain jobs are hard to staff, the PM system will want to add the competencies required for
that job so that more internal candidates can be surfaced. Similarly, training applications need to be
coordinated with the PM system so that evaluation of training (and development) programs will be
possible.
Typical Reports
The most important standardized reports produced by the HRIS are the performance contract and the
annual summary appraisal for each employee. Other reports include aggregate performance data by
unit and reports comparing aggregated unit performance with unit output (Cohen & Hall, 2005, p. 64).
The HRIS needs to have the capability of archiving data so long-term performance trends for
individuals and groups can be tracked. If competency assessments are used as a part of the review, the
HR department can monitor systemic developmental requirements based on the aggregated
competency results (e.g., those for business unit, location, or level).
Data Out lows
Performance data are used in many HRM decisions and will low automatically into some processes or
be available for others as needed. One automatic low will be into compensation. Organizations with
merit pay need performance distributions to construct a merit matrix. (Note that many performance
applications are capable of having compensation functionality built in.) The performance measure used
is the summary performance level for each employee. Performance data on various performance
dimensions are used in decisions relating to promotion, layoffs, assignment to training programs, and
developmental assignments. Performance data are also central to HR planning. Other applications that
make use of performance data are training and development (so that training needs can be analyzed
based on current weaknesses in employee performance) and staf ing, where aggregated strengths and
weaknesses of currently needed skills and competencies can trigger recruitment and staf ing goals. In
addition, performance processes utilizing competency assessment can be used by manpower planning
applications to assist in forecasting future de iciencies based on required skill pro iles.
Decision Support
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The basic decision support system in the area of PM is the entire system. Having performance criteria,
performance measures, performance standards, goal-setting results, and recent performance
documentation in a single place allows managers to keep track of how each direct report is doing and
what interventions need to be made to improve performance (Evans, 2001). This self-service feature
for managers makes the performance management module a management tool for daily use. All
performance management documentation activities required of the manager can be dealt with through
the system. Performance planning, documented observation of performance, feedback documentation,
and the formal appraisal can all be developed on the system itself and stored there for future reference
by managers. Similarly, the system can provide self-service for employees by allowing them to view the
same data and use those data as a basis for deciding on areas where improvement is needed. For
example, were performance “speci ic” goals set at a high enough level to motivate employees to
perform at higher levels on their jobs? Appropriate interfaces between the performance management
module and training and development modules can lead either the manager or the direct report to
training programs or other developmental activities based on the speci ic performance problems
noted. Indeed, PM software can be categorized as either preformatted appraisal systems—systems that
allow the development of customized appraisals—or systems that diagnose performance problems
(Forrer & Leibowitz, 1991, pp. 104–106).
Flowers, Tudor, and Trumble (1997) note that such systems should allow managers to update
information, serve as a support in conducting the appraisal interview, allow the creation of effective
appraisal forms, and support all legal mandates relevant to performance appraisals. In some systems, a
copy of the current job description for the position is available to the manager so that it can be
reviewed for accuracy on an annual basis. A system supporting multisource feedback appraisals such as
360° appraisals (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_140#glo250) is
described by Meyer (1998).
Group performance can also be tracked and the data used for performance improvement; because most
employees work as part of teams, there has been increased interest in measuring and managing team
performance (e.g., Jones & Schilling, 2000). Stegner and Kofahl (2004) provide a case study of a process
for group performance improvement that could not exist without heavy input from the HRIS. In some
cases, systems tie closely with marketing and management information systems; Charles, Kurlander,
and Savage (2000) describe a sales performance tracking system that keeps home of ice and sales
personnel aware of results against quotas and suggests where efforts need to be made to enhance sales
performance.
Finally, automated PM systems allow managers and HR managers to track the administrative aspects of
PM: Have all managers completed performance contracts with their direct reports? Are summary
appraisals done on time? Do ratings by a manager and the performance of the manager’s unit jibe?
These are questions that can be answered by the system. Additionally, performance ratings can be
checked for possible bias against protected groups. This checking can include not only the ratings
themselves but also their use in HR decisions. Under the Uniform Guidelines on Employee Selection
Procedures (U.S. Department of Labor & U.S. Department of Justice, 1978), performance appraisals are
considered “tests” when used for HR decisions, such as promotions, and are subject to the same validity
and reliability requirements as other tests when they are found to have an adverse impact on protected
groups.
Web-based systems can also provide a calibration tool for employee performance ratings that allows
for a visual inspection of the distribution of ratings for a population. This calibration is often essential
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as a tie-in to the compensation process since performance ratings often dictate how much employees
may receive for their annual merit review. The example of performance calibration presented in Figure
14.3 (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_114# ig14.3) is part of a
succession planning system being used by a large utility organization, a system that allows managers to
view the distribution and even drag-and-drop employees within the ratings to adjust for any
discrepancies.
Figure 14.3 Example of Relating Performance to Compensation
Source: © SuccessFactors, Inc. All Rights Reserved.
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14.2 Compensation
Overview
Compensation is one of the most complex topics in HRM, and attempting to present an overview is
ambitious. The central motivational issue for compensation is whether or not it is seen as equitable or
inequitable to employees as de ined by Equity Theory. Since compensation is the primary outcome for
most employees, a great deal of dissatisfaction could result when it is viewed as unfair. Organizations
faced with the complexities of creating and administering compensation systems are increasingly
turning to technology for help. Wright (2003, p. 55) estimates that a 12,000-person irm can save as
much as $850,000 per year in administrative costs by automating compensation planning alone. Brink
and McDonnell (2003) point out that nearly all processes used to design, communicate, and manage
pay are moving toward Web applications.
The basic compensation system includes base pay (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo18) , merit pay, short-term and long-term incentives,
perquisites, recognition awards, and attraction or retention awards. There are many processes
associated with each of these, all of which must be coordinated. If that were not enough, there are also
special populations that have unique pay processes: executives, sales personnel, scientists and
engineers, expatriates, unionized workers, and the whole panoply of temporary, contract, or part-time
workers.
Base pay is built around two processes: job evaluation (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo135) and market benchmarking. Job evaluation creates an
internal hierarchy of value. In the most common form of job evaluation, a set of factors is developed
that re lects characteristics that add value to work in the speci ic organization (e.g., the education
required). Each factor is weighted by importance, and scales are developed. Every job that will be in the
base pay system is evaluated on the set of scales, and a point score is calculated. Jobs are arranged by
total points, and this forms the basis for a salary structure.
Market benchmarking (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections
/nav_140#glo154) is used to price the structure (or individual jobs). Market data are collected for as
many jobs as possible. In most organizations, one or more surveys may be developed in-house to
collect market benchmarks; but the bulk of benchmark data come from commercial and association
surveys. Many of these surveys are now available electronically (either on disk or through a website)
and can be integrated into the compensation information system. Entering data can be done through a
website with a format that maximizes ease of data entry (Tobin, 2002). However, websites with salary
data are not without problems; employees frequently access websites that may have unrepresentative
data and argue that they are underpaid based on bad data (Menefee, 2000).
An employee is placed in the salary grade appropriate for her or his job. Each grade has a midpoint that
serves as a proxy for all the jobs in that grade, and a range is built around that midpoint. (This range
de ines the minimum and maximum salary for jobs in that grade, usually ±20% from the midpoint.)
Exact placement in the range is usually a function of performance and individual characteristics
(quality of degree, job seniority, and experience).
The structure is adjusted each year based on market movements. If the market were to increase by 3%,
for example, the midpoints would increase by 3% as well. However, not all employees receive a 3%
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increase if the organization uses a merit pay system. In a merit pay system, the size of the increase is a
function of performance level and of where an employee is in the range: the higher the performance,
the larger the increase and, generally, the lower the place in the range, the higher the increase. A merit
matrix, developed to provide guidelines based on performance and place in the range, ensures that the
total amount spent by the organization is no more than the speci ied percentage of payroll.
There are many forms of short-term incentive pay (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo120) . Unlike merit pay, short-term incentive pay is rarely
added to base pay and must be re-earned every year. Typical short-term incentive programs include
bonuses, gain sharing, goal sharing, small-group incentives, and pro it sharing. Short-term incentive
programs usually have speci ic measures, set up prior to the beginning of the program that will drive
payout (pro it sharing as an incentive is not typically covered by these measures). Gain sharing, for
example, bases payouts on reductions in production costs due to more ef icient use of labor. Speci ic
preplanned formulas based on past production costs drive payouts. Bonus systems can be driven by
preplanned criteria related to manufacturing, customer service, safety, or anything else that the
company wishes to motivate employees to achieve. Pro it sharing is usually retrospective, however; the
board decides after the books have closed for the iscal year that some percentage of pro its will be
shared with employees. In all cases, the measures driving short-term incentive payouts must be
collected, either through existing measurement systems or through special systems designed for the
purpose.
Long-term incentives are primarily based on organization stock, options to buy organization stock, or
phantom (make-believe) stock. The goal of long-term incentives is twofold: to align the interests of
employees with those of shareholders and to motivate aligned performance over periods of more than
one year.
Perquisites (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_140#glo184) are
rewards that are a function of organizational status. Executive dining rooms, irst-class or corporate jet
air travel, and club memberships are examples. Perquisites frequently have tax consequences to the
employee receiving them and, thus, must be included as part of the pay system. In the past several
years, some organizations have transformed perquisites into incentive rewards based on performance;
go to any Disney property, and you will see parking spaces near the employee entrance that are
reserved for high performers.
Recognition awards (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections
/nav_140#glo213) are low-cost or no-cost awards that are retrospective: When an employee does
something of note, he or she receives an award that may have little inancial value but is psychologically
rewarding. The use of websites in recognition programs, so that every employee can go online and ind
where he or she stands in comparison with other eligible employees, can greatly enhance the
motivational impact of such programs (Perlmutter, 2002). Attraction or retention awards are onetime awards that are used to attract prospective employees to the organization or persuade them to
remain with the organization. These awards may take the form of cash, stock options, bene its, or
adjustments to bene its rules. The goal is to incur a one-time cost that does not drive up base pay.
Although the types of compensation already described are made up of multiple programs, it is critical
that all compensation programs be integrated, so employees receive a single message about what adds
value in the organization and the type of behavior and culture that is desired.
Compensation programs must also meet federal and state statutory and regulatory requirements. The
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Fair Labor Standards Act (FLSA) (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections
/nav_140#glo88) differentiates exempt workers (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo84) and nonexempt workers (http://content.thuzelearning.com
/books/Kavanagh.5623.17.1/sections/nav_140#glo163) ; the organization must pay nonexempt workers at
least the minimum wage, must pay for time worked in excess of 40 hours a week at an overtime rate of
1.5 times the normal pay, and must provide records to the federal government on hours worked and
regular and overtime pay for all nonexempt workers. The Of ice of Federal Contract Compliance
Programs (OFCCP) requires annual evidence of no unfair bias with respect to race and gender for
similarly situated employee groups (SSEGs) and requires multiple linear regression analyses as
evidence.
Typical Data Inputs
Compensation data inputs include internal, external, and generated data. Internal data include
information about jobs (descriptions, speci ications), people (performance, salary history), and
organizational units (salary budget, job evaluation system). External data would include market survey
data and information on rewards practices. Internal and external data would be combined and used to
generate job evaluation results, salary structures, merit matrices, and a variety of reward guidelines.
Incentive programs will require input data on whatever behavior or outcome is being encouraged; such
data might include customer survey results, accident data, time-to-market data, or product quality data.
Data from the staf ing function can highlight problem areas, for example, jobs for which compensation
may be too low.
Compensation for a special employee group usually requires data speci ic to that group. Executive
compensation is likely to require organization-wide sales, productivity, pro it, share price, market
share, and other inancial, market, and production data indicative of organizational success. Sales
compensation systems may require data on quotas, sales, bonus or commission rates, and competitive
market data. Gain-sharing programs require historical averaged data on labor costs as a proportion of
value of production. Bargaining unit employee pay systems require data on contract speci ics. For
nonexempt employees, hourly rates and hours worked per week are required.
In short, there are very few data within the organization that might not be required by some part of the
compensation system. As an example, a company that market-prices jobs will collect as much market
data on wages as possible. Even so, it is unlikely that market data can be found for all jobs. The “market
rate” for these jobs must be estimated. It is common to use multiple linear regressions for this purpose.
As much information about all jobs is collected as possible, using either job speci ication data or
aggregate information from job incumbents. Some speci ic information that might be collected from the
HRIS includes the average education level of job incumbents in each job, the average amount of training
incumbents in each job have had, the average number of direct reports each incumbent in a job has, and
so forth. Although logic guides the choice of which independent variables to use in the regression
equation to predict market rates, the goal is to get the best prediction, so whatever variables end up
providing the best prediction are the ones that will be used. Similarly, incentive programs may make
use of any inancial, market, or production data to determine whether bonuses should be paid and, if
so, how much and to whom.
Typical Reports
There are a number of standard reports in the compensation arena; however, because of the sensitive
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nature of compensation information, they are not widely circulated. The most common reports include
budget reports to managers showing how their actual compensation costs compare with the projected
costs. Most organizations provide each employee with an “Annual Compensation Report” showing the
total amount of money spent by the organization on the employee, including money spent on wage or
salary, incentive pay, and the cost of bene its paid for by the organization. Similar reports, such as
incentive reports that tell people how they are doing with respect to earning a speci ic incentive award,
become much more effective when a website is used for communication (Stif ler, 2001).
Companies participating in wage surveys produce reports for use by surveying organizations. In some
cases, a compensation analyst draws the data from the HRIS and enters them into the survey, but, in
other cases, an automated application gathers data from the HRIS and enters them into the survey
program.
A new report on the analysis of possible “systemic compensation bias” among “similarly situated
employee groups” is now required by the U.S. OFCCP. This report will be due annually, along with the
organization’s EEO-1 Report.
Data Out lows
The primary data out low from compensation modules is to payroll. Compensation analysts draw on
the data for additional analyses, however. Managers preparing budgets draw on compensation data as
they project costs over the next budget period. Bene its analysts draw on compensation data as they
analyze probable future costs of wage-based bene its (pensions are usually a function of salary level
while health bene its are largely independent of salary level).
Data are sent to federal, state, and local agencies, including taxing agencies, labor departments, and
other units tracking wage data. Many organizations also provide data to irms conducting reward
surveys.
Decision Support
The major rewards decision that has to be made about every employee is how much to pay that
individual to be seen as fair by the employee. Decision support systems in compensation are all aimed
at that decision. Because of the complexity of compensation, though, a series of decisions must be made
before a inal compensation decision is made. Thus, there are decision support systems dealing with
job evaluation, the use of market data, market pricing, building a salary structure, developing a merit
matrix, and running incentive programs. Although much of this activity is carried out by compensation
and other HR managers, other managers can do much of the work themselves if the system is set up
correctly as a self-serve system. The most common areas that managers would handle themselves
include salary budget planning, merit, promotional and other increases, and most incentive programs.
Using Web-based compensation modules, managers can perform salary-planning functions much
easier than was possible with paper-based processes. Data such as current salary, compa-ratio, and
salary ranges can be viewed for all their employees at once; for international organizations, such
systems can handle multicurrency requirements; and these systems can ensure that the total of the
projected salary increases recommended by each manager does not exceed budgeting guidelines.
Figure 14.4 (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_116# ig14.4)
depicts the work area of a Web-based application that enables managers to do compensation planning
for their employees.
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Koski (2003) describes a project that automated a worldwide employee bonus system; executives and
managers got a self-service system, and compensation executives could keep track (in real time) of
award amounts and payouts. Supported by computer and Web-based products, these processes
generally offer advantages to the organizations using those (Zingheim & Schuster, 2005). Indeed,
Zingheim and Schuster (2004) argue that Web management of pay and rewards is one of two great
innovations in the rewards ield.
Employees do not make many compensation decisions themselves, so self-service functions are largely
restricted to providing information. Most companies now make salary structures available on the
company intranet, and job postings typically provide either structure information or the salary grade of
a job, so employees can look up what the range of pay for any job would be. The merit matrix, average
salary increases, average bonuses of various kinds, and other reward information are all posted by
some companies. Most public sector salaries are publicly available under state and local “freedom of
information” acts, and, in these cases, salaries (and total earnings) of speci ic employees are available;
private organizations almost never post such information.
There can be dif iculties with Web management of pay. Van De Voort and McDonnell (2003) point out
that working “live” can create problems when numbers change during the process. As an example, if a
manager is calculating merit pay and is working off a speci ic budget number, changes to that number
by a senior manager can create confusion and bad decisions. The use of a frozen or static database
ensures that everyone is working with the same data, formulae, and igures.
Other decision support systems deal with sales compensation. Cocks and Gould (2001) note that
compensation software is critical in de ining commission levels, designing compensation plans, and
managing compensation, since all three areas require on-the- ly complex calculations on a repeated
basis. Weeks (2000) notes that virtual sales teams in widely separated areas can be much more
effective in maintaining customer satisfaction; only the Web allows the coordination between team
members required to pull off this strategy, and it also allows sales compensation experts to audit and
ine-tune the sales compensation system to maintain high motivation levels.
A whole set of applications relate to executive pay. Since the Enron scandal and the subsequent passage
of the Sarbanes-Oxley Act (SOX), compliance reports, including those dealing with executive pay, are
required. SOX compliance is greatly supported by data from the HRIS (“How HRIS Can Help with SOX
Compliance,” 2005; Sherman, 2005). Additional regulations covering executive pay have come about as
a result of the Troubled Asset Relief Program (TARP) of 2009 and the inancial bailout of troubled
inancial services irms and automakers. More inancial regulations are expected in the future. The
HRIS must be lexible enough to add any new ields required by these regulations and capable of
running the audits required.
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14.3 Bene its
Overview
A full discussion of bene its programs is beyond the scope of this chapter. There are ive broad types of
bene its programs in most U.S. organizations. Because some company-provided bene its in this country
are government provided in other countries, a different typology would be required for organizations
abroad. As might be expected by Equity Theory, bene its are becoming important outcomes from the
organization and could affect employee turnover.
Figure 14.4 Screen of Salary Review Module for Department Manager
The irst set of bene its programs common in U.S. companies includes pension plans (both de ined
bene it and de ined contribution), individual savings plans (such as Keoghs, simpli ied employee
pensions [SEPs], and individual retirement accounts [IRAs] and Social Security. Although few
Americans think of Social Security as a bene it, the organization must fund contributions to Social
Security just as an employee does. The goal of all these bene its programs is to ensure that the
employee will have continuing income after retirement. The second set of bene its programs includes
workers’ compensation, unemployment insurance, long- and short-term disability insurance, and life
insurance. The goal of these programs is to ensure that employees who cannot work (through no fault
of their own) have some income until they can work again and to provide income protection to
employees’ families.
The third set of bene its programs includes medical and other health bene its, such as hospitalization
and medical care insurance; surgical and major medical care insurance; long-term care; dental, vision,
and hearing care insurance; and prescription drug coverage insurance. These bene its are designed to
make sure that employees and their families are not bankrupted by illness or accident and can obtain
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preventative and curative care. The fourth area of bene its is paid time off and includes vacation,
holidays, personal days, special purpose days (because of jury duty, bereavement, or military service,
for example), and family leave. The purpose of paid time off is to allow employees to recharge their
batteries, spend time with their families for celebrations, and participate in other signi icant life events.
The ifth and inal category of bene its includes miscellaneous bene its such as dependent care, lexible
working bene its (telecommuting, job sharing, and compressed workweek), employee assistance
programs, professional memberships, tuition reimbursement, holiday parties and gifts, subsidized
cafeterias and gyms, legal advice bene its, and employee discounts. These bene its round out the
bene its package and are typical of organizations found in the “best companies to work for” lists.
Bene its programs differ from compensation in two major ways. First, in the majority of organizations,
employees pay part (or all) of the costs for most bene its. (Even when bene it costs are borne entirely
by employees, group purchasing reduces the cost that the employee would pay for an equivalent selfpurchased bene it.) Second, most organizations offer some lexibility in their bene its programs. All
employees receive a core bene its package but then choose additional coverage or additional bene its,
or both, up to the level of the total bene its package. (Flex plans (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo93) also allow the employee to purchase additional coverage
or bene its, or both, at cost.) These two characteristics of bene its programs make them relatively
complex to administer; each employee in the organization may have a slightly different bene its
package with a unique salary deduction pro ile. Things even get complicated with paid time off. Not
only may different employee groups (e.g., bargaining units, executives) have different con igurations for
paid time off, but these con igurations may also differ within groups based on seniority. In addition,
many organizations have what is called a paid time off bank, through which employees can trade paid
time off for cash or other bene its, can buy additional paid time off, or can donate paid time off to other
employees (e.g., in cases of long-term illness). All this makes bene its programs extremely complex and
dif icult to administer.
Another major difference between bene its and compensation programs, one that strongly affects HRIS
con iguration, is the growing trend to outsource bene its programs and administration. Few parts of
the typical compensation program are outsourced. The most common is the outsourcing of wage
benchmarking. Although consultants are frequently used in compensation, they tend to work of line. In
bene its, however, program design, bene it delivery, and program administration (including employee
communications) are increasingly outsourced. As a result, the HRIS must interface not only with other
internal systems, such as rewards and payroll, but also with the IT systems of other organizations. The
necessity of establishing these interorganizational linkages introduces problems such as how to de ine
ields, which ields can be included, what protocols for interaction to establish, and how to maintain
security.
Legal requirements for bene its programs are also more stringent than those for compensation
programs. Most bene its programs are in luenced by the Employee Retirement Income Security Act
(ERISA), which grants bene its a tax-favored status. However, to qualify for favorable tax treatment, the
bene it must meet stringent requirements. These include reporting to recipients of bene its and to the
federal government, demonstrating that requirements for quali ied status are met. In addition, many
organizations offer nonquali ied bene its to some employee groups, particularly to executives.
Typical Data Inputs
There are HRIS bene its modules with different purposes, and each requires a different type of data
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input. One set of functions focuses on the organization’s relationship with current and prospective
bene its vendors (of health insurance, for example). Inputs, in this case, will include aggregate data
about the people to be covered, data outlining the relevant demographics for the covered groups, and
data specifying the program coverage desired and cost limitations.
A second set of functions focuses on the internal management of bene its programs and will be used to
track usage, employee choices (in the case of lex plans), and costs. Experience, usage, and costs will be
fed into this program.
A third (and the most common) set of programs focuses on employee input about enrollment and other
coverage choices, changes in coverage desired, and changes in employee status (e.g., addition of a
dependent, change in marital status) that may affect coverage and employee costs. These programs
may also allow employees to ile claims with the organization. In these programs, many of which are
Web based, employees feed in personal data, coverage choices, and other data relevant to their use of
the bene it.
The fourth set of data placed into the system consists of the myriad federal, state, and local laws and
regulations governing bene its practice. These laws and regulations provide decision support system
“rules” for managers using the system.
Typical Reports
There are dozens of reports required by federal and state government units, including the IRS, units of
the U.S. Department of Labor, other federal agencies, and similar units at the state level. The most
common report is the annual bene its report to employees required for tax-quali ied plans under
ERISA. This report requires organizations to report to employees annually about certain bene it facts,
such as vested pension levels. Most organizations have gone beyond the ERISA requirements and
provide a report to each employee showing the total value of all compensation and bene its received by
the employee during the year. This annual compensation report is the “rewards scorecard” for the
employee. Ceccon (2004) estimates that putting this annual report online rather than distributing
printed copies can save a company with 30,000 employees $678,000 in actual costs over ive years and
that productivity savings from reducing the amount of time employees use to ind bene it account
balances, pay information, and other rewards information on multiple sites or via phone calls to the HR
department can save $625,000 per year. HR productivity increases net an annual savings of $30,000,
and increased employee retention would reduce costs by $150,000 per year. With a ive-year savings of
$678,000 and an annual productivity savings totaling $805,000, Web reporting is clearly advantageous.
With Web-based access to bene its and other employee information, staff can view summary reports at
any time, which, in many cases, eliminates the need for a company to produce expensive paper
versions. With a Web-based system, an employee can, at his or her convenience, view his or her current
bene its, salary, and other information directly (as shown in Figure 14.5
(http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_116# ig14.5) ) and decide to
print a paper copy if one is needed. For an international company that distributes bene its or pay in
multiple currencies, the system could normalize that data into a single currency.
Data Out lows
Data generated by bene its programs have to be transferred to payroll and accounting internally. Data
are sent externally to bene its providers, outsourced bene its administrators, and a variety of federal,
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state, and local agencies. Aggregate data are provided to bene its survey irms.
The real-time transfer of data can result in large cost savings. Moynihan (2000) notes that AT&T saved
$15 million when it switched to providing updated enrollment information to all its various health
plans. Previously, tardy data transfer resulted in health plans denying coverage to employees who were
in fact eligible and in claims being paid out to people who no longer worked for AT&T.
Decision Support
Decision support tools overlap to some extent with reports in the bene its arena because, frequently,
these reports trigger the need to make changes to comply with federal, state, or local requirements. As
an example, McCormack (2004) notes that the Family and Medical Leave Act (FMLA) has complicated
the administration of employee leave. Many states have more stringent leave requirements than FMLA
or the 40 other federal leave laws. A system that tracks these laws and can tell the HR manager exactly
what the leave requirements are in a speci ic locality ensures compliance and minimizes the risk of
lawsuits and ines.
Figure 14.5 Compensation and Bene its Planning Screen
Similarly, tax-quali ied bene it plans are subject to federal bias regulations. In this case, “bias” refers to
income level rather than protected group status. Federal policy is that tax laws should not underwrite
bene its that are available only to highly paid employees. If an organization is to have a quali ied 401(k)
retirement plan, for example, the plan must be available to both low- and high-paid employees, and, in
addition, it must be used by both. Tracking enrollments against those eligible for participation can
trigger efforts to get more low-paid employees to participate in the plan.
When organizations offer lexible bene it plans, it is common to track the choices made by employees to
guide plan development. A few organizations have looked at bene its choices made by high performers
to see if they differ from the choices made by low performers. Others look at the choices made by
protected groups. Recruitment literature can then be tailored to speci ic groups to ensure a better yield
of desirable applicants.
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Web-based services also offer decision support to employees deciding what levels of coverage to sign
up for (Dawson, 1997). Employees can readily compare the cost of various levels of bene its service and
more readily understand the cost-bene it trade-off that they are going to make. Similarly, transferring
the enrollment process to the employees themselves can save the organization money (Teer, 1997).
However, such savings are not likely to occur unless the system is easy to use for all employees, not just
the technologically savvy (Ashley, 2006).
Self-service systems for managerial use in the bene its area are not frequent, as few managers have a
role in bene its decisions concerning their direct reports. However, self-service systems for employees
are increasingly relied on by employers to lessen the burden of bene its transactional administration.
Employees typically make and change selections in lexible bene its plans through the company
intranet. They can change bene iciaries or dependents as births, deaths, and divorces occur. They can
increase tax-deferred or pretax contributions to various bene its categories such as 401(k) plans,
health spending accounts, and similar programs. They may buy or sell vacation days from the paid time
off (PTO) bank. They may transfer PTO days into their 401(k). (There are timing and contribution limits
and other rules that must be observed, but these can be built into the application.) Employees can also
ind out the status of various bene its through self-service approaches. At least one organization allows
employees to do “what-if” scenarios with respect to retirement: for example, “If I retired tomorrow,
what would my pension be?”
The outsourcing of bene its creates additional issues for the HRIS. Some major corporations have
outsourced all bene its. An extensive interface must be built connecting the organization’s HRIS with
the outsource irm’s system. The bene its advisers at the outsource irm must have current, accurate
data on the bene its status of every organizational employee to be able to answer questions and
provide advice. Outside access raises security issues to a greater level of concern; bene its data
(including hospital and other medical billing and psychiatric care and employee assistance program
billing) are the most sensitive employee data held by the organization, and privacy standards
(including Health Insurance Portability and Accountability Act [HIPAA] requirements) must be met.
A whole range of decisions concerning bene its is made outside the HR department. Bene its costs are
the most rapidly increasing part of labor costs, particularly costs for health care bene its and de ined
bene it pension plans. Consequently, senior executives (especially the CFO) are interested in the
aggregate costs of the various bene its packages offered by the organization. However, determining
these costs is complicated. For many bene its, such as workers’ compensation, cost is a function of
experience; for others, such as insurance, cost depends on usage; and for others, such as health
insurance and pensions, employee demographics are particularly signi icant. Therefore, the
organization needs to be able to price current bene its packages and project costs based on expected
demographic changes. It also needs to be able to run “what if” scenarios based on alternate bene it
packages: What would we save over the next ive years if we switched from a de ined bene it pension to
a cash balance plan? How would that compare to switching to a 401(k) with match?
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14.4 Payroll
Overview
Payroll is the transactional process through which compensation is transferred to employees and
federal, state, and local income and payroll taxes are withheld from employees’ checks. It is also
through payroll that any bene its costs borne by employees are withheld. Although some employees
receive actual checks for net pay, it is more common, especially among large organizations, for direct
deposits to be made to employees’ bank accounts. Companies that outsource need to make sure that
the compensation and bene its modules of the HRIS interface lawlessly with the provider’s payroll
input. Even when companies do payroll in-house, the payroll module is usually part of the accounting
system rather than the HRIS, so it is critical that the interface between the HRIS and the payroll
software work lawlessly (Walker, 1987).
In the majority of organizations, payroll is a function administered by inance or accounting rather than
the HR department. HR departments feed compensation data and bene its coverage (and employees’
coverage choices) to payroll, which makes sure that all appropriate federal, state, and local income and
payroll taxes are withheld at the correct rate and that any deductions for bene its are also withheld at
the correct rate. Payroll usually has the responsibility for keeping track of income and payroll tax rates
and applicable salary levels. Payroll results are fed back into the general accounting system by payroll.
Because labor costs are the largest variable cost for most organizations, it is critical for the
organizations’ inancial well-being that payroll records be accurate and timely. Because the paycheck is
a signal of the employment relationship and because many employees rely on their paychecks to meet
bills that are due, it is critical that the payroll system deliver accurate and timely paychecks or bank
transfers. Little will anger or demoralize an employee more than a missing or an inaccurate paycheck
or transfer. In short, payroll is a transactional task that must be lawless.
Payroll is the most heavily outsourced HRM function. Great economies of scale can be achieved by a
payroll processor with respect to keeping up with the intricate requirements of income and payroll tax
deductibles or maintaining (and upgrading) software that ensures that payroll is accurate and
completed in a timely manner. However, outsourcing companies do not work in a vacuum, and
compensation and bene its functions must deliver data to the outsourcer, and the accounting and
inance functions must receive data back from the outsourcer. Also, some companies argue that
integrating the HR and payroll functions makes sense and saves data entry and labor costs while
providing greater accuracy and timeliness (Gale, 2002).
Typical Data Inputs
Data entered into the payroll system from inside the organization include compensation data, bene its
data, and other payroll addition data (e.g., special awards) and deductions data (e.g., union dues, wage
garnishments for child support, credit union repayment installments). Time and attendance data are
usually handled in a special module, and data from this module are also fed into payroll (Robb, 2004).
Data external to the organization include federal, state, and local income and payroll tax rules that
allow the organization to withhold appropriate amounts from each employee’s paycheck. There may be
payments made to individuals who are not active employees. Although these are usually taken care of
in a separate COBRA module, there may even be payments from ex-employees for the continuation of
bene its. The most frequent data input are change data. Every time a new employee goes on the payroll,
an employee changes status, an employee makes bene its elections changes, governments change tax or
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withholding rates, or the organization makes changes such as pay increases, data re lecting the changes
have to go into the payroll system. Many of these elections can be performed by employees themselves
using the self-service capability of a Web-based payroll system. Through a direct entry screen (shown
in Figure 14.6 (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_117# ig14.6) ),
the employee can enter or update any data that he or she controls, such as the number of exemptions
or extra withholding, without the need for HR intervention. For an international company, the system
could automatically present any inancial data in whatever currency the employee requested.
In addition to internal and external data, the system generates data that it stores and uses over time.
For example, in 2010, FICA (Federal Insurance Contributions Act, i.e., Social Security) taxes were
withheld on the irst $106,800 of income and the maximum tax withheld for any employee was $6,621.
Payroll must keep a running total of FICA paid to date so that it does not deduct too much from the
employee’s paycheck.
Typical Reports
There are a number of standard payroll reports. These show—for the organization as a whole (or for
subunits)—the actual amount paid to employees for a period (and cumulatively) and the amounts
deducted for various purposes. Reports go to federal, state, and local agencies, including taxing
authorities, and to bene its providers. Employees receive reports with their paychecks or notices of
deposit; the report shows gross pay and all deductions. Usually year-to-date accumulations are also
provided.
Figure 14.6 Screen Used for Entering Data for a Paycheck
Data Out lows
Payroll data go to accounting; federal, state, and local agencies; bene its outsourcing irms; and
individual bene it program providers. These payroll data are the input for a variety of processes in
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those units, so it is critical that systems interface lawlessly. Interface becomes even more complicated
as external systems communicate not only with payroll but also with compensation, bene its, and other
HR systems.
Decision Support
Payroll data are not usually used by HR departments or line managers for decision-making purposes.
They are used extensively for audit purposes. Employees, on the other hand, like to know from time to
time how much money they have earned in a given year, how much income and payroll taxes have been
paid, and the level of pretax and deferred tax contributions made for various bene its. This information
can be made available through a self-service system. Similarly, a self-service system can allow
employees to increase withholding or make other (limited) changes in their pay.
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SUMMARY
The overall goal of this chapter was to provide the reader with a broad understanding of the role and
focus of HRIS in supporting performance management, compensation, bene its, and payroll processes.
The combined PM, compensation, bene its, and payroll systems constitute some of the most important
parts of the HRIS. Money may not be at the forefront of how people talk about the organization and
their linkages to it, but, if performance ratings result in lower than expected salary increases, bonuses
are miscalculated, bene its elections are not implemented, or a paycheck is wrong or (worse still) not
delivered, employees become vocal. Because pay and bene its constitute the largest variable cost to any
organization and the largest cost overall to many organizations, it is critical that managers plan, track,
and audit outlays on a real-time basis. A signi icant proportion of the data and reports owed to federal,
state, and local agencies come from the compensation, bene its, and payroll modules. The
consequences of inaccurate, misleading, or missing data and reports include embarrassment, ines, and
even jail time. And these are the risks associated with poor data from just the transactional part of
these modules. The additional fallout would be the negative effects on the motivation of the employees
to work at higher levels and/or to leave the company for a company that does not have these problems.
Thus, one of the major purposes of an HRIS is to help organizations administer their performance
management, compensation, bene its, and payroll systems.
The role of motivation in work performance was covered, with a speci ic discussion of Equity Theory. It
is easy to see that employees who perceive their job situation in terms of the ratio of their inputs to the
company’s outputs as inequitable will not be highly motivated to perform adequately on their jobs. A
key part of strategic HR is aligning employee behaviors with the strategic intent of the organization. As
seen in the discussion of goal-setting theory, the process of the PM system needs to follow the research
indings on goal setting. It is important to hire the best people and provide them with the training and
development needed. Without PM, the success of hiring strategies is unknown, and, similarly, the need
for training and development interventions is unknown. PM systems support the translation of
corporate strategy into individual performance plans. Compensation and bene its systems can be used
to hire the right people, retain the high performers, and motivate all employees to perform at a higher
level. Compensation can also be used to motivate poor performers out of the organization. As systems
technology has progressed, managers have become better able to enhance the performance of their
direct reports and to tailor compensation and bene its programs to attract, retain, and motivate the
best. Thus, the importance of understanding the central role of an HRIS in assisting managers in
making key decisions regarding performance, compensation, bene its, and payroll cannot be
underestimated.
KEY TERMS
attraction awards
base pay
Consolidated Omnibus Budget Reduction Act (COBRA)
corrective feedback
direct report
Employee Retirement Income Security Act (ERISA)
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Equity Theory
exempt workers
Fair Labor Standards Act (FLSA)
Federal Insurance Contributions Act (FICA)
lex plans
Goal-Setting Theory
incentive pay
individual development plan (IDP)
individual retirement account (IRA)
job evaluation
market benchmarking
nonexempt workers
Of ice of Federal Contract Compliance Programs (OFCCP)
pension plans
performance contract
performance management (PM)
performance observation
performance planning
perquisites
positive feedback
recognition awards
retention awards
Sarbanes-Oxley Act (SOX)
simpli ied employee pensions (SEPs)
360° appraisals
Troubled Asset Relief Program (TARP)
DISCUSSION QUESTIONS
1. Discuss how a manager might make sure that the performance plan for each of her direct reports
was driven by organizational strategy and the business plan. How can information systems support
this goal?
2. Merit increases require a single “performance” number, while most incentive plans have multiple
and varying performance measures. How can the PM system meet both needs?
3. Compensation strategy includes how competitive the organization wants to be, the number of
different compensation systems the organization wants to have, the mix of various reward and
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bene it components, and the basis of increases. Discuss the data in lows required if an organization
wanted to automate its compensation design and administration processes.
4. Both PM and bene its information systems make provisions for employee access and input. What
access would you provide in each of these systems, and what leeway would you provide employees
in reading, entering, and changing data?
5. A lot of compensation information is available to employees today on the Web (e.g.,
www.salary.com (http://www.salary.com) ), and much of it is inaccurate. How can an organization
assure employees that they are fairly compensated (assume they are) when public data suggest
otherwise?
6. Flexible bene it plans are common today. Discuss ways in which employers can ensure that
employees make good choices about the bene its and bene it levels that they choose within the
bene its information system itself.
7. Payroll and bene its are commonly outsourced. Discuss which parts of PM, compensation, bene its,
and payroll you would consider outsourcing; justifying your views.
CASE STUDY: GRANDVIEW GLOBAL FINANCIAL SERVICES, INC.
Grandview Global Financial Services is an international corporation providing multiple inancial
services. Although it is one of the smaller players in the ield, the irm has about 20,000 employees
worldwide. Corporate strategy has focused on serving a niche market comprised of high net worth
individuals, providing them with all the wealth management services they require. These services
include investments, insurance, banking, real estate, inancial planning, and related services.
The linchpin making all these services work well is the quality of the employees—the degree to which
they are motivated to provide “over-the-top” attention to clients’ needs. Clients have come to expect
this level of service regardless of where they might happen to be and regardless of the time. Because of
clients’ high expectations, every employee is expected to provide lawless service.
As it has expanded globally, Grandview has hired employees from all the countries in which it does
business. While all employees are expected to speak English, business is conducted in nine different
languages in 45 locations. Grandview has invested heavily in developing a uniform corporate culture
but has not succeeded in doing so in all locations.
One dif iculty has been the PM and reward systems. Each geographic area developed its own PM tools,
which re lect the national culture and the past experiences of local employees. There are a variety of
systems using different performance criteria. Most of the PM materials are in Microsoft Word. Some of
the systems seem to work all right, while others do not. None of the systems are coordinated, except to
the extent those inal performance ratings are sent to the Grandview corporate HR department. There
has been enormous push back and noncompliance with PM policies from the employees because of the
dif iculty of the paper performance process as well as the nine different languages being used
worldwide.
Rewards systems are similarly localized. Base pay, incentive systems, and bene its have grown up in
each geographic location in accord with local market practices, laws, and customs. The complexity and
number of Excel spreadsheets needed to manage the inancial targets and the resulting compensation
plans for that many employees have created perceived and actual inequities. It is dif icult to transfer
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employees across geographic areas because of the different systems in place, and awareness that
employees in different locations have very different terms and conditions has created morale problems.
Corporate HR has PM and rewards modules in its HRIS covering U.S. employees, but this takes care of
only about 60% of Grandview’s employee population. An executive rewards module does cover about
2,000 senior executives worldwide, but all foreign data are sent from different locations and entered
into the module at headquarters. Part of the historic reason for this process involves the legal
requirements concerning privacy of information in the EU and some other locales; it is easier to get
executives to grant permission for the transmission of speci ic data when those data are used to
calculate stock option awards and other executive incentive payments granted by the corporation.
Corporate HR would like to move away from local systems and institute a corporate-wide system that
relies neither on Word documents for performance reviews nor on Excel spreadsheets for the resulting
compensation plans that result from the overall performance ratings. It was thought that common
systems for PM and rewards would support a more uni ied culture and help translate Grandview’s
corporate strategy into individual performance plans worldwide.
The ideal system would be a Web-based, multilingual, integrated PM and compensation system. The PM
system would be accessible by managers and their direct reports and would be tied to corporate
strategy and the current business plan. Managers and their direct reports could access the system at
any time to see performance criteria, measures, and standards and to look at current progress against
standards. The rewards and bene its modules, while based on local law and customs, would be
standardized with respect to process, fostering a more uniform rewards culture. It is critical to HR
managers that the technology selected is lexible enough so that yearly changes to the application could
be made ef iciently and legal requirements in different locations could be accommodated, as well as
changes in those requirements.
Because the performance goals are based on inancial targets, and employees’ merit and incentive
payments are directly related to employee performance as well as Grandview’s overall results, all
necessary functionality for the compensation process should be built into the performance system. At
year end, results should be able to be imported directly from corporate inancial systems and used to
generate performance reviews and compensation plans for the employees. The resultant pay increases
and bonus payments would be fed directly into the payroll system already in use by Grandview in the
United States and abroad. The system administrators should be able to ensure worldwide compliance
with the performance process directly from the system through a variety of reports.
Case Study Questions
1. What is the role of PM in establishing and maintaining corporate culture?
2. What is the role of compensation and bene its in establishing and maintaining corporate culture?
3. Since laws, labor markets, and customs relevant to PM, compensation, and bene its differ from
country to country, does it make sense to try to maintain a common global process for managing
each of these areas?
4. Given all the cross-country differences, why would a global organization want to have a common
HRIS?
5. How should Grandview go about implementing a global PM system?
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6. How should Grandview go about implementing a global rewards system?
7. How should Grandview go about implementing a global bene its system?
8. How should Grandview go about implementing a global HRIS to manage these functions?
STUDENT STUDY SITE
Visit the Student Study Site at http://www.sagepub.com/kavanagh3e (http://www.sagepub.com
/kavanagh3e) for additional learning tools such as access to SAGE journal articles and related web
resources.
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HRIS Effectiveness Measures and HRM
Advice for HRIS Implementation
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Human Resource Information Systems
Applications
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Human Resource Information Systems and
International Human Resource Management
Michael J. Kavanagh and John W. Michel
EDITORS’ NOTE
Chapter 1 (ch0001.xlink.html) emphasized the emergence of the global marketplace as one of the most
important trends in the ield of HRM. In particular, Figure 1.2 (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_12# ig1.2) in Chapter 1 (ch0001.xlink.html) indicates that the system
model of organizational functioning centered on an HRIS exists within each country’s national cultural
environment. The in luence of the national culture may raise some of the most important issues for
HRM, and there are frequent con licts between the culture of the country and the culture of both the
organization’s and HR’s environments. The cultural differences between countries will in luence HR
programs and practices. In this chapter, some of the signi icant differences between domestic HRM1
(http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_123#note1) and international human
resource management (IHRM) (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections
/nav_140#glo130) in multinational enterprises (MNEs) (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_140#glo158) are covered, and some of the additional HRM issues
involved in an international organization are also described. To understand the operation of multiple
companies in the global marketplace, we identify the different organizational structures that exist. The
importance of the in luence of national culture on the external environment in which the irm competes
for market share is highlighted. The external environment also has a major impact on the IHRM
department’s activities and program—that is, the human capital management (HCM) of a irm. This
impact, in terms of six factors listed in Figure 1.2 (http://content.thuzelearning.com/books
/Kavanagh.5623.17.1/sections/nav_12# ig1.2) and their effects on IHRM programs, is discussed. Naturally,
these added international issues and additional complexities pose signi icant challenges for the design,
development, implementation, and use of an HRIS in a global company, and the ways in which these
challenges are met will be covered.
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CHAPTER Objectives
After completing this chapter, you should be able to
• Understand the differences between domestic HRM and international HRM
• Identify the types of organizational forms used while competing internationally
• Understand the different types of employees who work in MNEs
• Discuss the staf ing process for individuals working in MNEs
• Understand the problems that handling expatriates poses for the IHRM department
• Describe the training needs of and programs for international assignees
• Reconcile the dif iculties of home-country and host-country performance appraisals
• Identify the characteristics of a good international compensation plan
• Understand the modi ications necessary for using HRIS applications in an IHRM
HRIS IN ACTION
Skylor Electronics,2 (http://content.thuzelearning.com/books/Kavanagh.5623.17.1/sections/nav_123#note2) an
MNE with headquarters in Seattle, Washington, was having considerable dif iculty with expatriate
failure in its overseas subsid...
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