When Kennametal Inc. decided to unify compensation practices for more than half of its 13,000 employees globally, the metal-working tool manufacturer knew many challenges lay ahead. With an aging ERP system and a regional reporting structure, Kennametal’s goal of globalizing compensation administration was aligned with a solution upgrade and a significant data transfer before the arduous project of mapping out detailed compensation plans could even begin.
Based in Latrobe, Pennsylvania, Kennametal planted the seeds for a major compensation management project with a 2010 reorganization that reinvented many regional reporting lines into a functional reporting structure with global reporting lines. The reorganization meant that compensation processes and considerations, such as merit increases, bonus management, long-term incentives (LTIs), and pay-scale structures, would need to be mapped out on a global matrix.
Compensation data that was mostly housed in disparate systems and databases would need to be unified and fully integrated with an ERP solution that could offer support on a global scale.
After researching options, Kennametal upgraded its aging SAP R/3 4.7 system with SAP ERP Human Capital Management (SAP ERP HCM) 6.0 on enhancement package 4.0, which could support full integration with the enterprise compensation management (ECM) module. One indication of the anticipated challenges the business faced was a directive to implement SAP ERP HCM with a target of 90% standard SAP functionality.
Phase One: Strategize, Plan, and Map
Because a prerequisite for leveraging most of the ECM functionality is implementing personnel administration (PA) and organizational management (OM) functionality, Kennametal chose to take its first step toward enhancing existing PA/OM structures with a rapid implementation of employee self-service (ESS), manager self-service (MSS), and an e-recruiting enterprise hub. With those in place, implementing the ECM module gave managers the ability to access compensation plan information from MSS, simulate, plan, and adjust employee compensation, or propose and approve LTI awards — all directly through the web-based hub.
With the prerequisites in place, Kennametal shifted its attention to the full scope of its ECM implementation strategy. The project team planned the implementation in three phases to address the challenges expected from the sheer volume of disparate data, customization, and multiple configurations needed to properly classify all employees in the correct eligibility and guidelines.
Configuration is a key step because a compensation plan is referenced throughout the overall compensation program, including review cycles, guidelines for bonuses or merit increases, and prorating of bonuses.
Kennametal narrowed the focus of its first phase, which began in July 2011 (the beginning of fiscal year 2012), to tightening up processes related to merit increases, company performance bonus plans, long-term incentives, collective agreements, and approvals. With so many aspects of compensation to map out, configuring compensation plans represented the bulk of phase one for Kennametal. “You have to first find out what plans you have and then determine eligibility,” says Brad Zorn, HRIS Manager at Kennametal. “It’s imperative to understand your processes. [Kennametal] took a lot of time mapping out the merit, company bonus, variable pay plan, and long-term incentive processes. Previously, we didn’t have a great map for these processes because they were in a variety of different legacy systems and spreadsheets. Walking this data into the SAP system, we had to re-map and re-architect where that data would sit and how it would function.”
The next step was establishing eligibility guidelines for bonuses and merit increases. But with a relatively new organization structure around the world and inconsistencies in the master employee data set, Kennametal was forced to start from scratch and, at times, struggled with validating the eligibility of employees in a specific program or budget.
“Eligibility was a challenge. Because pay practices differ around the world, we weren’t even sure that basic pay was configured correctly for all countries going into the ECM system,” says Zorn, explaining why validating eligibility was a particular challenge in some countries, where basic pay data was newly integrated and somewhat untested. “If there were 100 people in an organizational unit, we had no idea what the eligibility rules were when the budget was set. So we could only multiply the salaries by what we thought would be the budget guideline when we implemented the solution. If an organizational unit didn’t tie out, we’d have to identify which employees weren’t actually eligible in the budget out of those we thought should be eligible. That was our big battle in validating eligibility. You can avoid a lot of that complexity if you understand eligibility concepts in the SAP system.”
Phase Two: Fix and Enhance
The second phase of the ECM initiative involved uncovering what wasn’t working and correcting it. For example, one issue Kennametal identified included instances where production employees were hired as salaried, but they were set up in the legacy system to be paid as hourly employees. At one plant in China, for instance, merit increases for some production employees were entered as a monthly rate increase, but because the employees were configured to be paid on an hourly basis, final amounts activated by the ECM system were way off.
Other global considerations concerned the use of classification systems and market rates in determining pay-grade structures. With phase two of the project devoted to a fix-and-enhance concept, Zorn and the project team made the determination to gather feedback from the first cycle and make systems modifications to improve the process for the next year. The modification of pay-grade structures illustrates how Kennametal took input from the business to improve compensation plans.
“Some of these concepts weren’t well received globally when first introduced,” Zorn says. “For example, several countries around the world don’t consider market-based referencing a prevalent way to do equity pricing on jobs, so concepts like a compa-ratio took some education. In addition, the compensation team was looking to make functionally-specific pay rates to provide more accurate midpoint references. Because of this input, we enhanced our market rate reference (MRR) structure during our second cycle.”
Phase Three: Respond to Feedback and Manage Change
After each phase, part of the project wrap-up agenda included the core team discussing lessons learned during that particular implementation cycle. “The focus for phase three is on user acceptance at the manager level — seeing what managers thought of the planning or approval processes, or whichever part they were involved in,” says Zorn. “For the first year, which coincided with the MSS rollout, part of the negative feedback was due to some struggles we had with the ECM project, but part of it was also the users trying to get familiar with the new MSS capabilities.”
Key lessons the team learned from this feedback included the importance of:
Training and developing core regional teams
Consolidating rules as much as possible, such as rules for merit increase eligibility
Having an experienced portal team
Creating and maintaining test documentation
For phase three of the project, Kennametal is upgrading to enhancement package 5.0 with a focus on reviewing eligibility guidelines and controls, as well as enhancements centered on processes such as data auditing, end-to-end testing, and end-user validation.
“We also need to enhance business intelligence reporting for HR administrators. I’m hoping that will happen this year,” Zorn says. “Overall, the goal is to not have to reinvent ourselves again. The initiative is to simplify. We first have to give managers time to fully acclimate to our new global concept because it’s a lot of change management.”