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Fixed compensation refers to an employee's regular gross salary or wages. Variable compensation is irregular pay such as bonuses or stock awards. Microsoft Dynamics AX contains the ability to calculate fixed and variable compensation amounts for your employees based on a number of factors including performance, region, and budget increases. Microsoft Dynamics AX supports all three compensation types: Step, Grade, and Band.

In this post I will go through the components needed to set up fixed compensation and enroll an employee in a fixed compensation plan. In later blog posts, I will cover compensation processing, and pay for performance.

Fixed compensation components

The first component we will set up are our compensation levels. To do this, go to Human resources > Setup > Compensation > Levels. Here you can create the compensation levels you would like for each of your Step, Grade, and Band plans. Use the Up and Down buttons to order the levels properly according to their Type. Compensation levels are set on Jobs to ensure that all employee's holding a position for that job are paid at the same compensation level.

Next we will set up our Reference points. When thinking about a compensation grid, the reference points are the columns in the grid that define the compensation ranges for a level, whereas the level is the row in the grid. Common reference points for a Grade type of plan may be a Minimum, Midpoint, and Maximum. To create reference points, go to Human resources > Setup > Compensation > Reference point setups.

Now we can combine our levels and reference points to create a Compensation grid. Go to Human resources > Setup > Compensation > Compensation grids. This is where you define information about the grid, what it's being designed to be used for, what type of plan it's going to be used with, which reference points or columns you want in your grid, etc. Once that information is set, click the Compensation structure button to add Levels and amounts to your grid. The GradeC compensation grid and structure is shown below. Note: use the Mass changes functionality on the compensation structure to set initial amounts and increment by percentages or amounts across your levels and/or reference points.

Pay frequencies (Human resources > Setup > Compensation > Pay frequencies) are used to define how an employee's wage or salary is being specified (for example $10 per hour vs. $50,000 per year) and the conversion between the hourly, weekly, monthly (12 months), and annual rates. If a company uses a 38 hour work week for their hourly employees, they may set up a pay frequency that has an hourly rate of 1, weekly rate of 38, monthly rate of 164.6666666667, and an annual rate of 1976. These conversions are used to calculate the different pay rates shown on an employee's fixed compensation record.

Fixed compensation plans

Finally, we can define our Fixed compensation plans bringing together all the above components. To create a fixed compensation plan, go to Human resources > Periodic > Compensation > Fixed compensation plans. Here you can give your plan a name and description, select what type of plan it is (Step, Grade, or Band), select the Pay frequency you will be using for the employee's pay rate (amount per hour vs. amount per year, etc.) and some options for controlling how compensation is processed.

The Out of range tolerance setting allows you to specify how strict you want to be about ensuring compensation amounts are between the minimum and maximum amounts. A hard tolerance will throw an error and cap the amount at the minimum or maximum value so that compensation cannot fall outside of the range for a given level. A soft tolerance will throw a warning to let you know that the compensation amount is outside of the range, but will allow you to continue. Setting the tolerance to None will allow you to enter any compensation amount for an employee without warnings or errors.

The Hire rule setting lets you determine if you want to give all employees the same increase regardless of the date they were hired (Hire rule = None) or if employees should get a percent of the award based on how long they have been employed during the cycle (Hire rule = Percent).

Setting a range utilization matrix is helpful if you want to accelerate employees getting to the midpoint of the range, as well as slowing down how quickly they get to the maximum reference point in the range. For example, you may want to give employees who are in the bottom 25% of their range 110% of their target award while employees who are in the top 25% of their range only get 80% of their target award to prevent them from hitting the maximum as quickly. An example of a range utilization matrix is shown below.

Once the basics of the fixed compensation plan are defined, it is time to set up the compensation structure for the plan. To do this, click on the Set up compensation button. This opens a dialog giving you 3 options: 1) Create a new compensation grid by selecting a reference point setup and giving the grid a name 2) Create a new grid by making a copy of an existing grid as a starting point 3) Use an existing grid that has already been defined. Any compensation plans that use the same grid will all receive updates if the grid is changed. Once a selection has been made, the Compensation structure form will open enabling you to make changes to the new or existing compensation grid.

Fixed compensation enrollment

The first step in enrolling employees in a fixed compensation plan is to determine who is eligible for the compensation plan. Without determining eligibility, you will not be able to assign the plan to any employees. To set up eligibility, go to Human resources > Periodic > Compensation > Eligibility rules. Note: Eligibility rules are used to determine eligibility for both Fixed compensation plans as well as Variable compensation plans. Here you will create a new eligibility rule for your plan and define the criteria needed for an employee to be eligible for a compensation plan. You may restrict eligibility based on Department, Labor union, Compensation region (Location), Job, Job function, Job type, and/or Compensation level. Employees must meet all conditions set on the eligibility rule in order to be enrolled in the compensation plan.

The eligibility rules looks at certain fields on the Job, Position, and Employee records in order to determine if an employee is eligible for a compensation plan. On the Job form (Human resources > Common > Organization > Jobs) the eligibility looks at the Job field, Job classification tab > Function and Job type, and on the Compensation tab > Level.

On the Position form (Human resources > Common > Organization > Positions > Positions) the eligibility looks at the Department and Compensation region fields.

Eligibility also looks at the Labor unions associated with the Employee (Human resources > Common > Workers > Employees, in the action pane, select Personal information > Labor unions).

Fixed compensation actions (Human resources > Setup > Compensation > Fixed compensation actions) are used when setting or applying changes to an employee's fixed compensation. They allow you to provide descriptive names for the types of actions a Compensation and benefits manager could do. Different action types have special logic behind them to allow them to be used at certain times. For example, when setting up fixed compensation for an employee, only actions with a type of Hire/Rehire will be allowed to be used. You may want to create 3 different actions of type Hire/Rehire and call them Hire, Rehire, and Transfer so you have a more descriptive reason why an employee's fixed compensation was given or changed.

At this point, you can enroll an employee in a fixed compensation plan. To do this, go to Human resources > Common > Employees and select the employee you would like to enroll in the compensation plan. In the action pane, select Compensation > Fixed plan. Now you can create a new fixed compensation action for that employee. In the New compensation dialog, select the Hire/Rehire Compensation action that you have created for this scenario. Select the employee's position that will be covered by this compensation plan and then select the Step or enter the amount keeping in mind the pay frequency associated with the compensation plan. The compensation plan drop down will only show the plans that the employee is eligible for given the eligibility rules set up for those plans. Again, if a plan does not have an eligibility rule set up for it, you will not be able to enroll any employees in that plan. Click OK and the employee will be enrolled in the plan. Note: The system will also check to ensure that the compensation amount specified for a Grade or Band type of compensation plan is within the minimum and maximum reference points for the given compensation level on the employee's job. If the compensation amount is outside of the allowed range, you will be given a warning or an error depending on what the tolerance level is set to on the fixed compensation plan.

This blog series was started based on feedback from readers like you! Have other topics you would like to see covered in this blog? Please let us know in the comments section below!