4 Reasons Payroll is Complex [How to Simplify it]

By Dean Goodman, VP, HCM & Payroll Practice
4 Reasons Payroll is Complex [How to Simplify it]

When we ask the payroll team “What makes payroll complex?”, the answer is not likely to be the payroll process itself.  Gross-to-Net calculations are fairly routine.  The day-to-day complexity of payroll is driven mostly by factors internal to the organization and can be categorized in 4 ways.

  1. Company Policies – PTO accrual plans, Collective bargaining agreement work rules, overpayment recovery, etc.
  2. Payroll System Configuration – Pay frequency and timing, Third-party vendor payment remittance, etc.
  3. Corporate Structure – for example, the data granularity needed to support payroll accounting.
  4. Business as Usual – Off cycle payroll runs, garnishments, stop payments and subsequent reissue of payments, etc.
Screen Shot 2018-06-20 at 12.00.01 PMDeans Blog Graphic

Payroll is far more involved than most people realize and it’s possible that you’ll get different answers to the complexity question depending on who you ask.  Senior leadership may not have thought about it; the payroll manager may be ready to commit unspeakable acts of violence if something doesn’t change; and employees may be pulling their hair out wondering why they can’t understand something as simple as their pay statement or, more likely, asking payroll why they can’t make the statement easier to understand.  Let’s face it – payroll is one of those business functions that only gets attention when something isn’t as expected.  Rarely does anyone call payroll and say “thanks, I got my check and everything was right” – and by rarely, I mean  never.

While even a “simple” payroll can be complicated by the things mentioned above, it’s also likely that your payroll processes have grown more complex over time.  Company acquisitions or divestitures, new corporate rewards programs – you know, day to day business activities - all require changes to payroll,  and that change usually means increased complexity.  Look at it this way – if you were creating your payroll system from scratch today without having to consider what things were like in the past, would your payroll system look the same?

The key to reducing this complexity in payroll, is to first know what drives  the complexity in your  organization, and then using that information to simplify the business processes specific to payroll.  Payroll complexity can be reduced by employing Program Management discipline to provide visibility into the complexity and make informed decisions about the payroll processes.  It’s important that responsibility for the program lies with the business function where payroll resides – typically HR or Finance.  The saying “Sunlight is the best disinfectant” comes to mind when examining business process inefficiency, and that applies just as much to payroll as it does to anything else. Think of Program Management as the sun.

Fundamental Program Management is about identifying the scope, scale and communications necessary to successfully deliver service.  Let’s face it, payroll is reactive.  It’s rarely a consideration when business decisions are made.  This is not to imply business decisions need to be made with a payroll focus - payroll is usually an unidentified stakeholder (or it’s lumped in with HR or Finance).  Effective Program Management provides a mechanism to increase awareness across the organization.  Increased awareness and visibility into the broader impact on payroll from various business decisions is a key benefit of Program Management - and to payroll simplification.  Business issues that will likely require changes to payroll or at the least, require analysis to determine if changes are needed, include, but are not limited to: new sales incentive plans, acquisitions, mergers, new PTO policies, new timekeeping systems for hourly workers, renegotiation of a union agreement and more. 

Let’s look at each of the categories of complexity drivers mentioned earlier – first is company policies.  We mentioned PTO policies specifically.  Does your Total Rewards manager (or whomever has responsibility for the PTO plans) have an awareness of how many different PTO policies are in effect, and what that means to payroll?  It’s very possible the Total Rewards manager isn’t aware of the issue.  Having payroll program management raise awareness might be the tipping point for Total Rewards to make a change!

How about Collective Bargaining Agreements (Union Contracts)?  It’s best to determine the company’s core policies and strive for commonality across the various CBA’s – things like pay frequency, Pay Timing, OT rules, call-in and call-back rules, step increases, vacation policies, standard work hours, etc – wherever possible they should be the same for all union agreements.  They can’t all be the same, but that’s the goal.  Does your organization have a baseline set of HR and Pay policies for your CBA’s?  

For overpayment recovery, the goal is to reduce them.  Are there HR policies that create the opportunity for overpayments (or better stated, do HR policies limit the potential for overpayments)?  Things like terminations being reported after the fact, or no-show new hires not being reported to payroll.  All of these create the potential for someone to be paid money to which they are not entitled.  The goal should be to minimize the potential for it to happen rather than having to spend time and resources trying to recover the overpayment.  In many cases it could cost more to get the money back than was incorrectly paid in the first place.

Now let’s look at the second category of payroll complexity - Payroll Configuration.  The two most common factors are Pay Frequency and Pay Timing.  For Pay Frequency, the goal should be to reduce the number of different frequencies.  Does your organization have weekly, biweekly (and alternate week biweekly), semi-monthly and monthly payrolls?  Is there a business reason to support all the pay frequencies, or is it simply that the various frequencies are the result of business changes over time? 

Now let’s look at Pay Timing.  Does your organization use a “Pay Current” or a “Pay Arrears” timing?  A “Pay Current” methodology for hourly non-exempt employees dramatically increases complexity due to overtime rules.  Does your organization experience high turnover among your staff with little notice?  In both of these cases a “Pay Arrears” timing should be a strong consideration. 

The next category of payroll complexity - Corporate Structure - typically affects in payroll in how it interfaces with accounting.  Does your corporate finance function manage that accounting at a summary level or a detailed employee level?  Are there multiple General Ledger systems in your company, each requiring a payroll interface?  What is the legal entity structure in your company?  Accounting at the detail level, multiple General Ledger systems and more legal entities all add to payroll complexity.  While these answers and how to affect change are outside of payroll’s control, Program Management can raise awareness of the impact these decisions have on payroll.

The fourth category – Business As Usual – can be viewed based on how the payroll staff goes about accomplishing their daily routine.  In the “Lather, Rinse, Repeat” process world that payroll functions in, having clear roles and responsibilities helps keep things simple.  The daily grind in processing garnishments, direct deposit changes and employee inquiries never stops.  These happen regardless of whatever else needs to get done.  What does the payroll team spend their time doing?  Are there an excessive number of corrections needed after each pay cycle, and do you know the root cause of those corrections?  Are there a lot of off-cycle new hires? 

While certainly not an extensive list, the examples used to show the impact of each of the four categories are intended to demonstrate how using Program Management to increase visibility on the affect they have on payroll can be used to help simplify payroll. 

In addition, Program Management can raise awareness of the impact to payroll of other business activities.  Company acquisitions are a great example, as they are typically negotiated by a small group of people on a “need to know” basis.  Information only becomes known across the organization after the fact.  For payroll, this means there is less (or no) time to analyze how to integrate the new employees into an existing payroll process.  The result is typically a quick and dirty “just like they are today” approach that misses an opportunity to simplify.  During your organization’s last acquisition, were transitioning employees added to an existing pay group or were new pay groups added?  Did transition dates correspond with HR policies regarding employee start dates?  Does HR even have a policy about employee start dates corresponding to pay period begin dates?   

Now, let’s look at the payroll system configuration itself.  How about pay schedules?  Do you have Monthly, Semi-Monthly, Bi-weekly and Weekly schedules?  Do the various schedules serve a business purpose or are they in use “because it’s always been done that way”.  Key here is to minimize the configuration variations.  While every organization is different, it’s a good first step to look at the pay groups and see what the purpose is for each one – and consolidate pay groups where possible.  There are many factors to consider when determining a pay group structure – load balancing among the payroll team, separate FEINs and/or General Ledger systems, different pay rules, pay frequencies or work week definitions, Exempt vs. Non-Exempt considerations, etc. – but simplicity in this case means there are no more than necessary.  Also, recognize that an optimal pay group structure may change over time as the organization and requirements change.

Another benefit of Program Management is the governance function. When program management discipline is introduced to payroll, organizational awareness improves related to the payroll function.  When complexity is identified, governance provides a mechanism to introduce the process improvement opportunity separate from the “business as usual” activities of the payroll team.

Program Management requires planning, and planning requires time.  When we look at the root cause of payroll complexity, most can be attributed to a lack of time to simplify. Payroll is always “on”.  When one pay cycle ends the next cycle begins.  There is rarely time to change business process mid-stream absent a separate business driver.  Once introduced, complexity may become permanent unless a separate business driver is put in place.  Program Management provides the discipline, and through that discipline the time, to include payroll simplification.

Conclusion
Regardless of how your organization views payroll, it’s a business function that affects every employee and area of the organization.  Whether payroll is part of the Human Resources or Finance departments, or is a stand-alone function, the ability of payroll to be delivered in an accurate, timely and efficient manner is table stakes for that organization – payroll needs to be right.  Any deviation from that is a distraction that must be resolved.  There is an inherent conflict between the desire for business flexibility and the need for payroll structure – mostly due to the regulatory nature of payroll (which in itself is another driver of payroll complexity).  Managing that conflict through disciplined Program Management pays dividends in helping ensure payroll accuracy, efficiency and timeliness.  Whether it’s viewed as an investment or expense, applying Program Management discipline ensures maximum return on the investment or minimizes the overall payroll expense.  

To learn how Spencer Thomas Group can help improve your organization’s payroll capabilities, please contact:Chris500_500

Chris Klein
SVP, Global HR & Payroll Solutions
+1-914-465-9493 
Chris.Klein@Spencer-Thomas.com
www.spencer-thomas.com/global-payroll

 

 

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