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How to Measure Payroll Performance

Key Takeaways

1. Companies can measure payroll performance by using different metrics such as direct cost involved, time taken, the number of errors made, training costs, and compliance with payroll laws and regulations.

2. It is important for companies to measure payroll performance because ultimately, payroll is usually a large expense area for businesses as it includes paying employees, paying payroll staff, and fees for payroll software. Therefore, keeping costs low and having an efficient process will impact the overall profitability of a company.

3. By setting up payroll performance indicators, companies can monitor the success or failure of each area of the payroll process so that they can make improvements where needed. The overall aim is to create a cost-effective, accurate and efficient payroll system.

4. Companies that operate internationally will need to consider complying with global payroll rules so that they are not breaching any laws. This is an important metric to keep track of as non-compliance can have serious consequences for companies.

Measuring payroll performance is a tool for helping companies manage business expenses. The main purpose for measuring payroll performance is to ensure that employees are being paid accurately and on time, in line with local laws. Payroll is a complex and time-consuming process with multiple sources of payroll data, and it is therefore vulnerable to inefficiencies. It is therefore important to have performance measurements or key performance indicators (KPIs) in place to be able to track how well your company payroll system is being managed.

The key aspects of payroll that should be measured include the efficiency of the processes, the costs involved, the time taken to go through payroll, the number of mistakes made in the process, compliance, and training costs. Ultimately, a company will track these to avoid issues that could affect the staff, company resources, and business profits after expenses. 

By measuring payroll performance, a company will be able to analyze and review progress towards a more efficient and effective payroll system.

What are the benefits of measuring payroll performance?

It is usual for companies to have key performance indicators (KPIs) to track overall business performance. Without these, companies wouldn’t know if they were hitting targets and they certainly wouldn’t be able to see where they need to make improvements to grow and scale better.

Similarly, it is normal for companies to have strategies to measure productivity within sub-teams and departments to ensure that the business is running efficiently like a well-oiled machine. The payroll department is no different, in fact, metrics can be even more important in this area as getting paid — the right amount and on time — is something employees value more than nearly anything else.  

Generally speaking, the benefits of measuring payroll performance are to understand the costs involved with the process, the resources that are being used, and finding ways of making the system more efficient and cost-effective. 

We consider the benefits individually below. 

1. Keeping employees happy

Ultimately, employees are working for a company to receive pay to live off, so it is important that they are paid on time and correctly. A key benefit of tracking payroll performance is ensuring that staff are happy with the timeliness of their pay, and that they do not suffer as a result of delayed payments or mistakes in the calculations. If mistakes are continuously made with payroll, staff will become irritated which may impact productivity, and lead to increase staff turnover. 

2. Maintaining compliance with global jurisdictions

A major challenge for companies that operate in different jurisdictions is that they will need to comply with different employment and tax laws surrounding payroll in multiple countries. This subsequently leaves room for further errors, or worse, penalties for non-compliance. As such, it is beneficial for businesses to regularly measure payroll performance so that they can check that they are complying with local laws and regulations.  

3. Monitoring and limiting errors

When a payroll administrator runs payroll, they will have to consider a number of factors such as an employee’s salary, relevant leave like sick leave or maternity leave, taxes, pension contributions, unpaid days, overtime, bonuses, and any other deductions. Often people will not receive the same pay which makes the task difficult and open to errors.

A benefit of measuring payroll performance is to track and develop a more efficient system, working to eliminate errors. By measuring this, companies are able to review where and how the mistakes are being made which will help to address them.

For example, perhaps more payroll training needs to be provided to administrators, or perhaps the software system needs to be updated. Not only this, payroll mistakes can result in a significant financial impact for the company: For instance, if an employee is mistakenly overpaid through miscalculations that are not reported or not usually picked up on, this could have a large impact over time. 

What are the best payroll performance metrics?

Before putting payroll performance metrics in place, it is important for companies who are not already using these to review their existing payroll processes to see what may need to be improved upon. The following payroll performance metrics will help companies to assess their existing payroll function. 

1. Cost of payroll

Payroll can be costly for companies, especially where there are lots of employees. Costs can include software system fees, the cost of paying payroll staff or outsourcing costs, and the cost of errors made. If payroll costs are unnecessarily high, this will impact profitability, so it is in the best interests of the company to measure this.

This metric can be tracked by calculating the payroll costs over a period of time and weighing this up against the number of employees in the company, the size of the business, and the payment schedule.

2. Time to process payroll

The time it takes to process payroll can be partly linked to the amount spent on payroll, as the longer it is taking may result in more resources being used and more costs being accrued.

This can be measured by calculating the duration of each section of the payroll process, including things like summer holiday periods and winter periods when more people are likely to be off sick. This way, companies can seek to pinpoint the different factors that contribute to the process taking a longer or shorter amount of time. 

If the process is taking longer than it should, companies are able to focus on specific areas of reform, such as improving the software used, or training up staff to understand processes better. Reducing the amount of time spent on payroll will in theory be more cost-effective, but it is also important that it does not compromise the accuracy of the work. If the payroll process is being completed quickly, but more mistakes are being made, then this is likely a counterproductive development.

3. Proportion of errors

The accuracy of payroll is very important, as inaccuracy could lead to non-compliance and serious consequences for the business. A good way to measure this is by assessing mistakes that have been made in each payroll period and reviewing the nature of those errors such as whether they were related to tax or pension contributions for instance. Keeping a track of mistakes will allow companies to see where and why these errors are occurring so that they can resolve any problems and try to eliminate them for future payroll periods.

4. Compliance

This payroll performance metric is vital to assess the success of a global payroll implementation. Companies that operate in different countries will need to consider complying with the payroll laws in each country in which they operate and pay employees. In many countries, an intentional or reckless failure to file payroll tax returns can lead to tax fraud penalties.

5. Training costs

It takes time and money to train employees in the payroll system that applies within the company. Training costs should be included as a performance metric to determine whether the payroll system needs to be simplified or optimized in some other way. 

Conclusion

At Horizons we are able to enable business expansion into major international markets and provide payroll services anywhere in the world. We have the ability to implement payroll processes in more than 150 countries. 

Don’t hesitate to contact us for further advice on setting up your international payroll function. 

Frequently Asked Questions (FAQ)

Key performance indicators (KPIs) in payroll are ways of measuring the efficiency and effectiveness of a company’s payroll system as these can have a financial impact on the business. KPIs are there to help the improvement of a more streamlined payroll system.

Payroll metrics measure the payroll process. Metrics are key areas in which companies should focus to develop and improve the payroll process.

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