Even for a business with a single location, payroll can be complex. Mistakes can damage your company’s business operations, reputation, and financial standing.

The risks increase when you expand across state lines or international boundaries. If your payroll operation is not prepared to manage your expansion, it becomes a chokepoint that limits your company’s growth.

• The need to comply with regulations at many levels increases costs and exposure to regulatory risk. Local, regional, and national taxing authorities often operate independent of one another, and their requirements may be in conflict. Failure to comply can expose your company to substantial fines.
• Employment laws like sick leave, benefits, and overtime rules can differ from one location to another, even in the same country.
• A hodge-podge of local payroll providers can significantly increase processing costs.
• Lack of centralized reporting creates an “information blind spot” in managing your company’s largest expense.

A smooth, error-free payroll operation is the foundation of your organization’s relationship with its employees. If the process operates well, it is invisible. If it doesn’t, it can affect productivity, turnover, and your recruiting brand.

The foundation for a smooth, error-free payroll operation is discipline and accountability, at every level and every step of the process.

Build a Culture of Accountability

Instilling accountability begins with transparency. Building trust where people feel comfortable  holding each other accountable requires open communications.

Over the past five decades, we have seen everything from efficient, effective operations to dismal  disasters. We want to share some of the practices that make the stellar operators stand out.

• Compensation philosophy, policies, and procedures are well documented. Anyone can find  information about how the organization determines every compensation element and how it is  calculated.
• The HR team includes Payroll in working sessions for compensation planning, including benefits and perks. Payroll can test changes and set up auditing procedures well before deployment.
• A disaster recovery plan is in place, and the team reviews it frequently. The business continuity plan includes contingency and succession planning for the loss of key personnel.
• Payroll policies and processes are clearly communicated and well understood throughout the organization. Policies regarding off-cycle checks are finely balanced between costs and employee welfare.
• Payroll is digital, from time entry to direct deposit. Organizations overcame resistance to direct deposit with well-timed communications. For employees who could not qualify for a bank account, companies work with their banks to provide debit cards at no cost to the employee. The cost savings per transaction are significant, and when you consider reduction in fraud risk and stolen or lost checks, it is even more.
• Digital transformation includes automation and integration. Your payroll system must be able to receive employee changes from your HR platform and deliver the right data to Finance systems. Automated tax reporting, benefits payments, court-ordered payments and any other interface with other business or government entities eliminates human error.
• For companies that use time clocks, biometrics eliminate the opportunity and temptation for fraud. Solutions are now widely available and budget friendly. Removing the opportunity for “buddy punching” alone can return the investment in a short time.
• Reporting and analytics are a priority, including real-time audits of time capture, approval processes, payroll runs, and tax reporting while they are in progress.
• Wherever possible, top-performing payroll operations consolidate and align payroll runs to reduce costs and improve performance.

Should You Outsource Payroll?

Outsourcing routine HR and Payroll functions can reduce costs and free management and professional staff for more strategic activities. Outsourcing can include strategies from consolidating functions in a shared services center to offloading all HR and Payroll activities, but most large global companies maintain 24-hour service centers in North America.^[1]

Software-as-a-Service outsources the technology, but not the business processes. A vendor or service provider hosts software applications on a subscription basis. This model provides predictable costs and frequent software updates. It frees up IT resources so they can focus on more strategic activities.

Business process outsourcing entails contracting with a third-party service provider who provides both the software and services. This arrangement offloads the administrative burden to specialists so you can focus on your core business. It can also give you access to specialized knowledge, which can be essential in global operations where you are dealing with dozens or hundreds of regulatory and taxation authorities.

Developing your outsourcing strategy requires planning and careful timing. You will save costs, but the outsourcing process itself incurs substantial expense. Work with your CFO to develop your business case. Consider whether you can manage the change without disrupting the current operation and whether you have experienced resources on your staff. Managing vendor relationships can be complicated.^[2]

Your payroll activity may seem automatic and times. Keeping it that way requires discipline and accountability. Make sure your payroll service protects your company and its people.

References: 

1. “Payroll Operations Survey summary of results.” Deloitte. January 7, 2015. 

2. “Outsourcing the HR Function.” SHRM.org. November 6, 2015.  

Payroll can have a significant impact on how successful a merger or acquisition will be, but it is only one part of the human capital factor. It will be up to the CHRO, Payroll Manager, and CIO together to keep the transition team on track. Your people are the most important part of the organizational change, and what you do will influence how much they help make it successful.

Chances are if you have not been affected by a merger or organization, you soon will be. Buying or merging companies is proving to be a mainstay in organizational growth.

Mergers, acquisitions, and restructurings can take many forms. It would be impossible for us to lay down an exact blueprint, but we can provide a framework. Good planning begins with aligning your project to your organizational strategy.

Organizational Strategy

The place to start is with how you will structure the new entities. Is your company acquiring another that will operate independently, or are you merging two organizations into one? Is it something in between? Will it begin with a simple co-branding and become one company over several years?

Human Capital Strategy

Evaluate the workforce needs of the new structure. Will there be redundancies or relocations? Do you have a well-managed outplacement program in place to protect your company brand and control your costs? Will you need to merge competency models and L&D?

Cultural assimilation will make or break an organization. Ensure that you have the resources and a plan in place. Begin change management before rumors start, and don’t stop at go-live. Continue until the organization has completely assimilated.

Technology Strategy

Since people are the greatest expense and value driver of your organization, your HCM technology, including payroll, should be a top priority. Your CIO will scramble to deal with the changes, and the better prepared you are, the better your CIO will support you.

Will you need to upgrade current HCM  and payroll platforms? Will you need to localize your applications for the first time? Can you save costs by outsourcing? If you have different systems, will one survive or both?

Data Governance

If your organization doesn’t have a formal data governance team and a master data management plan, we recommend you make it a part of your project execution. If you are having data difficulties now, a lack of governance in a merger will only compound the problems. Even if your data governance efforts only include your part of the implementation, it will be a start. Your success will influence and guide the rest of the organization.

The Payroll Execution Plan

Your plan to execute the changes in payroll should be in step with the organizational change plan. You need to move quickly but cannot afford to overlook due diligence.

• Make sure you have Payroll representation on the M&A team. Don’t let the cost and effort of managing multiple databases and vendors be a surprise to the team.
• Assess the situation. Complex does not mean complicated. The organizations involved may use the same software. The tools and methods for bringing data sets together are not the nightmares they were a few years ago. Data mapping and integration have become routine.
• The Head of Payroll should lead the team. Include Compensation, Benefits, Employee (Labor) Relations, Talent Management, IT, Analytics, and a member of the executive integration team.
• Plan your project and any sub-projects with specific time frames. If you need an experienced project manager, borrow or hire one. If this is your first rodeo, ride with an experienced partner.
• In an ideal situation, the go-live date will be the start of a fiscal year. That is not always possible, and you must prepare to manage mid-year cumulations. Be prepared to audit yearly and quarterly totals. If possible, it is best to plan any transitions from old compensation and benefit plans to new ones at the fiscal year start.
• Back up every data set, then assemble and assess the data. If you need data integration expertise, an integration consultant can help you. If you must clean up the data, preparation tools are available from many vendors, or your integration specialist can help.
• Test every data transfer. Your data preparation tool will help you analyze the new data sets and spot errors.
• Run end-to-end tests of each pay element, and plan parallel testing for several iterations. Give yourself adequate time to correct errors before go-live. You may find it best to phase in small groups of people.
• Keep your people informed. You can help your change management team by publishing successful milestones—even little ones. For example, telling your people your initial test had six errors you are working on then reporting a successful retest will build confidence in your team.
• Make sure to staff your support team to handle inquiries. Let the first thing your people hear when they have a question is a friendly, helpful human voice.

 At a compliance symposium about ten years ago, the keynote speaker began with a zinger:

“In a small business, a Payroll Manager can usually do fairly well at HR administration. They are meticulous record-keepers and know how to stay in compliance. If you ask your HR Manager to handle payroll, you are in trouble.”

I laughed along with everyone else, remembering back to the time when a payroll implementation failed. My first indications were people standing outside my office asking about their paychecks. When we learned the fix would take two months or more, the company issued chequebooks to HR managers so we could estimate pay and write cheques. We worked closely with Angela, the Payroll Manager, and kept her sane while she worked with IT to straighten out the mess.

That exciting experience that broadened my horizons. I made a lot of new friends at the local Wage and Hour Division office.

In honor of Angela’s hard work recalculating my “estimates,” I want to pass on a few tips learned over the past fifteen years in HCM technology.

Automate and Move Payroll to the Cloud

Because Payroll is a repetitive process, machines can do the work better than people if you manage the tools well. Automating Payroll can cut costs by as much as 80%.

Automate your payroll tax forms and integrate them into your onboarding application. Set up alerts to notify you if a new employee fails to complete the documents, and audit your records frequently.

Moving to the cloud will cut costs, ease integration, and make it easier to update your software. Almost all cloud vendors update their platforms automatically when laws and regulations change.

Integrate Payroll With Other Systems

Integrate your Payroll process with Finance and HR systems. Since nearly all the employee transactions affecting pay originate in HR or self-service operations, you will eliminate duplication and error with a well-designed interface. What you spend in design and integration will repay your costs many times over.

The data your process generates is invaluable to planning. Unify your reporting so you can integrate Payroll into cost analysis and show your business leaders what people cost.

Classify Employees and Contractors Correctly

Classify your workers properly. Misclassifying employees as independent contractors can incur substantial penalties. If necessary, get a legal review. Pay contractors through Accounts Payable and let Procurement handle the financial details of the contractor relationship.

Keep managers aware of what constitutes a contractor relationship. If they attempt to exert control over when and how a contractor performs work, they can run into trouble. Most freelancers and contractors choose that lifestyle because they want freedom from control. Managers need to coach and develop their contractors, but micromanaging will sour the relationship, and could create the appearance of an employee/employer relationship.

Manage Payroll Globally and Process Locally

Your organization needs to stay on top of costs and trends. Fragmented systems will make that exceedingly difficult. Global business platforms like Workday, SAP, and Infor make it possible for you to centrally manage broad policies and procedures across the organization while giving your local managers the control they need.

You can outsource processing to local providers so your local managers can be more responsive to local authorities. We advocate outsourcing payroll processing wherever possible. It’s a great way to cut costs.

Communicate the Payroll Process to Employees

Keeping employees informed about their pay will promote trust and understanding. Make the payroll process transparent, and publish information to employees about how the process works.

You will generate much of the information about pay from your Compensation team. Informing people how you determine salaries, how you calculate each pay element, and how you calculate salary changes is more important than the actual numbers.

Keep employees well informed of how you determine leave balances, eligibility, and paid time off. Give them the details of year-end adjustments and how you calculate them.

Create a simple diagram of the payroll process and make it available to employees wherever they are.

Require Payroll Direct Deposit

How you manage direct deposit depends on your culture, but your aim should be 100% participation. A printed check costs many times more than a bank transfer and is much harder to manage if there is an error.

If employees resist, you can require it for new hires only. When your people see their new teammates receiving pay earlier than they do, they will change their minds.

Test, Retest, and Audit Your Payroll Process

The cause of the troubles I described was inadequate testing. We recommend end-to-end parallel testing for as long as it takes to be sure there will be no issues after go-live. Test and retest every process from the initial transaction to the final file transmission.

Your automated Payroll platform should allow you to configure alerts and notifications to tell you of processing errors or if transactions exceed specified limits or violate rules. We recommend you also conduct frequent regular audits so you can catch problems before they escalate.

Choose the Right Payroll Partners

If you are outsourcing, bear in mind that some payroll providers strive to be the low-cost solution. Selecting a vendor solely on price may not lead to the best choice. Accuracy, service, and ease of use (including integrations) count for much more.

Consider experience and expertise, but more important, choose a partner who will work with you. The right partner will take the time to understand your business and your needs, and will be sensitive to your constraints.

We have always admired Payroll Managers. People who can hold their breath from the last payroll of one year until the first payroll of the next without passing out deserve a special place in the pantheon.

New cloud payroll solutions that remove much of the stress and risk from year-end payroll closeout. These sleek new platforms from vendors like Workday and SuccessFactors do not eliminate the need for diligence, but they do make updates much easier. Workday provides the means to run test calculations on the fly without the need to set up a separate test instance.

Unlike legacy systems, cloud vendors who have customers on a single code base can automatically apply tax and regulatory updates for all customers. Although customers should test updates as recommended, they do not have to bring their systems down to apply patches.

Each vendor publishes its own year-end checklists for payroll management of the year and the first run of the next, but we want to provide here some general guidelines. We hope they make year-end processing easier for you.

1. A smooth year-end process depends on diligence in every cycle throughout the year. Resolve issues when they arise and don’t put off corrections and adjustments until year  end.
2. If you have a legacy payroll management system or an older cloud system that requires IT  to apply changes, bring people together early in the year. Give everyone time to prepare.
3. Rely on employees and managers to spot issues throughout the year. Make payroll  information easily available to them, and provide it as soon as possible. Alert employees  will help you spot problems before they become cumulative.
4. If you can, provide a mobile application so employees can check their balances quickly at  any time.
5. Provide timely information about tax and regulation changes in simple terms that  everyone can easily understand. Use multiple communication channels.
6. Coordinate your employee communications with the Benefits office and other HR  functions. Not only will you prevent cross-communication, but you will instill confidence  and trust among your employees. There is comfort in having the people who manage your pay and benefits working well together.

Preparation can go a long way toward making the year-end a good time for enjoying a little time off for relaxation. Our best wishes to you for a stress-free year-end process.

Pixentia is a full-service technology company dedicated to helping clients solve business problems, improve the capability of their people, and achieve better results.