What's at Stake with Payroll Best Practices

Back in 2003, Business Finance ran an article on payroll best practices. That article has proved to be such a perennial hit among readers that we decided to provide updated payroll best practices as a series of posts.

A lot has change in eight years, including payroll. But why worry about payroll best practices? Well, like payroll itself, it's all about money. According to available benchmarking data, companies that improve their payroll processes stand to save a great deal of money by reducing process costs, errors and under- and over-payments and resolving other issues.

Anyone who questions what is at stake can just take a look at the variation in payroll costs among organizations. Benchmarking data compiled by the American Productivity and Quality Center (APQC) in Houston shows a significant gap between the highest and lowest performers when it comes to payroll processing costs. The APQC data shows the top 25% (best performing) of the companies in its database have a “total cost of payroll processes per employee paid” of $67, while the bottom 25% (worst performing) spent $398 per employee paid.

Clearly, there is a significant gap between the highest and lowest performers and plenty of room for improvement. Moreover, organizations don't even have to reach that top level of performance to make a difference. Even the difference between the lowest performers and the median total cost of payroll processes per employee paid of $218 shows significant improvement opportunities. Companies that have a long way to go to reach top performance can focus on that median number as an interim goal.

One of the most important drivers of payroll cost is the level of automation in the process. “Entering employee time information into the payroll system is really what drives payroll costs,” says Mary Driscoll, a senior research fellow at APQC. The more manual that process is, the higher the organization's costs and, perhaps more importantly, the greater the opportunity to introduce errors into the system.

APQC looked closely at the processes of 162 organizations and found that the 24.7% of those organizations that qualify as top performers process 88.5% to 100% of employee time sheets electronically. Overall, these top performers report having fewer manual processes in their time collection and reporting process. Among the entire 162-company sample, more than half of the organizations process less than 1% of their time sheets electronically.

This is just the tip of the iceberg in payroll. In this series, we'll be focusing on a range of issues and best practices, including self service, standardization, systems integration and even globalization. We'll also discuss whether it is possible for companies to achieve a 100% electronic payment level in payroll and what barriers companies may need to overcome to come close to achieving that level.

Read the second article in our payroll series "The Nuts and Bolts of Payroll Best Practices."