USA Today recently reported that more American workers are suing employers for overtime pay under federal and state wage-and-hour laws. This should come as no surprise since the “Great Recession” squeezed employers’ bottom lines, meaning fewer employees do more work. However, overtime, compliance and other payroll issues are usually not rooted in malcontent by the employer. In fact, for most employers, payroll sits in the middle of a tangled web of HR and financial systems and the management routines that drive them. Many companies struggle just to post payroll to the general ledger each pay period. The result: payroll “leakage” and the countless hours needed to reconcile current payroll and resolve past payroll runs.
What is payroll leakage?
ISG defines payroll leakage as (hard or soft) dollars that are unnecessarily paid out by a company due to inefficient processes that do not align with company policies and procedures and/or compliance with federal and state laws. Leakage can take the form of settling class action lawsuits brought on by employees or as “death by a thousand cuts” in which employees reap untold additional dollars in their paychecks or get additional soft benefits for which they’re not entitled. ISG estimates that poorly designed payroll processes that lack the proper technology and management routines can cost a company between .5% and 1.5% of total payroll dollars each year. When you consider that a typical Fortune 500 company pumps anywhere from $1 billion to $2 billion into payroll each year, this leakage can rob as much as $30 million from cash flow annually.
How do I regain control of payroll?
Many companies view payroll as a “gross to net” process. The fact is most issues are caused in the “source to gross” build-up with the “source” being all the inputs that have an impact on pay – employee data (job code, job status, transfers, location), time and attendance, compensation, onboarding, etc. The best way to gain control is to:
- Analyze the big picture of all the inputs that make up the “source”
- Evaluate the processes and management routines of the key “source inputs”
- Align key policies and procedures to key source inputs
- Determine which processes and management routines cannot change due to critical links to the core business
- Evaluate the enabling technology (or lack thereof) that facilitates getting the “source to gross”
- Determine the right mix of insourced and outsourced solutions
- Establish a governance model that drives continuous improvement into the fiber of the culture
These steps will help make dramatic reductions in payroll leakage and more effectively manage what is often the largest expense item on the financial statements.
ISG has performed many payroll assessments for Fortune 1000 companies and has deep knowledge on payroll process design, the enabling technology available in the marketplace and the circumstances that benefit from outsourcing. Please let us know how we can help you to establish and deploy a more effective payroll process.