Payroll costs money. Not just the money that you pay your staff — but the costs of calculating pay, producing cheques, running payroll systems and correcting errors. Payroll production costs don’t add value to your business. There is no strategic advantage to producing the payroll.
Many companies outsource payroll to reduce costs and to retain a focus on the strategic areas of their business. But, depending on the complexity of your payroll and the business requirements, it can be a cost advantage to produce payroll in-house. Do you know what it costs to prepare payroll? All the costs including systems resources, facilities, financing charges, overhead cost, accounting functions, and so on.
If you don’t know the costs, maybe examining activity based costing of a paycheque might be in order.
If running payroll in-house is an advantage to your business, then at least minimize the costs of producing the payroll. Here are 10 ways to cut your payroll costs.
1. Have an integrated HRMS and payroll system
In the recent survey, HR Management Systems: Are They Making a Difference?, conducted by Canadian HR Reporter, ARINSO and Affinity Systems, 36.4 per cent of companies reporting that they had an HRMS noted that the payroll was not integrated with HR.
This means that in these companies data entry is performed twice; once for human resources and once for payroll. When an employee has a name change it must be recorded on the HR system and the payroll system. Or a pay change or an address change and so on. Of course each system also maintains unique information but in general there is a great deal of duplication.
In an integrated system there is only one field for “Last Name.” When you change it in HR, it is automatically changed in payroll because it is the same field. There is less opportunity for errors and inconsistencies between HR and payroll because the source of data is the same and the system cannot be out of balance.
Where data is inconsistent between the HR system and the payroll system, there is a considerable amount of effort expended in reconciling the two systems. Even worse, management loses trust in the system and requires that everything be cross-checked. This erosion of faith ultimately leads to even larger credibility problems for both departments.
One way around the integration issue is to have interfaced systems. When a change is made in one system, the change is transferred on a defined schedule to the other system and data integrity is preserved, or so we think. The problem is that in an interfaced HR/payroll environment, clerical staff will still make entries in one or the other system and make changes to data that will not be reflected in the other system. This is true when only changes occurring during a pay period are applied to the system. The only answer for truly reducing payroll costs is a fully integrated system.
2. Use the system for processing all pay types and deductions
Many payroll systems are capable of automatically processing different earnings types and deduction types. As an example of this, consider incentive pay. Many companies calculate incentive payments outside of either HR or payroll (most often on spreadsheets) and then they are entered manually into payroll.
This is not only a waste of effort but it is also a potential source of errors. A simple typing error or transposition of numbers and a correction will be needed in the next pay period that will occupy considerable amounts of staff time. Do not do manual entries if you can avoid it.
Where an earning or deduction can be accommodated on the system, perform it there. In some large installations functionality that could be used is often not configured due to resource constraints on the implementation. In a post-implementation environment consider examining all manual processes to see if they can be performed on the system. A frequently overlooked function is the deduction for Canada Savings Bonds.
3. Conduct retroactive calculations on the system
Some pay systems cannot calculate retroactive changes to payroll. They require a payroll staff member to manually calculate all changes in a retroactive pay change, and then apply an adjusting entry to the person’s payroll to balance the payroll.
To avoid excessive staff costs, purchase or upgrade to a system that will calculate retroactive payments automatically. This will significantly reduce payroll costs.
4. Keep historical records online
Often when you enter a payroll department you are struck by the amount of paper. Thousands of dead trees, stacked in binders with old payroll records and journals. In newer systems, payroll records can be maintained for a number of years and then archived permanently. They are still available at your fingertips and can be accessed electronically.
The advantage of an online report is that it can be accessed quickly, right from a payroll employee’s desktop. When an employee calls with a payroll question, rather than put the employee on hold, walk across the room, retrieve the binder and return to his desk, the payroll staff member can look up the pay period in question online and can answer the query. Often payrolls can be compared and discrepancies detected without having to conduct a manual comparison.
5. Use direct deposit
Do you have holdouts? These are the people who insist on getting a cheque — a paper cheque. There are many reasons why people insist on a cheque, some are merely Luddites who don’t trust machines or banks. Some are hiding the money from a spouse or a creditor. Some just want it that way, period. Unfortunately, some of the worst offenders are the executives in the company.
There are advantages to using cheques. If you use a cheque, not all of the cheques are cashed on time. This provides a float (money committed but not yet spent). The float can be a benefit to the company. The company earns interest on the float and in large companies this can be considerable; floats can be as large as $5 million for one day, $3 million for the second day, $2 million for the third day.
However, the cost of producing and distributing paper cheques is a significant expense. Besides the printing and distribution, there’s the cost of tracking lost cheques and re-issuing cheques that “the dog ate.” In most cases, these costs will far exceed the benefit of the float.
Included in the recent changes to the Ontario Employment Standards Act is the provision to pay employees through direct deposit. Previously the employee was required to be paid by cheque or cash. This long overdue amendment to the act allows for all employees to be paid by direct deposit.
The act states: “An employer may pay an employee’s wages by direct deposit into an account of a financial institution if,
(a) the account is in the employee’s name;
(b) no person other than the employee or a person authorized by the employee has access to the account; and
(c) unless the employee agrees otherwise, an office or facility of the financial institution is located within a reasonable distance from the location where the employee usually works.” (2000, c.41, s.11(4).)
This will reduce payroll costs directly but only if employers directly address the holdouts.
6. Produce pay statements through employee self-service
In a similar vein, even when employees are paid through direct deposit, organizations still print and distribute pay statements. In the past under Ontario law, pay statements were required on paper. The cost of not printing the cheque, if you had direct deposit for all employees, could not be realized because you still had to print the pay statement.
Again under the revised Ontario Employment Standards Act, the following change will reduce payroll costs for many employers:
“The statement may be provided to the employee by electronic mail rather than in writing if the employee has access to a means of making a paper copy of the statement.” (2000, c.41, s.12(3).)
Of course this requires that payroll is integrated with the mail system or that employee self-service (ESS) can be enabled to allow the employee to access current (and previous) pay statements.
In our HRMS survey, many employers referred to ESS as some future potential panacea. They felt that employees were either currently not ready for ESS or would not have access to a system, especially in blue-collar environments. But contrary to popular belief, the acceptance rate among employees is surprisingly high. In some organizations, employees view online access to their pay information as part of their benefit plan. Even blue-collar employees have home or library access.
If you must print statements, consider mailing them to the employee’s home address rather than distributing them at the workplace. The cost of paper and mailing will be less expensive than someone delivering the statements by hand, and the employee pondering over the statement at work. Combine the statement with other company mailings if appropriate. This also ensures employees promptly notify the company to accurately maintain their current home addresses.
7. Why stop there? Offer online T-4s and other tax forms
You see them every year, employees that sheepishly enter the payroll department on Feb. 27 and ask for a duplicate copy of their T-4. They lost their original, the dog ate it or they simply confess that they have no idea where they put it.
A minor annoyance, but reproducing these statements takes time and effort, particularly if they are produced manually. Being able to direct the employee to an ESS area on an intranet will reduce the amount of effort for payroll and place the responsibility on the employee — where it truly belongs.
8. Pay everybody through direct deposit — not just employees
The case for the advantages of paying employees through direct deposit can also be applied to the payment of all suppliers via file transmittal and electronic funds transfer (EFT). As opportunities for e-commerce between businesses expand, EFT and file transmittal is becoming more common. Even the government accepts files instead of reports.
Examine payroll processes to see where manual payments and reconciling accounts on paper still exists. Then have a chat with suppliers. It doesn’t make sense to do business with someone who causes higher expenses. Like a proactive purchasing department, ensure that suppliers are easy to do business with.
If you cannot make these arrangements, consider setting up customers and payment schedules in your integrated system so that the system will automatically produce cheques on the due dates or interface the payments to the financial accounts payable system.
9. Automate time collection
Do you still have timecards? I hope you store them beside the green eye-shades and starched collars in the payroll department.
The costs of processing manual pay rules are huge. Much of the costs of payroll are in this area. This is where the payroll staff earns their money. They know the time rules for every circumstance. Unfortunately, if a bus hits the payroll person, then the jig is up. One manager I know is convinced that HRIS actually stands for “Hope Rosa Is Safe.” Rosa being the payroll staff person who knows how the pay rules work.
Automating time entry, either to note exceptions or for positive time entry, will save significant dollars in payroll. Ideally, use the same system with full integration for all three areas — HR, payroll and time collection.
10. Automate accounting distribution function
Build accounting distributing functions into the integrated system where possible by assigning accounting information to the employee position record and to third-party payment record in the integrated system. Have the system produce an automatic feed to the accounting general ledger system as soon as payroll has been processed. This will not only save money but will also provide the accounting department with expenditure results many days earlier.
Perhaps one or two of these ideas will benefit your payroll department. At least they are worth the discussion. Who knows you may even save a few bucks to spend on upgrading your system.
John Johnston is the director of strategic consulting and e-HR Solutions for ARINSO International, a leading Canadian HR systems consulting firm active in the implementation of SAP HR/ payroll software and the use of innovative Web-enabled systems for HR areas such as e-recruiting, e-learning and employee portals. He can be reached at [email protected] or visit www.arinso.com. The contributions of Bob Nadeau in the preparation of this article are gratefully acknowledged.
Many companies outsource payroll to reduce costs and to retain a focus on the strategic areas of their business. But, depending on the complexity of your payroll and the business requirements, it can be a cost advantage to produce payroll in-house. Do you know what it costs to prepare payroll? All the costs including systems resources, facilities, financing charges, overhead cost, accounting functions, and so on.
If you don’t know the costs, maybe examining activity based costing of a paycheque might be in order.
If running payroll in-house is an advantage to your business, then at least minimize the costs of producing the payroll. Here are 10 ways to cut your payroll costs.
1. Have an integrated HRMS and payroll system
In the recent survey, HR Management Systems: Are They Making a Difference?, conducted by Canadian HR Reporter, ARINSO and Affinity Systems, 36.4 per cent of companies reporting that they had an HRMS noted that the payroll was not integrated with HR.
This means that in these companies data entry is performed twice; once for human resources and once for payroll. When an employee has a name change it must be recorded on the HR system and the payroll system. Or a pay change or an address change and so on. Of course each system also maintains unique information but in general there is a great deal of duplication.
In an integrated system there is only one field for “Last Name.” When you change it in HR, it is automatically changed in payroll because it is the same field. There is less opportunity for errors and inconsistencies between HR and payroll because the source of data is the same and the system cannot be out of balance.
Where data is inconsistent between the HR system and the payroll system, there is a considerable amount of effort expended in reconciling the two systems. Even worse, management loses trust in the system and requires that everything be cross-checked. This erosion of faith ultimately leads to even larger credibility problems for both departments.
One way around the integration issue is to have interfaced systems. When a change is made in one system, the change is transferred on a defined schedule to the other system and data integrity is preserved, or so we think. The problem is that in an interfaced HR/payroll environment, clerical staff will still make entries in one or the other system and make changes to data that will not be reflected in the other system. This is true when only changes occurring during a pay period are applied to the system. The only answer for truly reducing payroll costs is a fully integrated system.
2. Use the system for processing all pay types and deductions
Many payroll systems are capable of automatically processing different earnings types and deduction types. As an example of this, consider incentive pay. Many companies calculate incentive payments outside of either HR or payroll (most often on spreadsheets) and then they are entered manually into payroll.
This is not only a waste of effort but it is also a potential source of errors. A simple typing error or transposition of numbers and a correction will be needed in the next pay period that will occupy considerable amounts of staff time. Do not do manual entries if you can avoid it.
Where an earning or deduction can be accommodated on the system, perform it there. In some large installations functionality that could be used is often not configured due to resource constraints on the implementation. In a post-implementation environment consider examining all manual processes to see if they can be performed on the system. A frequently overlooked function is the deduction for Canada Savings Bonds.
3. Conduct retroactive calculations on the system
Some pay systems cannot calculate retroactive changes to payroll. They require a payroll staff member to manually calculate all changes in a retroactive pay change, and then apply an adjusting entry to the person’s payroll to balance the payroll.
To avoid excessive staff costs, purchase or upgrade to a system that will calculate retroactive payments automatically. This will significantly reduce payroll costs.
4. Keep historical records online
Often when you enter a payroll department you are struck by the amount of paper. Thousands of dead trees, stacked in binders with old payroll records and journals. In newer systems, payroll records can be maintained for a number of years and then archived permanently. They are still available at your fingertips and can be accessed electronically.
The advantage of an online report is that it can be accessed quickly, right from a payroll employee’s desktop. When an employee calls with a payroll question, rather than put the employee on hold, walk across the room, retrieve the binder and return to his desk, the payroll staff member can look up the pay period in question online and can answer the query. Often payrolls can be compared and discrepancies detected without having to conduct a manual comparison.
5. Use direct deposit
Do you have holdouts? These are the people who insist on getting a cheque — a paper cheque. There are many reasons why people insist on a cheque, some are merely Luddites who don’t trust machines or banks. Some are hiding the money from a spouse or a creditor. Some just want it that way, period. Unfortunately, some of the worst offenders are the executives in the company.
There are advantages to using cheques. If you use a cheque, not all of the cheques are cashed on time. This provides a float (money committed but not yet spent). The float can be a benefit to the company. The company earns interest on the float and in large companies this can be considerable; floats can be as large as $5 million for one day, $3 million for the second day, $2 million for the third day.
However, the cost of producing and distributing paper cheques is a significant expense. Besides the printing and distribution, there’s the cost of tracking lost cheques and re-issuing cheques that “the dog ate.” In most cases, these costs will far exceed the benefit of the float.
Included in the recent changes to the Ontario Employment Standards Act is the provision to pay employees through direct deposit. Previously the employee was required to be paid by cheque or cash. This long overdue amendment to the act allows for all employees to be paid by direct deposit.
The act states: “An employer may pay an employee’s wages by direct deposit into an account of a financial institution if,
(a) the account is in the employee’s name;
(b) no person other than the employee or a person authorized by the employee has access to the account; and
(c) unless the employee agrees otherwise, an office or facility of the financial institution is located within a reasonable distance from the location where the employee usually works.” (2000, c.41, s.11(4).)
This will reduce payroll costs directly but only if employers directly address the holdouts.
6. Produce pay statements through employee self-service
In a similar vein, even when employees are paid through direct deposit, organizations still print and distribute pay statements. In the past under Ontario law, pay statements were required on paper. The cost of not printing the cheque, if you had direct deposit for all employees, could not be realized because you still had to print the pay statement.
Again under the revised Ontario Employment Standards Act, the following change will reduce payroll costs for many employers:
“The statement may be provided to the employee by electronic mail rather than in writing if the employee has access to a means of making a paper copy of the statement.” (2000, c.41, s.12(3).)
Of course this requires that payroll is integrated with the mail system or that employee self-service (ESS) can be enabled to allow the employee to access current (and previous) pay statements.
In our HRMS survey, many employers referred to ESS as some future potential panacea. They felt that employees were either currently not ready for ESS or would not have access to a system, especially in blue-collar environments. But contrary to popular belief, the acceptance rate among employees is surprisingly high. In some organizations, employees view online access to their pay information as part of their benefit plan. Even blue-collar employees have home or library access.
If you must print statements, consider mailing them to the employee’s home address rather than distributing them at the workplace. The cost of paper and mailing will be less expensive than someone delivering the statements by hand, and the employee pondering over the statement at work. Combine the statement with other company mailings if appropriate. This also ensures employees promptly notify the company to accurately maintain their current home addresses.
7. Why stop there? Offer online T-4s and other tax forms
You see them every year, employees that sheepishly enter the payroll department on Feb. 27 and ask for a duplicate copy of their T-4. They lost their original, the dog ate it or they simply confess that they have no idea where they put it.
A minor annoyance, but reproducing these statements takes time and effort, particularly if they are produced manually. Being able to direct the employee to an ESS area on an intranet will reduce the amount of effort for payroll and place the responsibility on the employee — where it truly belongs.
8. Pay everybody through direct deposit — not just employees
The case for the advantages of paying employees through direct deposit can also be applied to the payment of all suppliers via file transmittal and electronic funds transfer (EFT). As opportunities for e-commerce between businesses expand, EFT and file transmittal is becoming more common. Even the government accepts files instead of reports.
Examine payroll processes to see where manual payments and reconciling accounts on paper still exists. Then have a chat with suppliers. It doesn’t make sense to do business with someone who causes higher expenses. Like a proactive purchasing department, ensure that suppliers are easy to do business with.
If you cannot make these arrangements, consider setting up customers and payment schedules in your integrated system so that the system will automatically produce cheques on the due dates or interface the payments to the financial accounts payable system.
9. Automate time collection
Do you still have timecards? I hope you store them beside the green eye-shades and starched collars in the payroll department.
The costs of processing manual pay rules are huge. Much of the costs of payroll are in this area. This is where the payroll staff earns their money. They know the time rules for every circumstance. Unfortunately, if a bus hits the payroll person, then the jig is up. One manager I know is convinced that HRIS actually stands for “Hope Rosa Is Safe.” Rosa being the payroll staff person who knows how the pay rules work.
Automating time entry, either to note exceptions or for positive time entry, will save significant dollars in payroll. Ideally, use the same system with full integration for all three areas — HR, payroll and time collection.
10. Automate accounting distribution function
Build accounting distributing functions into the integrated system where possible by assigning accounting information to the employee position record and to third-party payment record in the integrated system. Have the system produce an automatic feed to the accounting general ledger system as soon as payroll has been processed. This will not only save money but will also provide the accounting department with expenditure results many days earlier.
Perhaps one or two of these ideas will benefit your payroll department. At least they are worth the discussion. Who knows you may even save a few bucks to spend on upgrading your system.
John Johnston is the director of strategic consulting and e-HR Solutions for ARINSO International, a leading Canadian HR systems consulting firm active in the implementation of SAP HR/ payroll software and the use of innovative Web-enabled systems for HR areas such as e-recruiting, e-learning and employee portals. He can be reached at [email protected] or visit www.arinso.com. The contributions of Bob Nadeau in the preparation of this article are gratefully acknowledged.
