There are some questions that I am constantly asked. Questions such as how many payroll professionals does it take to manage a certain size payroll, or what proportion of workers are paid fortnightly, or what the best payroll system is, should payroll report to finance or HR, or what’s an acceptable payroll error rate?
Up until recently, I have only ever been able to offer my experience and gut feel, as there has never been a comprehensive payroll benchmarking study on which to draw firm details.
Determining the answers to many of these questions depends on having a good understanding of the employer, their industry, their payroll technology, their payroll team knowledge and capability, and their payroll processes. I have spent the last 20 years assisting employers to have the most efficient and compliant payroll operations possible. During this time I have noticed one consistent theme. That is, where there is one payroll issue, more will follow.
For example if there are payroll errors, the organisation probably has inefficient processes, a poorly trained team and are not maximising their investment in payroll technology.
In a conversation about continuous improvement, payroll is often left out. Some employers disregard payroll as a fixed cost that is a fact of life. With this view you may be missing the opportunity to identify and leverage the value of payroll in your organisation.
For example, I recently worked with an organisation that employ 200 casuals and I noticed some incorrect payroll calculations relating to them. After investigating the issue I was able to document over $500,000 in annual savings by just fixing some compliance issues relating to their payroll. What was a small amount per person, turned into a material amount when calculated over 200 employees.
Australian Payroll Association commissions an annual study of payroll costs in Australia. The data collected from the 2014 Payroll Benchmarking Study includes payroll salary costs, technology costs and all other costs of running a payroll operation such as training, travel, memberships and recruitment, reported as a total cost per payslip.
The 2014 study participants represented over 1.1 million employees from 1782 organisations. It measured both average payroll costs by employer size as well as the cost differences between average and top performers.
Average costs per payslip generated for employers with 50 to 200 employees is:
Salary cost $24.50
Technology cost $2.66
Other cost $4.67
Total cost per payslip $31.83
Average costs per payslip generated for employers with 201 to 500 employees is:
Salary cost $10.16
Technology cost $2.46
Other cost $1.04
Total cost per payslip $13.66
Average costs per payslip generated for employers with 501 to 2000 employees is:
Salary cost $7.54
Technology cost $2.01
Other cost $0.54
Total cost per payslip $10.09
Average costs per payslip generated for employers with 2001 to 10,000 employees were:
Salary cost $4.87
Technology cost $1.72
Other cost $0.56
Total cost per payslip $7.15
Average costs per payslip generated for employers with more than 10,000 employees is:
Salary cost $2.96
Technology cost $1.14
Other cost $0.08
Total cost per payslip $4.18
Based on these figures, the larger an organisation’s employee population, the more it invests in technology to deliver economies of scale in the payroll function.
Many employers don’t feel they can significantly improve the cost of delivering the payroll function. I disagree with this and the statistics support my view. At both the 201-500 and 501–2000 categories, the top performers are providing payroll services at 42% of the category average cost. At the 2001-10,000 category, this reduced to 33% and 26% for employers with more than 10,000 employees.
This means that employers that record average or above average costs to deliver the payroll function, potentially have significant financial benefits to be made by improving their processes, technology and payroll team.
Technology is certainly the place that many employers find efficiency and costs vary greatly. What the research showed was that for every employer category, the top five payroll software suppliers accounted for more than 75% of total market share. With well over 40 software suppliers in Australia, the other 25% is a very crowded market!
Likewise the top five payroll outsourcing suppliers made up 85% of total reported market share.
The number of payroll professionals required to manage a certain size payroll can obviously vary on technology, processes, industry and the collective knowledge and capability of the payroll team. But on average, one payroll professional processes 274 weekly paid employees, or 549 fortnightly paid employees or 1190 monthly paid employees.
As reported in the 2014 study, 56.2% of organisations have payroll reporting to finance, 33.4% to HR and 10.4% to elsewhere, typically managing director for smaller employers and in a shared services environment for large employers. However the study found that the larger an employer was, the more likely payroll was to report to HR.
Cost of outsourcing varies depending on the actual services provided, payroll frequencies and employer size. In every category the average cost to outsource the payroll is less than the average cost of running a payroll inhouse. However caution should be exercised when comparing costs alone. It’s important to understand exactly what processes are being outsourced and what processes have to be completed by the employer. It’s also important to note that outsourcing payroll doesn’t outsource your employment obligations or responsibilities.
As you can see, there’s no simple answer to the questions I’m often asked about payroll. But one thing is sure, you are unlikely to improve your payroll process, compliance or cost of the operation unless you measure your current efforts and identify where the value lies for your organisation.