What metrics should you use to measure payroll performance?
Managing payroll is one of the most important company functions you need to get right—failure to do so can lead to compliance issues and dissatisfied employees.
Unfortunately, many companies fail to capture valuable data related to their payroll practices. They miss out on payroll reporting processes that empower business leaders to better understand their company costs and ways to save money.
In this article, you’ll learn about common payroll metrics, why it’s important to collect this data, how to implement effective processes to run reports, and how to make improvements to your payroll practices.
What are payroll metrics?
Payroll metrics (also commonly referred to as payroll KPIs) are used by HR professionals to identify areas to improve processes and maintain employee satisfaction. Good metrics are numeric and quantifiable.
Why have payroll KPIs?
Companies that adopt clear and effective payroll metrics are able to evaluate performance and processes, monitor compliance with regulatory requirements, and identify areas to improve and reduce costly inefficiencies.
With an understanding of how effective existing processes are, companies are able to set goals and track progress towards those goals through ongoing reporting. It is in the best interest of any business leader to improve these processes to avoid payroll inaccuracies and to save time and money in the long run. Ultimately, these metrics should align with your overarching business goals.
The metrics you should be tracking to measure payroll performance
Before you can successfully implement payroll metrics to evaluate payroll performance, you must consider your main objectives for doing so. Is this effort prompted by recent feedback, or are you proactively looking to make improvements before any issues arise?
Once you know your objectives, you can decide which metrics will be the most helpful for your company to track. Some common metrics to consider are:
1. Cost of payroll
Payroll is one of the greatest expenses a company will have, accounting for 50 to 70% of a company’s overhead. Having a thorough and accurate understanding of these costs will allow business leaders to make informed decisions and to project future needs.
Payroll costs extend beyond paychecks. It’s important to also consider costs in terms of employee bandwidth that payroll processes dip into.
For example, how much time do HR employees need to spend fixing errors or running reports? How much time and money is spent on IT support and systems? This metric can be calculated as a percentage of total revenue or as the cost per employee.
2. Time to run payroll
Companies can measure the time required to complete specific payroll tasks or a series of tasks that make up an entire process. For example, how much time does it take an employee to collect and process attendance data? How much time is spent each month distributing paychecks?
Answering these questions may reveal opportunities for automation to streamline common and recurring tasks.
3. Effectiveness and productivity of payroll
Metrics can capture how efficient your payroll processes are. Common measurements of effectiveness and productivity include how long it takes to resolve an error and how many payments are processed within a set time period.
Addressing any delays in these areas can help reduce employee stress and improve overall company satisfaction.
4. Accuracy rate/number of errors
Payroll errors are costly from both a financial and opportunity cost perspective. Some errors to look out for include overpayments, underpayments, and missed payments. These can result from data input errors, calculation errors, and inefficient or confusing tools. Access to this data is important to identify trends and to address the root source of the errors before they become too costly.
5. Overtime costs
If employees need to work overtime to get the job done, there may be some inefficiencies to address. Paying employees for overtime is costly and requires additional administrative work to process.
Calculate how much is spent each month on paying employees for overtime and identify ways to bring this number down by reducing workloads, adjusting schedules, or hiring more employees.
6. Training costs
A certain level of turnover within a company is both natural and healthy for an organization. With that said, it’s also a costly experience as companies need to absorb the cost of training and hiring new employees when this happens. During the initial onboarding, a new employee (understandably) will not be at their optimal productivity level, and current employees may need to absorb additional tasks.
This is something that employers need to take into consideration and be aware of when calculating the amount of time required to train a new employee and the associated costs.
7. Employee leave
Regardless of time off being categorized as sick leave, paid time off, or holidays off, companies absorb the costs of all employee leave. However, the cost of these days off can be made up for — and can even be exceeded — by the increased productivity that well-rested employees offer.
On the other hand, the cost of days off can be a slippery slope if companies fail to keep track of employee absenteeism. Employers need to determine if employees are taking an appropriate number of sick days and vacation days, and if there are any causes of absenteeism that need to be addressed.
Best practices for implementing payroll performance metrics
Once you identify the best payroll performance metrics to track, you will need to implement processes to collect and analyze the data regularly. Working with the payroll team to select the best metrics will ensure team buy-in and make it easier to adopt new processes for data collection.
While it can be tempting to just jump in and start collecting data, it pays off to be strategic and determine the payroll data that is necessary before you begin measuring any metric. It is important to track and measure results consistently. The data you collect must be accurate and clean for reports to provide meaningful insights.
Setting up a process to collect clean data will also save your employees time each time a report is needed, increasing the likelihood that employees will run reports to make data-based decisions at all levels.
Finally, make sure to set targets and benchmarks for the different metrics. This is how you will track your company’s progress and define success. Take note of your starting point and how long it takes your company to reach various milestones on the way to achieving the ultimate target goal. Progress can be incremental, and benchmarks can help you celebrate the little wins along the way.
Simplifying the payroll process
Payroll management is complicated, especially when you have a globally distributed team and need to consider legal requirements across different countries. Luckily, technology solutions, like Oyster, can help companies automate and manage their payroll processes in one place. Technology solutions can simplify payroll processes and make it easier to measure payroll performance.
Don’t let complicated payroll processes cost your company more than it needs to. Beyond straining a company’s finances and resources, payroll errors and inefficient processes put companies at risk of non-compliance and employee dissatisfaction. While it takes some effort to identify payroll metrics and implement processes to collect data, software solutions make it easier than ever to quickly collect and analyze live data.
If you're interested to learn more on this topic, check out our complete guide to HR metrics.
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